Cases
Practical case
Tectonia SA (fictitious entity) installs solar panels and gives its customers a performance warranty. At the 31 December 20X5 year-end, it must measure this liability at fair value; no market quotes the transfer of such a warranty. The valuation department proposes a risk-free rate, an own credit spread and a flow of repair costs.
Your assignment
Explain how the warranty is measured; compute its fair value and check the effect of own credit risk; identify the missing information; classify the measurement in the fair value hierarchy and justify; record the liability (case data) and present its effect; conclude.
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.
Advanced level: no help, the work is grouped by kind.
4 documents: open each one to read it.
Document 1Contract
Performance warranty given on 1,250 installations sold in 20X5: repair or replacement of faulty panels for 2 years. No quoted price exists for the transfer of this warranty to a third party and no third party holds it as an asset; the measurement rests on a present value technique of the outflows. The standard that applies to this liability requires it to be measured at fair value (case data).
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Installations sold covered by the warranty | 1,250 units | |
| Expected repair cost in 2 years (market participants' estimate, margin included) | €1,102,500.00 | |
| Number of discounting periods of the warranty | 2 years | |
| Risk-free rate (government bond curve) | 3% | |
| Entity's own credit spread (internal estimate) | 2% | |
| Discount rate used | 5% | |
| Change in fair value for a 10% change in the estimated flow | €100,000.00 | |
| Maximum change in fair value for a reasonable change in the credit spread | €15,000.00 | |
| Annual insurance premium 20X6 | €45,000.00 |
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.
Performance warranty
Flows and rates
Sensitivity analysis
Insurance premium
8 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.
Task 1Analysis
How is the warranty measured (transfer, non-performance risk)?
Task 2Calculation
Compute the fair value of the warranty.
Part 1 · Calculation
Compute the fair value of the warranty.
Task 3Calculation
Check: what would the present value be at the risk-free rate only?
Part 1 · Calculation
Check: what would the present value be at the risk-free rate only?
Task 4Missing information
What information is missing to support the rate?
Task 5Professional judgement
In which level of the hierarchy should the measurement be classified? Justify.
Task 6Journal entries
Record the liability.
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 7Effects on the financial statements
What is its effect on the financial statements?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 8Conclusion
Write the conclusion.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 10).
Document this file
These working papers use the data and results of this case.
Normative references