Question 1

Certain events occurred in Platinum Bhd during the year ended 30 June 2019 in which provisions for warranty were recognized at RM2 million since the product warranty was part of the marketing strategy to encourage sales. This amount was based on actual previous pattern of repairs and replacements. However, the customer services division had estimated that only 5% of product A and 10% of product B will be returned for repairs and replacement out of the sales made during the year end. The sales for product A and product B during the year ended was RM5 million and RM20 million respectively.

Required:

a) Explain the differences between provision and contingent liability in accordance with MFRS 137 Provisions, Contingent Liabilities and Contingent Assets and why they are accounted for differently.

b)Discuss and show the accounting treatments for the above events according to MFRS 137 Provisions, Contingent Liabilities and Assets.

Question 2

Arena Bhd operates as a shipping company transporting cargo from Malaysia to various destinations overseas. Its financial year ends on 31 December and its annual reports are usually approved for publication three (3 months) after the financial year end. It has a subsidiary, Angkat Angkut Bhd, which operates a ferry to Indonesia from the Port of Malacca. It has no other investments in the equity shares of any other entities.

The following events took place during the year ended 31 December 2019.

i)On 1 June 2019, Arena Bhd acquired 45 percent equity interest in Zazan Bhd, a land transporter of cargo, as part of its expansion plan. The balance of the shares in Zazan Bhd is held by numerous shareholders, none of whom hold more than one percent (1%) of Zazan Bhd's shares.

ii)On 30 of December 2019, one of its ships suffered an oil leak 15 kilometers off the shore of Thailand. Due to strong currents, the oil was washed ashore and contaminated 3 kilometers of the beach. Thailand has no environmental regulation on contamination of its shores. However, the company is very well known as an advocate of environmental preservation and has an excellent track record of cleaning up all contamination that it causes. As at 31 December 2019, it is estimated that the clean-up of the contaminated beach would costs the company RM500,000.

iii)On 30 January 2020, Arena Bhd entered into a negotiation to acquire 40 percent of the equity shares in Gedombak Bhd from its controlling shareholder, Com-Ex Bhd. Gedombak Bhd is a commodity exporting company. Under the terms of acquisition, Arena Bhd would have joint control with Com-Ex Bhd over the daily operations of Gedombak Bhd with equal rights over its net assets. The directors of Arena Bhd believe that the acquisition would allow the company to expand its business upstream. The agreement is expected to be completed by the end of March 2020.

Required:

Advise Arena Bhd whether it should treat the cost for cleaning the oil spill contamination as a 'provision' or a 'contingent liability' in order to comply with the requirements of MFRS 137 Provisions, Contingent Laibilities and Contingent Assets.