1. Financial Accounting II Lecture 32

2. Warranties – IAS 37
A manufacturer gives warranties at the time of sale to the purchaser of its products. Under the terms of the contract for sale the manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent within three years from the date of sale. On past experience, it is probable (i.e. more probable than not) that there will be some claims under the warranties.

3. Warranties – IAS 37
Present obligation as a result of past obligating event – the obligating event is the sale of the product with warranty, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement – probable for the warranties as a whole.
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4. Warranties – IAS 37
Conclusion – a provision is recognised for the best estimates of the costs of making good under the warranty products sold before the balance sheet.

5. Refund Policy – IAS 37
A retail store has a policy of refunding purchases by dissatisfied customers, even though it is under no legal obligation to do so. Its policy of making refunds is generally known.

6. Refund Policy – IAS 37
Present obligation as a result of past obligating event – the obligating event is the sale of the product, which gives rise to a constructive obligation because the conduct of the store has created a valid expectation on the part of its customers that the store will refund the purchases.
An outflow of resources embodying economic benefits in settlement – probable, a proportion of goods are returned for refund.

7. Refund Policy – IAS 37
Conclusion – a provision is recognised for the best estimates of the costs of refunds (constructive obligation).

8. Onerous Contract – IAS 37
An entity operates profitably from a factory that it has leased under an operating lease. During Dec 2000 the entity relocates its operations to a new factory. The lease on the old factory continues for the next four years, it cannot be cancelled and the factory cannot be re-let to another user.

9. Onerous Contract – IAS 37
Present obligation as a result of past obligating event –The obligating event is the signing of the lease contract, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement – when the lease becomes onerous, an outflow of resources embodying economic benefits is probable. (until the lease becomes onerous the entity accounts for the lease under IAS 17)

10. Onerous Contract – IAS 37
Conclusion – A provision is recognised for the best estimate of the unavoidable lease payments.

11. A Court Case – IAS 37
After a wedding in 2000, 10 people died, possibly as a result of food poisoning from products sold by the entity. Legal proceedings are started, seeking damages from the entity, but it disputes liability. Up-to the date of authorization of the financial statements for the year to 31 Dec 2000 for issue, the entity’s lawyers advise that it is probable that the entity will not be found liable.

12. A Court Case – IAS 37
However, when the entity prepares the financial statements for the year to 31 Dec 2001, its lawyers advise that, owing to developments in the case, it is probable that the entity will be found liable.

13. A Court Case – IAS Dec 2000
Present obligation as a result of past obligating event – On the basis of the evidence available when the financial statements were approved there is no obligation as a result of past events.
Conclusion – No provision is recognised. The matter is disclosed as a contingent liability unless the probability of any outflow is regarded as remote.

14. A Court Case – IAS Dec 2001
Present obligation as a result of past obligating event – On the basis of the evidence available there is a present obligation.
An outflow of resources embodying economic benefits in settlement – probable
Conclusion – A provision is recognised for the best estimate of the amount to settle the obligation.

15. Refurbishment Costs (No Legislative Requirement) – IAS 37
A furnace has a lining that needs to be replaced every 5 years for technical reasons. At the balance sheet date, the lining has been in use for 3 years.

16. Refurbishment Costs (No Legislative Requirement) – IAS 37
Present obligation as a result of past obligating event – There is no present obligation.
Conclusion – no provision is recognised.

17. Refurbishment Costs (No Legislative Requirement) – IAS 37
The cost of replacing the lining is not recognised because, at the balance sheet date, no obligation to replace the lining exists independently of the company’s future actions – even the intention to incur the expenditure depends on the company deciding to continue operating the furnace or to replace the lining.

18. Refurbishment Costs (No Legislative Requirement) – IAS 37
Instead of provision being recognised, the depreciation of the lining takes account of its consumption, i.e. it is depreciated over 5 years. The re-lining costs then incurred are capitalized with the consumption of each new lining shown by depreciation over the subsequent 5 years.

19. Refurbishment Costs (Legislative Requirement) – IAS 37
An airline is required by law to overhaul its aircraft once every 3 years.

20. Refurbishment Costs (Legislative Requirement) – IAS 37
Present obligation as a result of past obligating event – There is no present obligation.
Conclusion – no provision is recognised.

21. Refurbishment Costs (Legislative Requirement) – IAS 37
The costs of overhauling aircraft are not recognised as a provision for the same reasons as the cost of replacing the lining is not recognized as a provision in the previous example.
Even a legal requirement to overhaul does not make the costs of overhauling a liability, because no obligation exists to overhaul the aircraft independently of the entity’s future actions.

22. Profit and Loss Account 4th Schedule Part III
1. The profit and loss account shall be so drawn up as to disclose separately the manufacturing, trading and operating results. In the case of manufacturing concern, the cost of goods manufactured shall also be shown.

23. Profit and Loss Account 4th Schedule Part III
2.The profit and loss account shall disclose all material items of income and expenses including the following, namely:
2(A) The turnover and showing as deduction there from trade discount and sales tax.

24. Profit and Loss Account 4th Schedule Part III
2(B) Expenses, classified according to their function under the following sub-heads, along with additional information on their nature, namely:__
(i) cost of sales;
(ii) distribution cost;
(iii) administrative expenses;
(iv) other operating expenses; and
(v) finance cost.

25. Profit and Loss Account 4th Schedule Part III
2(C) Other operating income, which shall include the following, namely:__
(i) income from financial assets;
(ii) income from investments in and debts, loans, advances and receivables to each related party; and
(iii) income from assets other than financial assets.

26. Profit and Loss Account 4th Schedule Part III
2(D) Finance cost shall show, separately the amount of interest on borrowings from related parties, if any.

27. Profit and Loss Account 4th Schedule Part III
2(E) Other information relating to the following, namely:__
(i) Debts written off as irrecoverable distinguishing between trade debts, loans, advances and other receivables; and
(ii) provisions for doubtful or bad debts distinguishing between trade debts, loans, advances and other receivables.

28. Profit and Loss Account 4th Schedule Part III
2(F) The aggregate amount of auditors’ remuneration, showing separately fees, expenses and other remuneration for services rendered as auditors and for services rendered in any other capacity and stating the nature of such other services. In the case of joint auditors, the aforesaid information shall be shown separately for each of the joint auditors.

29. Profit and Loss Account 4th Schedule Part III
2(G) In the case of donations where any director or his spouse has interest in the donee, the names of such directors, their interest in the donee and the names and address of all donees shall be disclosed.