How to approach it
- For each matter: was there a present obligation (legal or constructive) at the reporting date from a past event?
- Is an outflow probable, and can it be measured reliably? Then provision, contingent liability or nothing.
- Events after the reporting date: adjusting if they give evidence about conditions at the reporting date; otherwise non-adjusting.
- Quantify where you can and give the reason for each conclusion.
Key rules to apply
- IAS 37: provision = best estimate of the expenditure needed to settle the obligation at the reporting date, using information available before authorisation.
- Contingent liability: possible obligation, or present obligation where outflow is not probable; disclose unless remote.
- Seriously prejudicial disclosure: in rare cases, disclose only the general nature of the dispute and why details are withheld.
- IAS 10: a customer's bankruptcy after the year-end usually confirms that a receivable was impaired at the year-end (adjusting).
- Warranty provision = expected cost for sales to date less repairs already done; a later extension of cover is a non-adjusting event.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Using the original offer or the claim amount instead of the latest best estimate (examiners' point).
- Not addressing prejudicial disclosure.
- Not deducting warranty costs already incurred; treating the extension as adjusting.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q7 without copying it.
Original practice question
Warranty and a bankrupt customer
A company sold 50,000 units in 2025 with a one-year warranty. Experience: 10% need minor repairs at Rs 200 and 4% major repairs at Rs 1,000. Repairs costing Rs 1.2m were already done on these units in 2025. In February 2026 it extended cover to two years. A Rs 20m receivable had a 25% allowance at 31 December 2025; the customer went bankrupt in January 2026 and only 40% is now recoverable.
Required: Calculate the warranty provision and the receivable adjustment at 31 December 2025.
Worked solution
| Working | Rs m |
|---|---|
| Expected minor: 50,000 × 10% × 200 | 1.0 |
| Expected major: 50,000 × 4% × 1,000 | 2.0 |
| Less already incurred | (1.2) |
| Warranty provision | 1.8 |
| Required allowance: 20 × 60% | 12.0 |
| Existing allowance: 20 × 25% | (5.0) |
| Additional impairment | 7.0 |
Answer: Provision Rs 1.8m; the extension is non-adjusting (disclose if material). Increase the allowance by Rs 7m: the bankruptcy is adjusting.