AFM391 Lecture Notes - Lecture 4: Deferred Income, Current Liability
28 Jun 2018
School
Department
Course
Professor
Warranties5.
Provided by the manufacturer included in the sale price
○
Sold separately
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Two forms of warranties:
•
Following discuss manufacturer's warranties •
Warranty is accounted for as a provision
•
Recall that a provision is an obligation that is uncertain in either amount or timing
•
We estimate warranty provisions using
expected value
techniques, which weight possible
outcomes by their associated probabilities
•
Warranty can extend beyond one year, those portions would be classified as a non
-
current
provision
•
•
At the end of 2017, $1,000,000 would be reported as current liability and $3,000,000 as a non-
current liability
•
•
•
If management's estimates subsequently is incorrect, changes are made prospectively •
If warranty obligations are immaterial, the costs can be expensed as the enterprise incurs them -
cash basis of accounting for warranties. See exhibit 11
-
11
•
AFM 391 Page 7
Document Summary
Provided by the manufacturer included in the sale price. Recall that a provision is an obligation that is uncertain in either amount or timing. We estimate warranty provisions using expected value techniques, which weight possible outcomes by their associated probabilities. Warranty can extend beyond one year, those portions would be classified as a non-current provision. At the end of 2017, ,000,000 would be reported as current liability and ,000,000 as a non- current liability. If management"s estimates subsequently is incorrect, changes are made prospectively. If warranty obligations are immaterial, the costs can be expensed as the enterprise incurs them - cash basis of accounting for warranties. It is a non-financial obligation arising from the collection of assets that have not yet been earned. Deferred revenue may have both a current and non-current portion e. g. publisher that sold a three year subscription would report current year"s subscription as current liability.
