25 February 2022 Tutorial Activity

Question 1

A manufacturer sells products to its customers. The sale terms include an assurance type
warranty that the product will function in accordance with the agreed upon specifications. Under
the terms of the sale, the manufacturer undertakes to make good any manufacturing defects in the
products within a one year from date of sale. On past experience, it is probable that there will be
some products sold with manufacturing defects.

一个制造商向其客户出售产品。销售条款包括一个保证式的担保，即产品将按照商定的规
格运作。根据销售条款，制造商承诺在销售日期起一年内弥补产品的任何制造缺陷。根据
过去的经验，可能会有一些产品在销售时存在制造缺陷。

Required:

Explain with reasons, whether a provision shall be recognized in the above case.

A provision is recognised when an entity has a present obligation ( legal or constructivel as a

result if a past event obligation event. Present obligations as a result of a past obligation event .
The obligation event is the sale of the product with a warranty, which gives rise to a legal
obligation • The past event is the sale of the product with 1 years warranty• Thus at legal
obligations, a provision should be recognized.

OR

There is a present obligation as a result of the past obligating event. The past event is the sale of
products that has manufacturing defects with a 1-year warranty. Hence, as a legal obligation, a
provision should be recognized.

According to the terms of the sale of the company, the company is willing to accept to make
changes to the defective products within one year’s time, hence it can be categorized as the sale
of a product that gives rise to a constructive obligation. Thus, a provision should be recognized.
Besides, the company may either exchange the products or make a refund to the customers. It is
probable that an outflow of resources embodying economic benefits will be required to settle the
obligation. Therefore, provision should be recognized.

Question 2

Explain the differences between contingent assets and contingent liabilities

A contingent asset is a possible asset whereas a contingent liability is a possible obligation that
arises from past events and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the entity.

A contingent liability that is probable is considered a liability whereas a contingent asset that is
probable will be disclosed.

A possible contingent liability will not be recognized but disclosed whereas a possible
contingent asset will be ignored.

Both remote contingent liability and contingent assets should be ignored.

OR

Contingent assets are possible assets whose existence will be confirmed by the occurrence or non
occurrence of uncertain future events that are not wholly within the control of the entity.
Contingent assets are not recognised, but they are disclosed when it is more likely than not that
an inflow of benefits will occur. However, when the inflow of benefits is virtually certain an
asset is recognised in the statement of financial position, because that asset is no longer
considered to be contingent.

Contingent liabilities are possible obligations whose existence will be confirmed by uncertain
future events that are not wholly within the control of the entity. An example is litigation against
the entity when it is uncertain whether the entity has committed an act of wrongdoing and when
it is not probable that settlement will be needed. Contingent liabilities also include obligations
that are not recognised because their amount cannot be measured reliably or because settlement
is not probable. Contingent liabilities do not include provisions for which it is certain that the
entity has a present obligation that is more likely than not to lead to an outflow of cash or other
economic resources, even though the amount or timing is uncertain.