Irrs insight accruals and contingencies under ifrs s

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IrRS INSIGHT Accruals and Contingencies under IFRS S requires that a "provision" be recognized as a liability if a present obligation exists, if it is prob- - e that an outflow of resources is required, and if the obligation can be reasonably estimated. - ese provisions are basically the same as accruals under GAAP. However, unlike GAAP, contin- t liabilities are not recorded for IFRS. Contingencies do not meet the IFRS provisions definition ::scause a present obligation does not exist as it mayor may not be confirmed by uncertain future ents. IFRS requires footnote disclosure of such contingent liabilities unless the eventual payment . remote in which case, no disclosure is required. ating Accruals accrued liabilities require more estimation than others. Warranty liabilities are an example accrual that requires managerial assumptions and estimates. Warranties are commitments manufacturers make to their customers to repair or replace defective products within a speci- period of time. The expected cost of this commitment can be reasonably estimated at the time -sale based on past experience. As a result, GAAP requires manufacturers to record the expected of warranties as a liability, and to record the related expected warranty expense in the income ment in the same period that the sales revenue is reported. To illustrate, assume that a company estimates that its defective units amount to 1 % of sales that each unit costs $10 to replace. If sales during the period are $10,000, the estimated war- _.expense is $1,000 ($10,000 X 1 % X $10). The entries to accrue this liability and its ultimate ent follow. Income Statement 1 ransaction Expen- ses Net Income 1: Accrued - .000 of expect- +1,000 -1,000 ! +1,000 :c warranty costs = Warranty Retained \ Warranty = -1,000 units sold dur- Payable Earnings \ Expense ~-;~~~~~~-- -- - ---- -.-------------.------------------.------------------:,)--------------------------------------------------------- $1,000 in -1,000 -1,000 ( cement Inventory = Warranty = ucts to cover Payable - anty claims WAE 1.000 WRP 1.000 WRE 1.000 I WRP I 1,000 WRP 1.000 INV 1.000 WRP 1,000 I INV I 1,000
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7-9 Module 7 I Liability Recognition and Nonowner Financing Accruing warranty liabilities has the same effect on financial statements as accruing wages expense in the previous section. That is, a liability is recorded on the balance sheet and an expense is reported in the income statement. When the defective product is later replaced (or repaired), the liability is reduced together with the cost of the inventory and/or the cash paid for other costs thar were necessary to satisfy the claim. (Only a portion of the products estimated to fail does so in the current period; we expect other product failures in future periods. Management monitors this estimate and adjusts it if failure is higher or lower than expected.) As in the accrual of wages, the expense and the liability are reported when incurred and not when paid. To illustrate, Harley-Davidson reports $54,134 thousand of warranty liability on its 201 balance sheet. Its footnotes reveal the following additional information: Product Warranty Estimated warranty costs are reserved for each motorcycle at the time of sale. The warranty reserve is an estimated cost per unit sold based upon historical Company
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