Dutch Lady & Nestle: MFRS 137 - Provisions, Liabilities, and Assets

This report provides an in-depth analysis of MFRS 137, the Malaysian Financial Reporting Standard concerning provisions, contingent liabilities, and contingent assets. It begins with an introduction to Dutch Lady Milk Berhad and Nestle, highlighting their business operations and market positions. The core of the report explains the definitions and objectives of MFRS 137, emphasizing the recognition criteria, measurement, and disclosure requirements for provisions, contingent liabilities, and contingent assets. Provisions are defined as liabilities of uncertain timing or amount, while contingent liabilities represent potential obligations dependent on future events, and contingent assets are possible assets arising from past events. The report details the accounting treatment for each, including recognition, measurement, and disclosure. It also discusses the specific application of these standards, offering examples and insights into how Dutch Lady and Nestle handle these financial reporting aspects. Furthermore, the report covers the measurement and disclosure requirements for each element, providing a comprehensive understanding of the standard's practical implications.

Intermediate financial
Accounting

Introduction of two company
Dutch Lady Milk Berhad is a producer of cow milk and dairy goods in Malaysia since
1960s. This was earlier under Royal Friesland Foods, which is a Netherlands-based multinational
Co-operative company. This is a subsidiary of Friesland Compina, that was incorporated in
December 2008 as an outcome of merger between Friesland Foods and Campina. This was
incorporated in 28th may 1963 where this provided render sweetened condensed milk in its
factory in Petaling Jaya, forming Friesland Foods’ first manufacture amenities outside the
Netherlands. During Incorporation, this was incorporated as the private joint-stock limited
organisation and incorporated with producing of only condensed milk, and later on it expanded
its operations into dairy products. Before expansion, various products started to be distributed to
surrounding nations in Asia and Oceania (Danthine and Donaldson, 2014).
Later on, it expanded its operations and serves various kinds of milk in the market. Now,
Company products covers emerging milk, UHT milk, pasteurised milk, sterilised milk, family
powered milk, low fat and 0% fat drinking yoghurt and low fat yoghurt.
While on the other hand, Nestle is the largest food and beverage producing company.
Which headquarter is situated in Switzerland, Nestle Malaysia is currently operates in 191
nations around the planet. The company’s most renowned brand line along with delivering good
food and good life. Since 1912, Company have nourishing Malaysians via our quality brands and
products such as Milo, Maggi, Nescafe and Kitkat and so on (Phillips, Alford and Guina, 2012).
Explanation on provisions, contingent liabilities and contingent assets according to MFRS 137
MFRS stands for Malaysian financial reporting standards which elaborates three situations
which are as follows:
A) Provisions
B) Contingent liabilities, and
C) Contingent assets
These are defined hereunder:
Objective: The objective of MFRS 137 is to make sure that an accurate recognition
principles and calculation bases are adopted to the provisions, contingent liabilities and
contingent assets and appropriate information is exposed in the notes in order to enables
users to know their nature, timing and amount (Kim and Zhang, 2016).
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Provisions: MFRS 137 elaborates a provision as a liability of ambiguous timing or
amount or both. An obligation is identified by standard as a current obligation of organisation
emerging from past events, settlement of which is forecasted to emergence in an outflow
from organisation embodying economic advantages. A provision is identified as a
responsibility when:
 An organisation has a current obligation (legal or constructive) as an emergence of
historical event (obligating event);
 This is possible that an outflow of resources embodying economic benefits would be
needed to settle the responsibility; and
 A justifiable forecasting could be emerged of the amount of responsibility.
This is elaborated as the liabilities of uncertain timing or amount or both. Although,
provisions are diverse from liabilities like- accrual and payables. Provisions are not specified
on timing or amount expenditure needed in the settlement.
Recognition Criteria: Provisions should be identified while: a company has current
obligation as an outcome of previous event; this is feasible that resource outflow representing
economic advantages which would be needed to settle obligation; and a justifiable
forecasting could be incorporated of the amount of obligation.
Current obligation: 1st identification criteria: current obligation emerges from the past event
(obligating events). There are basically two kinds of obligation. One is legal and other one is
Constructive obligation (Rich, Cherubini and Zhu, 2012).
Legal obligation emerges from the contract, laws or other operations of law. for instance,
obligation to replace defective parts for car sold as mentioned during sales agreement. In this
situation, obligation would emerge at the time legislation is virtually specific to be enacted.
Contingent liabilities: This is an obligation which emerges from the historical events
and whose existence would be in conformity with the occurrence or non-occurrence of one or
highly ambiguous future events not entirely throughout the control of the organisation or a
current obligation which emerges from previous events but this is not identified as this is not
probable that an outflow of resources embodying economic advantages would be needed to
fix the obligation.
Nature of liabilities:
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A responsible is elaborated as a current obligation of the organisation emerging from the
past events, settlement is forecasted to emerge in an outflow from organisation of resources
completing economic advantages.
Contingent assets: This contingent asset could be determined as:
 Virtually specific, (receipt of assets, address in balance sheet/ income statement).
 Possible and remote.
Three main criteria on recognition, measurement and disclosure requirements for the accounting
treatment of Provisions, Contingent Liabilities and Contingent Assets:
Treatment of Provision: This is the amount company put it in side for meeting the expected
liabilities. It is not saving of business instead of this it is an identified of a future liability.
 Recognition of provision- An firm must value it provision when a present responsibility
arisen as an outcome of past, for payment likely or the amount can be approximately
dependably on the money which organisation have for meeting liability needs. For
example, in the case lawsuit it is not clear that there will be need of provision which firm
have in present or not. The same is recognised only for the present obligation through
which administration is going on.
 Measurement of Provision- Amount of provision company have should be best estimated
to meet the expenses required for settlement of present duty in the form of monetary.
These can be done for the settlement of balance sheet at the year-end or for transferring
amount to third party. Measuring provision some future events are considered forecast
changes in existing technology or when gain on sale of assets are ignored (Manetti,
2014).
 Disclosure of provision- previous year equalisation is not required is provision disclosure.
Reconciliation for every class of provision is done like opening and closing balance,
changes in rate of discount, amount charged for the provision, unwinding of the discounts
and many more. Description of each class provision is done on the basis of timing, nature
and uncertainties.
Apart from these restructuring provision accept following: sale of operation it can be
done after binding sale agreement, these are done only for present future losses are not
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recognised and apart from this restructuring provision is only made for direct expenditures as
well as it is not created for activities which are ongoing.
Treatment of Contingent liabilities- This is an expected liability that can be happen and
these are depended on the result of uncertain future events. This obligation but payment is not
likely and the sum of money cannot be measured reliably. It is not confirmed that responsibilities
related to liabilities are present that may be lead to an outflow of resources substantiate economic
advantages.
Treatment of Contingent Assets- this is the assets which company can arises with the
help of their past activities or events. It is confirming only when their existence is confirmed
with their occurrence. The same is not recognised but it should be unveiled when inflow related
to economic benefits is likely. When it is realised by the company that there is income which is
just about certain, then the related assets are not a contingent asset and its acknowledgement is
suitable. The same can be classified as probable, virtually certain, possible and remote.
Measurement and disclosure requirements for the accounting treatment of Provisions, Contingent
Liabilities and Contingent Assets
Accounting treatment of Provisions: In MFRS 137 provision is define as liability of
uncertain amount, time or both. The liability means present obligation of entity which arise in
past event. The provision is recognised as obligation when present obligation is result of past
events, the outflow of resources substantiates economic benefits which help to settle obligation,
reliable estimate can develop obligation. The standard required in business for measuring
provision are as follows:
 Take uncertainty and risk into accounts. Whereas uncertainty is cannot justify the making
of excessive provision and studied the over statement of obligation and liability.
 Discount the provision. Time value of money are very important factor. Using per tax
discount rate which shows current market assessment of time value of money. Those all-
risks are very specific to obligation that cannot be show in expenditures of the company.
Discounting method are used for increasing provision due to spending time in way where
recognized as borrowing cost (Savage, Cerf and Barra, 2013).
 Take future program. Such as changes in rules and regulations or technological changes
are considering into account. Where sufficient objective and goals evidence are available.
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 Not consider profits which earn form expected disposal of assets, even if expected
disposal is related to program which rise to the provision.
Contingent liability: It is a potential liability that depends on occurrence or non-
occurrence of a future event. This refer to a probable obligation which emerge from previous
activities which will be agreed only through non- occurrence or occurrence of more than one
upcoming uncertain events not entirely within the both organisation's control. In accounting
system, a contingent liability and related loss are recorded with a journal entry. Reasonable possible: To examine whether chance of occurrence of future events is
between probable and remote.
 Remote: Chance of future events to be occurred is slight.
A contingent liability likewise emerges in highly rare case when there is a responsibility
which can’t be identified as this is not able to calculate in a reliable manner. Standard
elaborates contingent liability as:
 A current obligation which emerges from previous events but this is not identified
(Weygandt, Kimmel and Kieso, 2015).
Nestle Company is a manufacturing company that specialises in engineering products and
development. It is a customer based service industry so, this firm provides a warranty to replace
its product after expiry period. Therefore, its product warranties give rise to contingent liabilities.
In case of warranty, work is performed in order to reduce liabilities and use other resources use
to credit the cash. In the year 2011, company consistently grow and capture almost 40% market
in the milk industry and becomes leader during Malaysian country. Dutch Lady Malaysia was
reported to be on track in order to attain its RM1 billion sales target for 2013.
Contingent Assets and its transactions: Contingent asset refer to a possible asset which
emerge from the previous activities and events whose existence will be agreed only through non-
occurrence of more than one uncertain events or Activity of future not only entirely within
monitoring or control of Nestle and Dutch Lady Milk. These assets are often expected or
unplanned activities or events where there is huge inflow possibility. When the realisation in
organisation are certain, these assets in companies can be recognised in convenient way. The
inflow of contingent asset in both companies would be probable in case of disclose in the
information or notes.
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Company’s main role is to be like a leading nutrition, health and wellness organisation,
company is striving hard to cherish healthier Malaysian families by rendering great quality of
products. As this can be rightly said that Nestle everyday milk regular to care growth in the
emergence in the children and adult. Advanced packaging features a clear and attractive design
along with eye-catching colours in order to stand out among contenders on shelf. The back of
pack communicates journey of the product from farm to shelf. Nestle Just milk likewise
highlights that the product covers 100% imported components.
For measurement of contingent asset, there can be faced many uncertainties and risk along
with best estimate (Elad, 2015). This also presents the present event values and future events
along with expected asset disposal. In order to apply the measurements and recognition rules in
Nestle and Dutch Lady Milk, the organisations have to follow some certain rules and terms such
as restructuring polices, onerous contract building, and upcoming operating losses. These assets
are often not identified in the statement of finance since it may lead to the income recondition
which might never be accomplished.
Summary
Financial reporting system helps as a fundamental tool for communication between firm’s
organisation and its diverse stakeholders. Management and BODs are commended along with the
assets of an organisation and financial reports mentioned about how they can do their work in an
effective manner. In rendering guidance to members on sound financial reporting, the Financial
Statements Review Committee (FSRC) desires to elaborates deficiencies emerging from their
review of the financial statements of the public-listed companies (Okpala, 2012).
Basically, a parent company issues corporate guarantees to financial companies in order to
assure credit facilities extended to subsidiary organisations. The Committee identified that
around 37% organisations contributed for FGCs issued like contingent liabilities and Contingent
Assets. Where it had been evaluated which an outflow of cash is not possible, these FGCs were
exposed as contingent liabilities. MFRS 137 does not implement to implement to financial tools
which are covered under MFRS 139 Financial instruments recognition and measurement. It
means: provision for restructuring, settlement of lawsuit, these are one-off events. Also for huge
population events which can be measured likely in the form of weighted anticipated value like
customer refunds and warranties so on.
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These corporate guarantees are FGC which satiate the definition of financial liabilities and
should be identified as per MFRS 139. After initial recognition, FGCs must be calculated at
higher of the best forecasting of amount needed to settle to responsibility as per MFRS 137 and
amount, in the starting time, is lower where adequate, cumulative amortisation is identified. It is
crucial to make analysis of various aspect of contingent liabilities and assets which were used in
accounting treatment of an organisation financial statements. Provision are mainly used at the
best suitable estimation which consists of risk and uncertainties. It consists of total expense
which is needed to settle current obligation which reflects present value of expenditure. The
business organisation requires to present every aspects as a positive outcomes of past events. It is
most probable helpful in transferring of economic advantage that will be required to be settle the
impacts. The most reliable estimate of total amount in order to meet out the obligations. A
restructuring plan does not develop a current impact at the balance sheet if it is announced after
the data. The overall financial growth is depending upon the performance and market
sustainability of an organisation.
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REFERENCES
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Savage, A., Cerf, D.C. & Barra, R.A., (2013). Accounting for the public interest: A revenue
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Elad, C., 2015. The development of accounting in the franc zone countries in Africa. The
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>2705>.
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