Eco State Sdn. Bhd. (ECOS) operates a chain of retail outlets. The Board of Directors decides not to buy the public liability insurance to cover the cost of compensation claims made against ECOS for injury or damage to its customers. The board of directors chooses to self-insure against potentially insignificant losses. ECOS expects to pay RM500,000 a year in respect of minor accidents to its customers. ECOS files a suit against its business partner for breach of contract. The companys lawyers advise that a favourable settlement is highly probable. ECOS has had a number of these significant lawsuits in the past three years.

1. Discuss the accounting treatment for the above events in accordance with IAS 37/ MFRS 137 Provisions, Contingent Liabilities and Contingent Assets.