The main contents of the chapter consist of the following: Measuring provisions, methods of measuring uncertainties, warranty provisions, guarantees, future operating losses, onerous contracts, onerous leases. | Revise lecture 17 1 Measuring provisions The amount recognised as a provision should be: A realistic-estimate A prudent estimate of the expenditure needed to settle the obligation existing at the reporting date Discounted whenever the effect of this is material 2 Methods of measuring uncertainties Methods of measuring uncertainties include: Weighting the cost of all probable outcomes according to their probabilities (expected values) Considering a range of possible outcomes 3 Warranty provisions Introduction A warranty is often given in manufacturing and retailing businesses. It is either an: Express (legal) or Implied (constructive) Obligation to make good or replace faulty products. 4 Warranty provisions A provision is required at the time of the sale rather than the time of the repair/replacement as the making of the sale is the past event which gives rise to an obligation. 5 Warranty provisions This requires the seller to analyse past experience so that they can estimate: How many claims will be made. If manufacturing techniques improve, there may be fewer claims in the future than there have been in the past. How much each repair will cost. As technology becomes more complex, each repair may cost more. 6 Warranty provisions The provision set up at the time of sale: Is the number of repairs expected in the future times at the expected cost of each repair. Should be reviewed at the end of each accounting period in the light of further experience. 7 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. 8 Future operating losses No provision may be made for future operating losses because they arise in the future and therefore do not meet the criterion of a liability. 9 Onerous contracts An onerous . | Revise lecture 17 1 Measuring provisions The amount recognised as a provision should be: A realistic-estimate A prudent estimate of the expenditure needed to settle the obligation existing at the reporting date Discounted whenever the effect of this is material 2 Methods of measuring uncertainties Methods of measuring uncertainties include: Weighting the cost of all probable outcomes according to their probabilities (expected values) Considering a range of possible outcomes 3 Warranty provisions Introduction A warranty is often given in manufacturing and retailing businesses. It is either an: Express (legal) or Implied (constructive) Obligation to make good or replace faulty products. 4 Warranty provisions A provision is required at the time of the sale rather than the time of the repair/replacement as the making of the sale is the past event which gives rise to an obligation. 5 Warranty provisions This requires the seller to analyse past experience so that they can estimate: How many
