Advanced Financial Reporting

IAS37 PROVISIONS,CONTINGENT LIABILITIES

& CONTINGENT ASSETS
When creating for the
first time

At subsequent period
ends, any changes
should be recorded

When used for the

purpose it was
created
A business has been told by its lawyers that it is likely to have to
pay $10,000 damages for a product that failed. The business
duly set up a provision at 31 December 20X7. However, the
following year, the lawyers found that damages were more
likely to be $50,000.

Required
How is the provision treated in the accounts at:
(a) 31 December 20X7?
(b) 31 December 20X8?
Parker Co sells goods with a warranty under which customers are
covered for the cost of repairs of any manufacturing defect that
becomes apparent within the first six months of purchase. The
company's past experience and future expectations indicate the
following pattern of likely repairs:
% of goods sold Defects Cost of repairs
$m
75 None –
20 Minor 1.0
5 Major 4.0

What should the warranty provision in Parker Co's financial statements

be?
During 20X9 Smack Co gives a guarantee
of certain borrowings of Pony Co, whose
financial condition at that time is sound.
During 20Y0, the financial condition of
Pony Co deteriorates and at 30 June
20Y0.Pony Co files for protection from its
creditors.

What accounting treatment is required:

(a)At 31 December 20X9?
(b) At 31 December 20Y0?
Warren Tees Ltd. is a manufacturer of golf tees.
Tees purchased are covered by a three year
warranty, whereby the company will replace
any defective tees.
At the end of last year on 31 March 20X6, a
provision of $150,000 was made. During this year,
$75,000 was paid for the cost of replacing tees
under warranty. At the end of this year, the
company estimated that a provision of $135,000
was needed.

Show all the accounting entries and disclosures.

 Onerous contracts
❖Cost of discharging the contract is
greater than the benefit that accrues
under it.

❖A provision is required for the cheapest

option of exiting the contract, which is the
lower of:
▪ cost of fulfilling the contract
▪ any compensation/penalties payable
for failing to fulfil it.
ABC has ten years left to run a sales contract that has
recently seen costs spiral. The present value of the costs to
be incurred on completion of the contract, estimated as
at the reporting date, is $50,000. The cost of terminating
the contract early is $55,000.

How should the above scenario be accounted for?

The End