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ACCA Applied Knowledge · Financial Accounting · Provisions and contingencies

Zeta Co sells appliances with a one-year warranty. Under IAS 37, which condition must be met before a warranty provision is recognised at the reporting date?

A warranty provision is recognised when goods have been sold under warranty, giving a present obligation from a past event, the outflow of economic benefits is probable, and the amount can be estimated reliably. Intentions, budgets or actual claims paid are not the test.

  1. ASales have been made with warranty terms, creating a present obligation from past events with a probable outflow that can be reliably estimatedCorrect
  2. BThe company intends to repair faulty goods in the future, whether or not it has sold any
  3. CThe first warranty claim has been received and paid in cash
  4. DManagement has approved a budget for future warranty costs

Explanation

IAS 37 requires a present obligation arising from a past event (the sale with warranty), a probable outflow and a reliable estimate. Intention or budgets alone create no obligation. Waiting for a claim to be paid is not required.

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