The main purpose of this essay is to investigate whether the disclosure information of two companies from Bursa Malaysia listed companies which are Berjaya Food Berhad and Dutch Lady Milk Industries Berhad complied with the Malaysian Financial Reporting Standard. Berjaya Food Berhad was incorporated with Kenny Rogers Roasters, Starbucks and Jollibean. Whereas Dutch Lady Milk Industries Berhad supply quality dairy and infant nutrition products. The investigation are based on four main areas compliances with accounting standards which are leasing, earning per share, liabilities and operating segment. Both companies have disclosed these four areas. Some recommendations for the disclosure of these four areas will be discussed to ensure the user to make better decision.
IASB conceptual framework defines ‘liability is a present obligation resulted from the past events, the settlement will result in an outflow of economic resources comprising economic benefits’. An obligating event exists only where the entity has no realistic alternative to settle the obligation as such the legal obligation may be comes from a contract, legislation or other operation of law. Furthermore, Malaysian Financial Reporting Standard 137 (MFRS 137) comprises provisions, contingent liabilities and contingent assets are set out in paragraphs 1 to 95.
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According to MFRS 137 para. 10 prescribe provision as a liability that has uncertain timing or amount. Besides, a provision can be differentiated from other liabilities such as the trade payables and accruals is their uncertainty. Trade payables are the obligations for the goods or services that have been received or provided while accruals are the obligations for the goods or services that have been received or provided but have not yet paid. The amount or timing of accruals should be estimated, however the uncertainty is generally less than for provision (MFRS 2011, MFRS 137 para. 11). Based on the MFRS 137 para. 14, provision is recognised if, arising from past event, the company has a present legal or constructive obligation that can be reliably estimated, and outflow of economic benefits is probable will be needed to settle the obligations. There are 3 conditions for the provision to be recognised. First, a provision is recognised when an entity has a present obligation arising from past event. Second, outflow of resources comprising economic benefits is probable will be needed to settle the obligations. Lastly, the amount of obligation can be reliably estimated. There is no provision if it fails to satisfy these 3 conditions. For the measurement, provision should be presented in the balance sheet at the best estimate of provision amount required to settle the obligation (MFRS 2011, MFRS 137 para. 36). The future operating losses is not a provision because a present obligation is not resulted from the past event (MFRS 2011, MFRS 137 para. 63). Other than that, the present obligation under the onerous contracts is measured and recognised as a provision (MFRS 2011, MFRS 137 para. 66). This standard also prescribes onerous contract have more unavoidable cost than the economic benefit (MFRS 2011, MFRS 137 para. 68).
For each class of provision, an entity should disclose the beginning and end of thecarrying amount, additional provision, the amount used, the unused amount reversed, charges in discount rate. Besides, the brief description of nature, timing, uncertainty, assumption and any of reimbursement also need to provided (MFRS 2011, MFRS 137 para.84 -85).
MFRS 137 para 10 defines contingent liabilities as the possible obligation occurred arising from past event and its existence will be established by the occurrence or non-occurrence of one or more indefinite future events not within the control of the entity. A present obligation are not recognised because there is not a probable that outflow of resources comprising economic benefits to deal with the obligation and its amount cannot be reliably estimated. If an obligation meets the definition of a liability but fails to satisfy its criteria, therefore it is classified as a contingent liability. The contingent liabilities are not presented in the financial statement however it will be disclosed in the notes of the financial statement.
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Each class of contingent liabilities have to disclose at the end of the reporting period where it has a financial effect of uncertainty regarding the timing and amount of outflow and if any of reimbursement (MFRS 2011, MFRS 137 para. 86).
3.6. Comparison the disclosure of liabilities includes provision and contingent liabilities of two companies
Both companies disclosed same types of current liabilities which is trade and other payables and provision. Besides that, Berjaya Food Berhad also disclosed other current liability which is deferred income, whereas Dutch Lady Milk Industries Berhad disclosed derivative financial liabilities. For Berjaya Food Berhad, the trade and other payables are non- interest bearing and typically settled on 30 - 45 days terms. By comparison to Dutch Lady Berhad, the trade payables are divided into trade and non- trade. For trade, the amount owing to related companies is settled on normal trade terms whereas non-trade is subjected to unsecured, interest free and repayable on demand. Other than that, Berjaya Food Berhad disclosed provision for restoration costs based on the estimated cost of property, equipment and plant. It is classified as current liabilities as it expire at least 12 months after the reporting date. For Dutch Lady, the company disclosed provision for employee pension contribution. The assumption that have been made is the employees will complete five year term services and will benefit later. In conclusion, both companies followed the standards of MFRS 137 para. 14 for the recognition of provisions which is liabilities and assume that reliable estimated because they are present obligations and outflow of resources is probable will be needed to deal the obligations.
3.6.2. Non-current Liabilities
From the non-current liabilities perspective, only Berjaya Food Berhad disclosed the provision in term of retirement benefits. It proved by the unfunded defined benefit obligations are recognised in the balance sheet and is determined by using those assumptions include discount rates and future annual salary increase. Besides, the estimated liabilities of employee benefit are based on actuary valuation using the projected unit credit method. Therefore, it followed the standard of MFRS 137 para.14.
In the financial report of Dutch Lady’s company, it stated that the company has no material contingent liabilities other than the operating leases for its equipments which is disclosed in note 22. However, for the Berjaya Food Berhad, the company has a contingent liability which is disclosed in note 27 of the financial statement, it stated as unsecured because the bank guarantees issued to third parties. Besides, the contingent liability is not recognised in the financial statement, however it will be disclosed in the notes of the financial statement. Therefore, the company followed the standard of MFRS 137 para. 10 for the definition of contingent liability.
3.7. Recommendation disclosure of liabilities
In recent years, users are dissatisfied with the disclosure of contingent liabilities. Kennes (2013) find that disclosure provide limited quantitative information regarding the magnitude of the expected loss. These results suggested that existing SFAS 5 disclosures are useful for measures the loss contingency. Environmental liability disclosure regarding the potential cost arising from the business is also important for the company nowadays (Yue, Richardson & Thornton 1997). Furthermore, the companies need to disclose the liability related with a guarantor’s obligation under guarantees which it can be divided into contingent and non-contingent liability. Guarantor should recognised the fair value of the non-contingent element of the guarantee as a liability (Maines et.al 2002).
Hennes, KM 2013, ‘Disclosure of contingent legal liabilities’, Journal of Accounting and Public Policy, vol. 33, Issue 1, pp. 32–50, viewed 10 September 2014.
MFRS (Malaysian Financial Reporting Standard) 2011, MFRS 137, Provisions, Contingent Liabilities and Contingent Assets, IFRS Foundation, viewed 5 September 2014 <http://masb.org.my/images/MFRS2011/MFRS_137.pdf>.
Maines, LA, Bartov, E, Fairfield, PM, Hirst, E, Iannaconi, T, Mallett, R, Schrand, CM, Skinner, DJ & Vincent, L 2002, American Accounting Association’s Financial Accounting Standards Committee Response to FASB Invitation to Comment on the FASB Proposed Interpretation, Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others, viewed 10 September 2014, < https://aaahq.org/about/committee/fasc/GuarantorsDisclosure.pdf >.
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Yue, L, Richardson, G, & Thornton, D 1997, 'Corporate Disclosure of Environmental Liability Information: Theory and Evidence',Contemporary Accounting Research, vol. 14, no. 3, pp. 435-474, Business Source Complete, viewed 10 September 2014.