CHAPTER 3 WARRANTY LIABILITY TECHNICAL KNOWLEDGE To understand the nature and Purpose of warranty. To ascertain the recognition of an estimated warranty liability. To know the measurement of an estimated warranty liability. To test the reasonable accuracy of an estimated warranty liability, 72 Scanned with CamScannerWARRANTY Home appliances like television se refrigerators and the like are ofte warranty to provide free repai during a specified period if the ts, stereo sets, ratio sets, n sold under guarantee or Yr service or replacement products are defective. Such entity policy may involve si, of the entity if the products sold future within the specified peri gnificant costs on the part prove to be defective in the iod of time. Recognition of warranty provision PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the financial statements under the following conditions: a. The entity has a present obligation, legal or constructive, as a result of a past event. b. It is probable that an outflow of resources embodying economic benefits would be required to settle the obligation. c. The amount of the obligation can be measured reliably. Past event The past event, often referred to a s the obligating event, must have occurred. : The obligating event in this case is the sale of the product which gives rise to a constructive obligation. Probable outflow resources The warranty results in an outflow of resources embodying economic benefit in settlement. It is probable that there will be some claims against the warranty. Reliable estimate The amount recognized as the warranty provision should be the best estimate of the expenditure to settle the present obligation. 5 inty liability Where no reliable estimate can be made, no warranty lia 18 recognized. 73 Scanned with CamScanner