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Practical caseIAS 37L1 · Fundamental

Warranties, shared pollution, lawsuits and a claim: provision, contingent liability or contingent asset

5 documents7 tasks≈ 55 min
0 / 11 items completed
Standards
IAS 37 — Provisions, Contingent Liabilities and Contingent Assets
Assistance levelFull guidance · strong assistance
  • Method: shown
  • Checklist: shown
  • Hints: shown
  • Step-by-step work: shown

Case brief

Situation

Calvenne Thermique SAS (a fictitious entity) manufactures and sells electric water heaters for households and hotels. Together with the chief financial officer, you are reviewing the liabilities for the year ended 31 December 20X1; the financial statements will be authorised on 25 February 20X2. Five documents describe the situations to be examined.

Your assignment

For each situation, determine whether there is a liability within the meaning of IAS 37 and, if so, whether it is a provision, a contingent liability (disclosed or not) or another type of liability; classify the claim against the supplier; calculate the warranty provision and the provisioned share of the clean-up obligation; record the entries at 31 December 20X1 and measure their impact on the financial statements.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Fundamental level: the method, help and references are shown.

Method

  1. Read the brief and the assignment.
  2. Open each document and spot the relevant data.
  3. Carry out the work in the suggested order.
  4. Submit, then read the conclusion and the model answer.

File checklist

  • Open each piece (0 / 5 consulted) · to do
  • Sort the information in the pieces · to do
  • Carry out the work (0 / 11) · to do
  • Submit the file, then assess yourself · to do

Events

Chronology of the file

  1. November 15 20X1Date of the prefectural order · Dated fact of the file

    Document 2

  2. December 10 20X1Date of the first-instance judgment · Dated fact of the file

    Document 4

  3. December 31 20X1Reporting date · Dated fact of the file

    Document 5

  4. January 20 20X2Date of the court-appointed expert's report · Dated fact of the file

    Document 3

Documents

File documents

5 documents: open each one to read it.

Document 1Memo

After-sales department memo on warranties

After-sales department memo, January 20X2. The water heaters sold in 20X1 are covered by a 24-month contractual warranty: Calvenne repairs or replaces any defective appliance free of charge. Based on the history of the last five years, for all appliances sold in 20X1 still under warranty: in 70% of cases, no repair will be needed; in 25% of cases, minor defects will lead to a total cost of 150,000; in 5% of cases, major defects will lead to a total cost of 1,100,000. The sales manager considers that no provision is needed, since each appliance is unlikely to fail.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Length of the contractual warranty24 months
Probability of no defect70%
Total cost of minor defects€150,000.00
Probability of minor defects25%
Total cost of major defects€1,100,000.00
Probability of major defects5%
Date of the prefectural orderNovember 15 20X1
Total clean-up cost€640,000.00
Share borne by Calvenne35%
Amount claimed by Hôtellerie Ruvalis€260,000.00
Estimated outflow if Calvenne loses€180,000.00
Date of the court-appointed expert's reportJanuary 20 20X2
Indemnity claimed by the former sales agent€40,000.00
Amount claimed from Faldaro Composants€95,000.00
Estimated recoverable amount€80,000.00
Date of the first-instance judgmentDecember 10 20X1
Reporting dateDecember 31 20X1
December servicing not yet invoiced€14,000.00
Paint shop refurbishment budget€300,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort5

  • After-sales department memo on warranties

  • Prefectural order and agreement between occupiers

  • Lawyers' letter on pending litigation

  • Lawyers' letter on the claim against Faldaro Composants

  • Chief financial officer's memo

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      7 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        For each situation, is there a liability at the reporting date? Distinguish a provision, an accrual and the absence of an obligation.

        Set out the facts, the question raised, then your analysis.

        This answer is not marked automatically: after submitting, you will compare it with the solution.

      2. Task 2Calculation

        Calculate the warranty provision at 31 December 20X1.

        Start from the data in the pieces, set the formula, check the unit and the order of magnitude.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the warranty provision at 31 December 20X1.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Calculate the provisioned share and the contingent liability share of the clean-up obligation.

        Start from the data in the pieces, set the formula, check the unit and the order of magnitude.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the provisioned share and the contingent liability share of the clean-up obligation.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Share of the clean-up treated as a contingent liability

      4. Task 4Analysis

        Classify the Ruvalis lawsuit, the former agent's claim and the claim against Faldaro.

        Set out the facts, the question raised, then your analysis.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Classify the Ruvalis lawsuit, the former agent's claim and the claim against Faldaro.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Estimated financial effect of the contingent asset (notes)

        This answer is not marked automatically: after submitting, you will compare it with the solution.

      5. Task 5Journal entries

        Record the entries at 31 December 20X1.

        Identify the accounts affected and the direction of each movement; check the balance.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      6. Task 6Effects on the financial statements

        What is the impact of these entries on the financial statements at 31 December 20X1?

        For each financial statement, state the line affected, the direction and the amount.

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      7. Task 7Conclusion

        Write the conclusion and answer the proposals of the chief financial officer and the sales manager.

        Write a conclusion that cites the facts and the treatment chosen.

        This answer is not marked automatically: after submitting, you will compare it with the solution.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 11).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 37 §10
      • IAS 37 §11
      • IAS 37 §13
      • IAS 37 §14
      • IAS 37 §15
      • IAS 37 §16
      • IAS 37 §17
      • IAS 37 §18
      • IAS 37 §19
      • IAS 37 §23
      • IAS 37 §24
      • IAS 37 §25
      • IAS 37 §27
      • IAS 37 §28
      • IAS 37 §29
      • IAS 37 §31
      • IAS 37 §32
      • IAS 37 §33
      • IAS 37 §34