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Note X: Provisions 

 

 

Warranty 

provision 

  

 

$'000 

At 1 April 20X6 

 

 150 

Increase in the provision during the year 

 

 60 

Amounts used during year 

 

  (75) 

At 31 March 20X7 

 

  135 

The warranty provision relates to estimated claims on those products sold in the year ended 31 March 

20X7 which come with a three year warranty. The expected value method is used to provide a best 

estimate. It is expected that the expenditure will be incurred in the next three years. 

The table above is essentially a T-account, set out as follows. 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

206

 

WARRANTY PROVISION 

 

 $'000      

 $'000      

Utilised 

  75 

Balance b/f 1 April 20X6 

 150 

Balance c/f 31 March 20X7 

 135 

Increase during the year 

   60 

 

 210 

 

 210 

3.2  Disclosures for contingent liabilities 

Unless remote, disclose for each contingent liability: 

 

A brief description of its nature, and where practicable 

 

An estimate of the financial effect 

 

An indication of the uncertainties relating to the amount or timing of any outflow 

 

The possibility of any reimbursement 

(IAS 37, para. 86) 

3.3  Disclosures for contingent assets 

Where an inflow of economic benefits is probable, an entity should disclose: 

  

A brief description of its nature, and where practicable 

 

An estimate of the financial effect 

(IAS 37, para. 89) 

 

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CHAPTER 11  

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  PROVISIONS AND CONTINGENCIES 

 

207 

 

A provision should be recognised:  

 

– 

When an entity has a present obligation 

 

– 

When it is probable that a transfer of economic benefits will be required to settle it 

 – When 

a 

reliable estimate can be made of the amount involved 

 

A contingent liability must not be recognised as a liability in the financial statements. Instead it should 

be disclosed in the notes to the accounts, unless the possibility of an outflow of economic benefits is 

remote. 

 

A contingent asset must not be recognised as an asset in the financial statements. Instead it should be 

disclosed in the notes to the accounts if it is probable that the economic benefits associated with the 

asset will flow to the entity. 

 

IAS 37 requires certain items for provisions and contingent assets and liabilities to be disclosed in the 

financial statements. 

 

1 

A company is being sued for $10,000 by a customer. The company's lawyers reckon that it is likely that 

the claim will be upheld. Legal fees are currently $5,000. 

How should the company account for this? 

2 

Given the facts in 1 above, how much of a provision should be made if further legal fees of $2,000 are 

likely to be incurred? 

A $10,000 

B $5,000 

C $15,000 

D $12,000 

3 

A company has a provision for warranty claims b/f of $50,000. It does a review and decides that the 

provision needed in future should be $45,000. What is the effect on the financial statements? 

 

Statement of profit or loss 

Statement of financial position 

A 

Increase expenses by $5,000 

Provision $50,000 

B 

Increase expenses by $5,000 

Provision $45,000 

C 

Decrease expenses by $5,000 

Provision $50,000 

D 

Decrease expenses by $5,000 

Provision $45,000 

4 

A contingent liability is always disclosed on the face of the statement of financial position. 

True or false? 

5 

How does a company account for a contingent asset that is not probable? 

A 

By way of note 

B 

As an asset in the statement of financial position 

 

C 

It does nothing 

 

D 

Offset against any associated liability 

 

 

 

CHAPTER ROUNDUP 

QUICK QUIZ

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