FRS 137

1. PROVISIONS, CONTINGENT LIABILITIES, CONTINGENT ASSETS. FRS 137

2. ACTG & DISCLOSURE PROVISIONS CONTINGENT LIABILITIES CONTINGENT ASSETS OVERVIEW

3. PARA 10: LIABILITIES OF UNCERTAIN TIMING OR AMOUNT PROVISIONS

4. PARA 14: Moreover PROVISIONS SHOULD BE RECOG WHEN: Present obligatn(legal/constructive) result of past event exist Probable an outflowof resources (economic benefit) required to settle obligani.e. (Para 23 ‘more likely than not’ and Para 24 probability det,. by class of oblg) Reliable est. on amt of oblign to setlle PROVISIONS

5. FRS 137 Example.doc What if ABC has a widely published environmental policy in which it undertakes to clean up all contamination that it causes? In this case there is constructive obligation (Para 20) arising from past obligatg event. The conduct of co has created a valid expectation on the part of those affected by it that it’ll clean up the contamination. Provisions: Example

6. A mgt or BOD dec x give rise to constructive oblig at bal sheet date unless the dec has been communicated b4 the bal sheet date to those affected by it in a sufficiently specific manner to raise a valid expectation in them that the enterprise will discharge its responsibilities (FRS 137: Para 20) Provisions: Constructive Obligatn

7. ..It creates a legal or constructive oblig that results in an enterprise having no realistic alternative to settling that oblig. The obligating events must have occurred for a provision to be recognised. Para 18: Provision recog and Obligating event

8. Provision x be set merely on the basis of mgt intent E.g. GreatFlierBhd is required by law to overhaul (maintenance related service) its aircraft once every 3 yrs. Should provision be set for this work? No provision, legal req x make cost of overhaul a liabbec x oblig exist for the work independently of the enterprise’s future action. XYZ Hotel has a policy of refurbishing its hotel buildings to pristine condition Once every 5 yrs. It has acquired a hotel building in Jan 20x2. Provision? No oblig for refurbishing at 31/12/20x2, hence x provision recognised • Para 17: Provision recognisedwhen enterprise has x realistic alternative to settlg obligation created by past obligtg event • Para 19:Where enterprise can avoid future outflow by its future action (e.g. sale of related asset), it has x present obligtn for future outflow, hence x provision should be recognised. Disallowance of Provision

9. Example: Product warranties The probability an outflow required determined by considerg class of oblig as a whole Zinc Bhd gives warranties at the time of sale to purchasers of its product to repair/ replace any defects within 3 yrs from date of sale. Past experience probable some claims made. In this case probable outflow of resources under warranties, and provision should be recognised Para 24: When there’s number of similar obligations….

10. FRS 137 maintains that except for extremely rare cases, an enterprise will be able to det range of possible outcomes and thereon made sufficiently reliable est. In measuring provision, enterprise should: Take risks and uncertainties into a/c (Para 42) Discount provision, effect of time value of money is material (Para 45) A/c future events, changes in law and technology where sufficient objective evidence to support it occurrence (Para 48) NOT to take gains from the expected disposal of assets into a/c, even if the expected disposal is closely linked to the event giving rise to provision (Para 51) Para 25: Reliable estimate

11. TebingBhd sells gd with warranty under which the co will repair any defects that become apparent within the 1st 6 mths after purchase. Based on past experience, it is estimated that if minor defects were detected in all gds sold, repair cost of RM100K would result, but if major defects were detected for all gds sold, repair costs of RM500K will result. For the current yr, the co expects 75% of the gds sold have no defect, 20% with minor defects and 5% with major defects. PROVISION AMT? = (75% X NIL) + (20% X RM100K) + (5% X RM500K) =RM45,000 Example….

12. Where enterprise expects reimbursement of some or all of the expenditure required to settle a provision (eg insurance contracts, supplier’s warranty), enterprise should: • Recognise reimbursement only when virtually certain reimbursement’ll be received if oblig settled (Amt recogd x > amt of provision) • Recognise reimbursement as a separate asset (In P&L the expense relating to provision allow presented net of amt recog for reimbursement) Para 53 & 54: reimbursement on provision

13. In June 2006, BayuBhd was sued for damages arising from an accident that the co’s vehicle was involved in. As at its bal sheet date 31/12/20x6, the co’s lawyer advised it was probable co. would loose the case and haveto pay a damage amounting to RM200K. The vehicle was insured and it is virtually certain the co should recover RM150K from the insurance co. The company would record following entries: (1) Dr Loss arising from accident 200K Cr Provision for accident loss 200K (2) Dr Amt receivable from insurance 150K Cr Gain from Insurance 150K In P&L The net loss of RM50K will be charged as ‘Other losses’. In Bal Sheet, The provision a/c will be presented as current liability item and receivable as current asset Example

14. At each bal sheet date provisions should be reviewed and adjusted to reflect the current best estimate. If x longer probable an outflw of resources req to settle the oblig, provision should be reversed. Gain? Para 59: Reviewal of Provision est.

15. PARA 61: Provisions should only be used for expenditures for which the provision was originally recognised Continue

16. Future Operating Losses X provision recogd for ~. An expectation of ~ an indication certain assets may be impaired. For enterprise to test assets for impairement under FRS 136 Impairment of Assets (2) Onerous contract Present oblig under contract recogd and measured as provision. The ~ is a contract in which the unavoidable Costs of meeting oblig under contract > economic benefits expected to be received under it. General recog and measurement req for prov under specified cases (Read Para 63-69)

17. Game Bhd operates profitably from a factory that it has leased under an operating lease. During May 20X7, the enterprise relocates its operations to a new factory. The lease on the old factory continues for nxt 4 yrs, it x be cancelled and factory x re-let to others. There is a onerous contract and a provision should be recognised based on the best estimate of the unavoidable lease payments Example

18. (3) Restructuring Costs Provision recogd when gen. recog criteria met. Constructive oblign arises on ~ when: (i) Has a detailed formal plan for restructuring (ii) Has raised valid expectatn in those affected that the restructg’ll be carried out (i.e. implementg plan or announcing main features to those affected) Continue

19. FRS 137 requires disclosure of: Movement schedule reconciling beging bal to the endg bal for the period Brief descriptn nature of oblig and expected timing of any resulting outflows Indication of the uncertainties about timing of those outflows Amount of expected reimbursement Para 84 & 85: Disclosure of Provision

20. IAS 10: ‘…a condition or situation where the ultimate outcome of which, gain or loss, will be confirmed only on the occurrence, or non-occurrence, of one or more uncertain future events • To qualify as a contingency, the condition or situation must have existed at the reporting period • Classification; • Contingent liabilities • Contingent assets Contingencies

21. a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or [Read Para 13 distinguishing characteristic of Provision and Contingent Liab] b) a present obligation that arises from past events but it is not recognised because: • it is not probable (but possible) that an outflow of resources will be required to settle the obligation; OR • the amount of the obligation cannot be measured with sufficient reliability. Contingent liability – Para 10

22. Para 36: An obligation arises from past events but x recognised as a provision bec x meet criteria probable outflow and/or reliable est. , SHOULD BE DISCLOSED AS CONTINGENT LIABILITY. If possibility of outflow is remote ---> ignore i.e.no disclosure of events required Contingent Liabilities

23. PROBABLE (p >50%) – Chances of occurring is high (more likely than not) POSSIBLE (30%>p>50%)- Chances of occurring is medium REMOTE (p<30%) - Chances of occurring is low Potential circumstances of outflow of resources embodying economic benefits

24. PROBABLE (p >50%) – recognised as liability by providing a provision • POSSIBLE (30%>p>50%)- Disclosure in the notes (Para 27: Contingent LiabSHOULD NOT be recogd) • REMOTE (p<30%) – no disclosure is required (Para 27:When possibility of outflw of resources remote) RECOGNITION – Contingent liabilities wrt to future outflow of economic benefit

25. a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise. • An example • a claim that an enterprise is pursuing through legal processes, where the outcome is uncertain. Contingent Assets – Para 10

26. An enterprise should not recognise a contingent asset. A contingent asset should be disclosed where an inflow of economic benefits is probable. When the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition (as an asset) is appropriate . NO RECOGNITION of Contingent Assets

27. Brief description of the nature of the contingency • Estimates of the financial effect • An indication of the uncertainties relating to the amt or timing of any outflw • Possibility of any reimbursement Disclosure in the notes- Para 86

28. Annual report of Sapura Motor Bhd (NEJ, 2009) 35. Contingent Liabilities Company 20042003 Corporate guarantee given to banks for 64,843,200 71,904,200 Credit facilities granted to subsidiaries (unsecured) Example: disclosure of Contingent Liab

29. Annual Report of Guthrie Ropel Bhd (NEJ, 2009) 34. Contingent Assets (RM’000) GrpCo. 2004 2003 2004 2003 Difference bet the amt claimed and the amt awarded by the govt in respect of land acquired or utilised by govt 1,590 3,184 1,483 - Example: Disclosure of Contingent Assets

30. Start No No Possible obligation? Present obligation Yes Yes Yes No Probable outflow? Remote? Yes No No (rare) Reliable estimate? Do nothing Yes Provide Provision Disclose contingent liability