Question 1

Discuss the difficulties in measuring a provision under HKAS 37 `Provisions, Contingent Liabilities and Contingent Assets

Given the following three scenarios, (all events below are independent with each other)

The director of ABC Limited has some queries about accounting for provision and contingencies for the following events that took place during the year ended 31 March 2023

At the start of 2022, ABC Limited provided a guarantee of $1.5 million in respect of certain borrowings of a subsidiary whose financial condition at that time was sound. During 2023, however, the subsidiarys financial condition deteriorated. On 31 March 2023, the subsidiary was declared bankrupt. Its outstanding borrowings guaranteed by ABC Limited amounted to $1.3 million at that time. (7 marks)

On 15 March 2023, ABC Limited filed a suit against its business partner for breach of contract for an amount of $5 million. The companys legal advisor estimated that a favourable settlement is probable. On 31 March 2023, ABC Limited had not received any money from this business partner. (5 marks)

On 15 January 2023, the board of ABC Limited decided to close down a division making a particular product. On 20 March 2023, a detailed plan for closing down the division, which included redundancy costs estimated to be $3 million, was agreed by the board. Letters were sent to customers informing them to seek an alternative source of supply and redundancy notices were sent to the divisions staff.

Required

In accordance with the requirements of HKAS 37, discuss and explain the appropriate accounting treatments and disclosures for the year ended 31 March 2023 for the events given in the question