QUESTION FOUR

$[25]$

Sibongile Construction $($Pty$)$ Ltd$,$ a South African company, specializes in large$-$scale infrastructure projects. During the financial year ending $31$ December $20$X$3,$ the company faced several legal disputes and uncertain events that require careful consideration under IAS $37$ Provisions, Contingent Liabilities, and Contingent Assets. The following events have raised concerns for Sibongile Construction's management:

Sibongile Construction is currently involved in a legal dispute with a subcontractor over faulty materials supplied during the construction of a highway in KwaZulu$-$Natal. The subcontractor is suing Sibongile Construction for R$10$ million in damages. The company's legal team believes there is a $60\%$ chance that they will lose the case, and the settlement could range from R$4$ million to R$7$ million, with a most likely outcome of R$5$ million. The case is expected to be resolved in early $20$X$4.$

Sibongile Construction has been issued a notice by environmental authorities for a clean$-$up operation on a project site where hazardous materials were improperly disposed of$.$ The company is legally required to carry out the clean$-$up$,$ which will cost an estimated R$3$ million. Although the clean$-$up has not yet started, management expects to begin the work in early $20$X$4.$

In $20$X$3,$ Sibongile Construction completed a major housing project in Gauteng. As part of the contract, the company provides a $2-$year warranty for any structural defects. Historically, $3\%$ of the project cost is spent on rectifying defects. The total cost of the project was R$200$ million.

$3$

Based on past experience, the company expects warranty claims amounting to R$6$ million over the next two years.

$4.$ Sibongile Construction has filed a claim against a different supplier for R$8$ million due to defective equipment supplied in $20$X$2.$ The company's legal team believes there is a $40\%$ chance of winning the case, which is expected to be heard in $20$X$4.$

Required:

a$.$ For each of the scenarios above, determine whether Sibongile Construction should recognize a provision or disclose a contingent liability as at $31$ December $20$X$3.$ Apply the principles of IAS $37$ in your analysis, explaining whether and how provisions should be recognized and how contingent liabilities should be disclosed.

b$.$ For each provision recognized in part $1,$ calculate the amount that should be recognized in the financial statements of Sibongile Construction as at $31$ December $20$X$3.$ Discuss the measurement of the provisions and whether any adjustments may be necessary in future periods.