Page 4 - 13. COMPILER QB - INDAS 37

warranties. However, industry research suggests that it is likely that such claims will be forthcoming.
Should the manufacturer recognize a provision in accordance with the requirements of Ind AS 37. Why or
why not?

(b) Assume that the firm has not been operating its warranty for five years, and reliable data exists to
suggest the following:
● If minor defects occur in all products sold, repair costs of Rs 20,00,000 would result.
● If major defects are detected in all products, costs of Rs 50,00,000 would result.
● The manufacturer‖s past experience and future expectations indicate that each year 80% of the goods

sold will have no defects. 15% of the goods sold will have minor defects, and 5% of the goods sold
will have major defects.
Calculate the expected value of the cost of repairs in accordance with the requirements of Ind AS 37, if any.
Ignore both income tax and the effect of discounting.

Solution
(a) For a provision to be recognized, Ind AS 37 requires that:
i) an entity has a present obligation (legal or constructive) as a result of a past event;
ii) it is probable that an outflow of resources embodying economic benefits will required to settle the

obligation, and
iii) a reliable estimate can be made of the amount of the obligation.
Here, the manufacturer has a present legal obligation. The obligation event is the sale of the product with a
warranty.

Ind AS 37 outlines that the future sacrifice of economic benefits is probable when it is more likely than less
likely that the future sacrifice of economic benefits will be required. The probability that settlement will be
required will be determined by considering the class of obligation (warranties) as a whole. In accordance with
Ind AS 37, it is more likely than less likely that a future sacrifice of economic benefits will be required to
settle the class of obligations as a whole.
If a reliable estimate can be made the provision can be measured reliably. Past data can provide reliable

measures, even if the data is not firm specific but rather industry based. Ind AS 37 notes that only in
extremely rare cases, a reliable measure of a provision cannot be obtained. Difficulty in estimating the amount
of a provision under conditions of significant uncertainty does not justify non-recognition of the provision.
Here, the manufacturer should recognize a provision based on the best estimate of the consideration required
to settle the present obligation as at the reporting date.

(b) The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x Rs 20,00,000) + (5% x Rs 50,00,000) = 3,00,000 + 2,50,000 = 5,50,000

Q3 (May 20)

Entity XYZ entered into a contract to supply 1000 television sets for Rs 2 million. An increase in the cost of
inputs has resulted in an increase in the cost of sales to Rs 2.5 million. The penalty for non- performance of
the contract is expected to be Rs 0.25 million. Is the contract onerous and how much provision in this regard
is required?

Solution

13. 3