MFRS 137

PROVISIONS, CONTINGENT
LIABILITIES AND
CONTINGENT ASSETS
 Learning Objectives
Definition and accounting treatment on
provisions, contingent liabilities and contingent
assets.

Understanding the appropriate recognition

criteria and measurement bases applied to
provisions, contingent liabilities and contingent
assets.

Application of the use of recognition and

measurement rule in specific cases.
 MFRS 137
MFRS 137 discusses three situations,
which are:
a. Provisions
b. Contingent liabilities, and
c. Contingent assets
 Characteristics of Liabilities
A liability is defined as
‘a present obligation of the enterprise arising from
past events, the settlement is expected to result in an
outflow from the enterprise of resources embodying
economic benefits’.

Probable Arise from

Result from
future present
past
sacrifices of obligations to
transactions or
economic other
events.
benefits. entities.
 PROVISIONS
 Provisions is defined as “liabilities of uncertain
timing or amount or both”.
 However, provisions are different from
liabilities – such as accruals & payables.
 Provisions are uncertain on the timing or
amount of future expenditure required in
settlement.
 PROVISIONS : Recognition Criteria
Provisions should be recognised when:
a. an enterprise has a present obligation (legal or
constructive) as a result of past event;
b. it is probable that an outflow of resources
embodying economic benefits will be required to
settle the obligation; and
c. a reliable estimate can be made of the amount of
the obligation.
 PROVISIONS : Present Obligation
1st recognition criteria : present obligation arises
from past event (obligating event).
There are Two types of obligation :
 Legal obligation
 Constructive obligation
Factors to consider :
 Past Event
 Outflow of Economic Resources
 Reliable Estimate
 PROVISIONS : Present Obligation

Legal obligation
Derives from a contract, legislations or other
operation of law.
Example: Obligation to replace the defective
parts for car sold as stated in the sales
agreement.

The obligation arises only when the legislation

is virtually certain to be enacted.
 PROVISIONS : Present Obligation
Illustration 137.1
ABC Bhd is an oil exploratory company. It causes contamination
but cleans up only when required to do so under the laws of the
company concerned.
One country in which ABC Bhd operates has had no legislation
requiring cleaning up, and ABC Bhd has been contaminating land
in that country for several years.
At 31 Dec 2012 it is virtually certain that a draft law requiring a
clean up of land already contaminated will be enacted shortly
after the year end.
In this case, there is a present obligation as a result of a past
obligating event .
The obligating event is the contamination of the land because of the
virtual certainty of legislation requiring cleaning up.
 PROVISIONS : Present Obligation
Constructive obligation
Derives from an entity’s actions
 By an established pattern of past practice, published policies or a
sufficiently specific current statement, the entity has indicated to
other parties that it will accept certain responsibilities;
 Thus, created a valid expectation on the part of those other parties
that it will discharge those responsibilities.

Example:
 By practice, the company pays two months bonus to its current
employees even though there is no contract to do so.
 A logging company by practice plants new trees after it has logged a
certain area though there is no legal requirement to do so.
 PROVISIONS : Present Obligation
Illustration 137.2
ABC Bhd is an oil exploratory company. It operates in a country
where there is no environmental legislation. However, the
company has a widely published environmental policy in
which it undertakes to clean up all contamination that it
causes. The enterprise has a record of honouring this
published policy.

In this case, the conduct of company has created a valid

expectation on the part of those affected by it that it will
clean up the contamination.
There is therefore a constructive obligation arising from the past
obligating event (the contamination of the land).
 PROVISIONS : Present Obligation

Constructive Obligation
A management or board decision does not
give rise to a constructive obligation at the
balance sheet date unless the decision has
been communicated before the balance
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.
 PROVISIONS : Present Obligation

Illustration 137.3
On 12 Dec 20x2, the Board of XYZ Bhd decided to
close down a division.
Before the balance sheet date (31 Dec 20x2), the
decision was not communicated to any of those
affected and no other steps were taken to implement
the decision.

In this case, there is no obligation as at 31 December

20x2, and therefore no provision should be
recognised.
 PROVISIONS : Present Obligation
Illustration 137.4
On 12 Dec 20x2, the Board of XYZ Bhd decided to close down a
division making a particular product. On 20 Dec 20x2, a detail
plan for closing down the division was agreed by the board;
letters were sent to customers warning them to seek an
alternative source of supply and redundancy notices were
sent to staff of the division.
In this case, the communication of the decision to the customers
and employees gives rise to a constructive obligation because
it creates a valid expectation that the division will be closed.
If the other two criteria are met, a provision should be
recognised at 31 December 20X2 for the best estimate of the
costs of closing the division.
 PROVISIONS : Past Events
The past events that leads to a present obligation is called an
obligating event.
Obligating event : An event that creates a legal or constructive
obligations that results in an enterprise having no realistic
alternative to settling that obligation created by the event.
This is the case only:
 Where the settlement of the obligation can be enforced
by law; or
 In the case of constructive obligation, where the event
creates valid expectation in other parties that the entity
will discharge the obligation.
 PROVISIONS : Past Events
MFRS 137 disallows recognition of provisions
merely on the basis of management intent.
A provisions is recognised only when an enterprise
has no realistic alternative to settling the obligation
created by the past obligation event.
Where the enterprise can avoid the future outflow
by its future action (e.g: sale of the related asset),
it has no present obligation for the future outflow
and no provisions should be recognised.
 PROVISIONS : Past Events
Example 1
A ship may need to undertake major overhaul,
repairs and maintenance (dry-docking expenditure)
that would cost millions once in every five years.
However, no provision for dry-docking expenditure
shall be recognised until the expenditure is incurred.
 PROVISIONS : Outflow of Resources
2nd recognition criteria : there should be a probable outflow of
resources embodying economic benefits.

An outflow of resources is regarded as probable if the outflow is

more likely than not to occur, ie, the probability that the outflow
will occur is greater than the probability that it will not.

Where there are a number of similar obligations (eg product

warranties), the probability that an outflow will be required is
determined by considering the class of obligation as a whole.
 PROVISIONS :Outflow of Resources
Illustration 137.7
DEF Bhd gives warranties at the time of sale to
purchase of its product to repair or replace any
defects within one years from the date of sale.
On past experience, it is probable that there will be
some claims under the warranties.
In this case, since it is probable that there will be an
outflow of resources under the warranties as a
whole, and assuming all the other recognition
criteria are met, a provisions should be recognised.
 PROVISIONS : Reliable Estimate
3rd recognition criteria : reliable estimate can be made of the
amount of obligation.
To be reliably estimate, an enterprise should be able to
determine a range of possible outcomes and can therefore make
an estimate of the obligation that is sufficiently reliable to use.
An obligation that arises from past events but is not recognized
as a provision because it does not meet the second and/or third
recognition criteria should be disclosed as contingent liability
unless the possibility of an outflow of resources is remote;.
 PROVISIONS : Reliable Estimate
Example 2 of textbook:
•A car dealer gives free car service for two years on
cars purchased from its outlet.

•There is a legal obligation to provide free car

service when cars are purchased.

•If the cost of the free service can be reliably

estimated, then the company has to recognise the
obligation when the cars are sold.
 PROVISIONS : Measurement
 The amount recognised as a provision should be the
best estimate (expected value) of the expenditure
required to settle the present obligation at the
balance sheet date;
 The estimates of the outcome and amount are
determined by judgment of the management, based
on past experience of similar transactions, and at
times even from reports from independent experts
 PROVISIONS : Measurement
In circumstances where the provision being estimated
involves a large population of items, the obligation is
estimated by weighing all possible outcomes by their
associated probabilities.
This may include the use of the statistical method of
‘expected value’.
For example, when estimating a provision for product
warranties, a range of possible outcomes and their
probabilities may be used to arrive at the expected
cost of warranties.
 PROVISIONS: Measurement
Illustration 137.8
LMN Bhd sells goods with warranty under which the company
will repair any defects that become apparent within the first six
months after purchase.
Based on past experience, it is estimated that if minor defects
were detected in all the goods sold, repair cost of RM100,000
would result, but if major defects were detected for all the goods
sold, repair costs of RM500,000 will result.
For the current year, the company expects 75% of the goods to
have no defect, 20% with minor defects and 5% with major
defects.
In this case, the amount of the provisions for defects will be
determined as follows:
 PROVISIONS: Measurement
Illustration 137.8 (cont.)
In this case, the amount of the provisions for
defects will be determined as follows:
= RM (75% x nil + 20% x 100,000 + 5% x 500,000)
= 0 + RM20,000 + RM25,000
= RM45,000
 PROVISIONS: Measurement
MFRS 137 requires that an enterprise should, in measuring a provision :
a. take risks and uncertainties into account ;
 Assessment of risks & uncertainties should be made by an
entity in determining the best estimates for the amount of
provision.
 Risk adjustment will increase amount of liability
b. discount the provisions, where the effect of the time value of
money is material ;
 Where the time value of money is material, the amount of
provision should be based on the present value of the
expenditure required to settle the obligation.
 The entity should use pre-tax discount rate that reflects the
current market assessment of the time value of money and
the risks specific to the liability.
 PROVISIONS: Measurement
Example 6 of textbook (Time Value):
Race Cars Bhd sells cars on which it gives a five-year warranty
and free service for three years.
In year x4, it sold 100 cars. It has to estimate the amount of
probable expenses that it would incur on warranties for five
years and the cost of services for the three years.
The warranties and free services are obligations when the cars
were sold.
The company’s cost of capital is 10%.
In year x5, the amount spent was RM17,000 in respect of the
100 cars sold in year x4.
Suppose the company makes the following estimates on future
expenses:
 PROVISIONS: Measurement
Warranties Services Total Discount Present value Discount Present value
factor End x4 factor End x5
RM RM RM RM RM RM RM

x5 10,000 8,000 18,000 1 18,000

x6 12,000 8,000 20,000 .909 18,180 1 20,000
x7 16,000 2,000 18,000 .826 14,868 .909 16,362
x8 20,000 nil 20,000 .751 15,020 .826 16,520
x9 15,000 nil 15,000 .683 10,245 .751 11,265
76,313 64,147
In year x4:
In Income statement charged as expenses:
Provisions RM76,313
Balance Sheet
Current liability RM18,000
Non-current liability RM58,313
 PROVISIONS: Measurement
In Year x5In Debit Credit
RM RM
Provisions for warranties & services 18,000
Cash/payables, etc 17,000
Income statement 1,000
(Actual expenses incurred is less by RM1,000)
Income statement/finance cost (RM58,313 x 10%) 5,831
Provision for warranties and services 5,831
(Unwinding of interest)
In year x5:
Income Statement
Interest RM58,313 x 10% = RM5,831
Unused provision (credit) RM1,000
Balance Sheet
Current liability RM20,000
Non-current liability RM44,147
 PROVISIONS: Measurement
MFRS 137 requires that an enterprise should, in
measuring provisions
take future events, such as changes in the law and
technological changes into account where there is
sufficient objective evidence that they will occur;
not to take gains from the expected disposal of
assets into account in measuring provision, even if the
expected disposal is closely linked to the event giving
rise to the provision
 PROVISIONS : Reimbursement
There could be a situations where some or all of the expenditure
required to settle the provision may be expected to be recovered from a
third party.
Examples : insurance contracts, indemnity clause or suppliers’ warranties
MFRS 137 provides that should the entity should:
Recognised the reimbursement when and only when it is virtually
certain that reimbursement will be received if the entity settles the
obligation. However, the amount recognised for the reimbursement
should not be more than the amount of the provision .
Recognise the reimbursement as a separate asset. However, in the
income statement, the expense relating to a provision may be presented
net of the amount recognised for a reimbursement .
 PROVISIONS:Reimbursement
Illustration 137.9
In December 20x2, STU Bhd (the company) was sued for
damages arising from an accident that the Company’s
vehicle was involved in.
As at its balance sheet date on 31 Dec 20x2, the Company’s
retainer lawyers advised that it was probable the company
would loose the case and would have to pay a damage
amounting to RM200,000.
However, the vehicle was insured and it is virtually certain
the company would recover RM150,000 from the insurance
company.
 PROVISIONS:Reimbursement
Illustration 137.9 (cont.)
In this case, the company would record the following adjusting
entries:
Dr : Loss arising from accident 200,000
Cr : Provision for accident loss 200,000
Dr : Amount receivable from insurance 150,000
Cr : Gain from insurance 150,000

In the statement of comprehensive income, the net loss of

RM50,000 will be charged as “Other losses”.
In the balance sheet, the provision account will be presented
as a current liability item, and the receivable account as a
current asset item.
 Changes in PROVISIONS
MFRS 137 provides that provisions should be reviewed
at each balance sheet date and adjusted to reflect the
current best estimate.
If it is no longer probable that an outflow of resources
embodying economic benefits will be required to settle
the obligations (obligations no longer required), the
provision should be reversed.
Provision should be used only for expenditures for
which the provision was originally recognised.
 Changes in PROVISIONS
Example
As at the beginning of the current financial year 20x9, LTK Bhd has
two provision accounts :
(i)lawsuit claims provision of RM10 million, and
(ii)warranty provision of RM30 million.
During the year, the lawsuit claims were settled at RM12 million.
Some warranty costs were incurred during the year and the
warranty provision was increased to RM40 million at year end in
tandem with the increase in products sold during the year.
Required:
Explain how the settlement of the lawsuit claims shall be
accounted for.
 Changes in PROVISIONS
Solution
The shortfall arising from settlement of the lawsuit claims shall be
recognised immediately as an expense in profit or loss. It shall not
be offset against the balance in the warranty provision. The journal
entry to recognise the shortfall and close the provision account is
as follow:

Dr. Claim Expenses in Profit and Loss RM2 mil

Dr. Lawsuit claims Provision 10 mil
Cr. Cash / Payable RM12 mil
PROVISIONS – SPECIFIC CASES
MFRS 137 further explains how the general recognition
and measurement requirements for provisions should
be applied in three specific cases:
a.Future operating losses
b.Onerous contracts
c.Restructuring
 PROVISIONS
Future operating losses
 An entity cannot make a provision for
future operating losses as future operating
losses do not meet the definition of a
liability.
 An expectation of future operating losses
is an indication that certain assets of the
operation may be impaired. (MFRS136
Impairment of Assets)

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 PROVISIONS
Example
Future operating losses
The manufacturing plant of ABC Bhd has been incurring losses in the past
three years. Management is contemplating the option of either to
restructure the plant or to sell it to an external party. Management
believes that losses will continue for another two years at about RM30
million per year before the business operation could turnaround. At year
end, neither the restructuring plan nor the plan to sell was finalised. The
carrying amount of the net assets of the plant at year end was RM400
million. Based on its current condition, the recoverable amount of the
plant was estimated at RM350 million.

Required
Explain the accounting treatment that shall be accorded to the above
case.
 PROVISIONS
Solution
Future operating losses
Notwithstanding that the operations of the plant may be restructured or
that it may be sold to an external party, the estimated future losses of
RM60 million shall not be recognised as a liability because there is no
present obligation at the end of the reporting period, ie. There is no
obligating event.
However, based on the impairment test performed, the plant shall be
written down to its recoverable amount of RM350 million and the
impairment loss of RM50 million recognised as an expense in the current
year’s profit or loss.
Carrying amount = RM400 million Choose lower
 RM350 million
Recoverable amount = RM350 million
Carrying amount to reduce to RM350 million
Impairment loss = RM400 million – RM350 mil = RM50 mil
 PROVISIONS - Onerous contract
 An onerous contract is one in which the unavoidable costs of
meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
 Unavoidable cost is the net cost of exiting from the contract
which is the lower of cost of fulfilling the contract and
penalties/compensation as failure to fulfill contract.
 If an entity has a contract that is onerous, a provision should
be recognised for the present obligation under the contract
based on the unavoidable costs.
 However, before provision is recognised, the standard requires
an entity to recognise any impairment losses for any dedicated
assets to the contract.
 PROVISIONS- Onerous contract
Illustration 137.10
PQR Bhd operates profitable from a factory that it has leased under an
operating lease. During Dec 20x2 the enterprise relocates its operations
to a new factory. The lease on the old factory continues for the next four
years, it cannot be cancelled and the factory cannot be re-let to another
user.

In this case, there is a onerous contract.

The obligating event is the signing of the lease contract, which gives rise to a
legal obligation.
An outflow of resources embodying economic benefits in settlement - When
the lease becomes onerous, an outflow of resources embodying
economic benefits is probable.
Conclusion - A provision is recognised for the best estimate of the
unavoidable lease payments.
 PROVISIONS- Onerous contract
Example 7 of textbook
Hire Bhd entered into an operating lease contract to rent a
building for five years at an annual rental of RM1 million. A
year after entering the lease, operations of Hire Bhd was
relocated. Hire Bhd was unable to terminate the contract.

In this case, the contract can be classified as onerous. In

year 2 of the contract, Hire Bhd has to make the best
estimate of the unavoidable lease payments. It will be the
present value of RM4 million.
The rental paid is debited to the provision account.
 PROVISIONS - Restructuring
A programme that is planned and controlled by
management, and materially changes either:
 the scope of a business undertaken by an entity,
or
 The manner in which that business is conducted.
Example:
•Sale or abandonment of a line of business,
•Closure of business location,
•Changes in management structure and fundamental re-
organisation that have a material effect on the nature and focus
of the entity’s operations.
 PROVISIONS - Restructuring
MFRS 137 provides that a provision is recognised only when the
general recognition criteria for provisions are met and a
constructive obligation to restructure arises only when an
enterprise:
a. has a detailed formal plan for the restructuring
identifying at least:
- the business or part of the business concerned,
- the principal locations to be affected,
- the location, function & approximate number of
employees who will be compensated for terminating
their services,
- the expenditure that will be undertaken.
- the time when the plan will be implemented.
 PROVISIONS - Restructuring
b.has raised a valid expectation in those affected that it will
carry out the restructuring by starting to implement that plan
or announcing its main features to those affected by it.

Implementing a restructuring plan or a public announcement

of a detailed plan to restructure before the year-end is an
evidence of restructuring.

If implementing a restructuring plan or a public announcement

of a detailed plan to restructure is done after the year-end,
then the entity is to make a disclosure if the restructuring is
material and non-disclosure would influence the economic
decisions taken by users of financial statement.
 PROVISIONS - Restructuring
A restructuring provision shall include only the direct expenditures
arising from the restructuring, which are those that are both:
(a) necessarily entailed by the restructuring; and
(b) not associated with the ongoing activities of the entity.
A restructuring provision does not include such costs as:
(a) retraining or relocating continuing staff;
(b) marketing; or
(c) investment in new systems and distribution networks.
 PROVISIONS - Restructuring
These expenditures relate to the future conduct of the
business and are not liabilities for restructuring at the
end of the reporting period.
Such expenditures are recognised on the same basis as if
they arose independently of a restructuring.
Besides, the future operating losses up to the date of a
restructuring are not included in a provision, unless
they relate to an onerous contract.
 PROVISIONS - Restructuring
Example 9 of textbook
On 23 September x5, the Board of an entity decided to close down
divisions A and B that made two particular products. The entity’s
year-ended 31 December.
Division A
The closure cost is estimated at RM600,000. The closure decision
was not communicated to any of those affected and no steps have
been taken to implement the decision.

In this case, as at the year-end, the entity has no obligation since

the decision has not been communicated to those involved.
Hence, the estimated closure costs of RM600,000 will be
disclosed as an event after balance sheet date.
No provision is recognised.
 PROVISIONS - Restructuring
Example 9 of textbook (cont.)
On 23 September x5, the Board of an entity decided to close
down divisions A and B that made two particular products.
The entity’s year-ended 31 December.

Division B
The closure cost is estimated at RM400,000. A detailed plan
for the closing down has been agreed upon by the Board on
15 Dec x5 and redundancy notices were sent to the staff.

In this case, as at the year-end, the employee have an

expectation that the closure will happen. Therefore the
provision of RM400,000 should be recognised.
 DISCLOSURE - Provision
An entity shall disclose the following for each class of
provision:
a.a brief description of the nature of the obligation and the
expected timing of any resulting outflows of economic
benefits;
b.an indication of the uncertainties about the amount or
timing of those outflows. Where necessary to provide
adequate information, an entity shall disclose the major
assumptions made concerning future events, and
c.the amount of any expected reimbursement, stating the
amount of any asset that has been recognised for that
expected reimbursement.

51
 DISCLOSURE - Provision
For each class of provision, an entity shall disclose:
a.the carrying amount at the beginning and end of the period;
b.additional provisions made in the period, including increases
to existing provisions;
c.amounts used (ie incurred and charged against the provision)
during the period;
d.unused amounts reversed during the period; and
e.the increase during the period in the discounted amount
arising from the passage of time and the effect of any change in
the discount rate.
Comparative figure is not required.

52
 DISCLOSURE - Provision
Example

Balance at beginning xxx

Additional / Increases in Provision xxx
Amounts used (xx)
Amounts released unused (xx)
Finance costs (if discounted) + charge in profit or xxx
loss
Balance at end xxx

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 CONTINGENCIES
Events or outcome which is determined by
other events whose outcomes are uncertain.

Classified into:
- Contingent liability;
- Contingent asset
 CONTINGENT LIABILITIES
MFRS 137 defined Contingent Liability as:
 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
 A present obligation that arises from past events but is not
recognised because:
1. it is not probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation;
2. the amount of the obligation cannot be measured with
sufficient reliability.
 CONTINGENT LIABILITIES
Contingent liabilities in MFRS137 is restricted to possible obligations and
obligations for which it is not probable that an outflow of resources
embodying economic benefits will occur, or for which the amount cannot be
estimated reliably.
Contingent liabilities should not be recognised.
Contingent liabilities should be disclosed in the notes to accounts, unless the
possibility of outflow of resources embodying economic benefits is remote.
If it becomes probable that an outflow of future economic benefits will be
required for an item previously dealt with as a contingent liability, a
provision is recognised in the financial statements of the period in which the
change in probability occurs (except in the extremely rare circumstances
where no reliable estimate can be made).
 Provision vs Contingent Liability
• A provision is a type of liability ie a present obligation exists and
it is probable that economic benefit will flow from the entity.
The liability however is of uncertain timing or amount.
By contrast a contingent liability can arise in three situation:
• Where a possible obligation exists (as opposed to a probable
obligation)
• Where there is a present obligation but it is not recognised as it
is not probable that economic benefit will flow from the entity
(with a provision outflow is probable)
• Where there is a present obligation but the obligation cannot
be measured with sufficient reliability (with a provision the
amount may be uncertain but is capable of reliable estimation)

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CONTINGENT LIABILITIES - Recognition
Contingent liabilities can be classified as to:
– Probable,
– Possible, or
– Remote
Probable contingent liability
A contingent liability that is probable is considered a liability.
Possible contingent liability
Possible contingent liabilities should not be recognised but
disclosed.
Remote
Ignore
Entity has to determine by judgement if a contingency is a
probable or possible or remote.
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 CONTINGENT LIABILITIES
Probable contingent liability
 A contingent liability that is probable is considered a liability.
 If the amount can be estimated reliably it should be accounted for.
 If the amount cannot be estimated reliably, then a disclosure by way
note is to be made.
Possible contingent liability
 Possible contingent liability should not be recognised.
 A disclosure is made in the financial statement by way of a note if a
contingent liability is possible but not remote.
Remote contingent liability
 If the contingent liability is remote it need not be disclosed.
 Disclosure –
CONTINGENT LIABILITIES
MFRS 137 requires disclosures of the following
information;
• a brief description of the nature of the
contingent liability;
• an estimate of its financial effect,
• an indication of the uncertainties relating to the
amount or timing of any outflow, and
• the possibility of any reimbursement.
 CONTINGENT LIABILITIES
Example of disclosures of contingent liability;

32 Contingent Liability
Company
20X4 20X3
RM RM
Corporate guarantee given to banks
for credit facilities granted to
subsidiaries (unsecured) 64,843,200 71,904,200
 PROVISION vs CONTINGENT LIABILITIES
 Generally, all provisions are contingent liabilities as there
is uncertainty about the timing and amount.
 However, MFRS 137 uses the term ‘provision’ to cover
contingencies that are recognised as liabilities in the
statement of financial position.
 The term ‘contingent’ is used for liabilities and assets that
are not recognised either because their likelihood of
crystallisation is only possible or remote, or because they
fail the recognition criteria such as reliable estimate of the
amount cannot be made.
 PROVISION vs CONTINGENT LIABILITIES
Example 3 of textbook
An employee was injured while carrying out his job function.
He has taken legal action and the outcome is uncertain.
In this case the entity has to determine if it has a liability.
There is a past event but the obligation is uncertain.
If there is a probability that the entity will be held liable, then
there is an obligation. The entity has to make a reliable
estimate of the cost to be incurred.
Assuming it is able to estimate reliably the cost, then the
entity has a liability and has to accrue it.
If the entity is unable to estimate the cost then it has to make
a disclosure of the fact.
 CONTINGENT ASSETS
MFRS 137 defines Contingent Assets as:
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.
MFRS 137 provides that contingent assets
should not be recognized .
should be disclosed where it is probable that the gain will be realised
or where inflow of economic benefits is probable .
gain contingencies which are possible or remote shall not be
disclosed.
This requirement is basically an application of the prudence
consideration because a contingent asset may result in the
recognition of income which may never be realised.
 Gain Contingencies
With the provisions of MFRS137 and also the
conservatism principle, contingent assets are seldom
disclosed in financial statements.

Note that the prior rules have supported the

recording of LOSS contingencies.

As a general rule, we
never record GAIN
contingencies.
 CONTINGENT ASSETS
In rare circumstance where the realisation of a contingent gain
is virtually certain, then such gain is not a contingency and its
recognition of the asset is appropriate.
Example
A legal suit filed against a third party has been ruled in favour
of the entity and the decision is known before the financial
statements are authorised for issue.

In this case, the amount recoverable from the third party shall
be recognised because the gain is no longer a contingency.
 CONTINGENT ASSETS
Example 4 of textbook
In Nov x3, a poultry farmer had to destroy all his poultry due to
a government order to contain the spread of the avian flu. On 15
Dec x3, the government made a press statement stating that it
would pay compensation to all poultry farmers.
On 10 July x4, the farmer received a letter specifying the amount
he would received.
Can the farmer recognise an asset in x3?

In this case the farmer has virtually certain of the receipt.

A press statement is not evidence of the virtually certain
situation. However, it can recognise the asset in x4 on receipt of
the document confirming the receipt.
 Disclosure
- CONTINGENT ASSETS
MFRS 137requires disclosures of
a brief description of the nature of
the contingent asset; and
an estimate of its financial effect (if
this is not disclosed due to not
practicable to do so, then the fact
should be stated).
 CONTINGENT ASSETS

34 Contingent Assets
Group Company
20X4 20X3 20X4 20X3
RM’000 RM’000 RM’000 RM’000
Differences between the amount
claimed and the amount awarded
by the Government in respect of the
land acquired or utilised by the
Government 1,590 3,184 1,483 -
 Tutorial Question
Questions from Jane Lazar & Huang Ching
Choo. 2014. Financial Reporting Standards for
Malaysia. 4th Edition – Chapter 38
•Question 3
•Question 4
•Question 5
•Question 6

70
Lecture
Exercise
 Questions
1. ABC is the plaintiff in a RM16 million lawsuit filed against a supplier. The
litigation is in final appeal and legal counsel advises that it is virtually
certain that ABC will win the law wuit and be awarded RM12 million. How
should ABC account for this event?
2. DEF can estimate the amount of loss that will occur if a foreign government
expropriates some company property. Expropriation is considered
reasonably possible. How should DEF report this loss?
3. XYZ manufactures kitchen storage products. During the year, the company
became aware of potential costs due to
a. a possible product defect that is reasonably possible and can be
reasonably estimated,
b. A safety hazard that is probable and cannot be reasonably estimated
c. A new product warranty that is probable and can be reasonably
estimated.
Which, if any, of these costs should be accrued?