The main contents of the chapter consist of the following: Warranty provisions, guarantees, future operating losses, onerous contracts, onerous leases, environmental provisions, restructuring provisions, contingent liabilities and contingent assets,. | Revise lecture 18 1 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. 2 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. 3 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. 4 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 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. 6 Onerous contracts An onerous contracts is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. 7 Onerous leases An onerous lease is an onerous contract, . 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. 8 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 . | Revise lecture 18 1 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. 2 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. 3 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. 4 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 .
