Professional Documents
Culture Documents
1
Warranty provisions
Introduction
A warranty is often given in manufacturing
and retailing businesses.
It is either an:
1. Express (legal) or
2. Implied (constructive)
Obligation to make good or replace faulty
products.
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Warranty provisions
3
Warranty provisions
This requires the seller to analyse past experience so
that they can estimate:
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Guarantees
• In some instances (particularly in groups) one
company will make a guarantee to another to
pay off a loan, etc. if the other company is
unable to do so.
• This guarantee should be provided for if it is
probable that the payment will have to be
made.
• It may otherwise require disclosure as a
contingent liability.
5
Future operating losses
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Onerous contracts
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Onerous leases
• An onerous lease is an onerous contract, i.e.
one where the unavoidable costs under the
lease exceed the economic benefits expected to
be gained from it.
• If leased premises have become surplus to
requirements but the lessee cannot find anyone
to sublet the premises to, the lessee will still
have to make the regular lease payments,
without being able to use the premises.
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Onerous leases
• The signing of the lease is the past event
giving rise to the obligation to make the lease
payments.
• A payment for this payment should be
recognised as an expense in the income
statement in the period when the lease
becomes onerous.
9
Environmental provisions
• A provision will be made for future
environmental costs if there is either a legal or
co constructive obligation to carry out the
work.
10
Restructuring provisions
A restructuring is a programme that is planned
and controlled by management and materially
changes either:
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Restructuring provisions
A provision may only be made if:
12
Restructuring provisions
• In the context of a restructuring, a detalied, formal
and approved plan must exist, but this is not
enough, because management may change its
mind.
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• Contingent liabilities and
contingent assets
14
Contingent liabilities
15
Contingent liabilities
2. A present obligation that arises from past
events but is not recognised because:
• It is not probable that an outflow of resources
embodying economic benefits will be required
to settle the obligation; or
• The amount of the obligation cannot be
measured with sufficient reliability.
16
Contingent assets
Solution:
19
Accounting for contingent liabilities
Contingent liabilities: