Practice Question Provisions and Contingencies

You are the accountant of Seabird Berhad, and you are preparing the financial statements of the company for the year ended 30 June 2016. Consider each of the following scenarios independently.

(1) On 23 March 2016, the board of directors decided to close down one of the companys local operations. By 30 June 2016, this decision had been announced to the employees and a detailed plan had been drawn up for its implementation. This closure would involve redundancy payments of RM500,000.

(2) The directors decided to close down another of the companys operations on 12 July 2016. This would involve redundancy payments of RM75,000. As at 30 June 2016, the decision had not been announced and had not been acted upon.

(3) As at 30 June 2016, Seabird Berhad owns a fleet of lorries, all of which require annual service and maintenance. This servicing work is expected to be performed during the year to 30 June 2017, at an estimated cost of RM50,000.

Required:

In each of the scenarios described above, explain whether a provision should be recognised in the financial statements of Seaboard Berhad for the year ended 30 June 2016 IAS 37 / MFRS 137 Provisions, Contingent Liabilities and Contingent Assets..