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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Sundaram Textiles Ltd. sold goods under a warranty on 1 February 2026. At the balance sheet date, 31 March 2026, the company's past experience shows that some goods will need repair under warranty, and a reliable estimate of the cost can be made. Which treatment is correct under AS 29?

A provision should be recognised. The sale of goods with warranty is a past event that creates a present legal obligation, repair outflows are probable based on experience, and a reliable estimate is available. Since all AS 29 recognition conditions are met, mere disclosure or waiting for claims is not appropriate.

  1. ARecognise a provision because a present obligation exists from a past event, an outflow is probable and a reliable estimate is possibleCorrect
  2. BDisclose only a contingent liability because repairs have not yet been claimed
  3. CIgnore the matter until actual repair claims are received
  4. DRecognise a contingent asset for the expected warranty recoveries

Explanation

The sale with warranty is the past event creating a legal obligation. An outflow is probable for the population of goods sold and the amount can be estimated reliably, so all three recognition criteria are met and a provision is made. Waiting for claims or disclosing only a contingent liability is wrong because the criteria are already satisfied.

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