Apparent Provisions Cannot Be Recognized †Myassignmenthelp.Com

Question: Discuss About The Apparent Provisions Cannot Be Recognized? Answer: Introducation The recognition of provisions is driven by AASB 137 in accordance to which the following three conditions are required to be met (AASB, 2010). A present obligation should arise based on the events in the past. In order to settle these obligations, it must be likely that economic resource outflow would be required. The amount of outflow can be estimated in a reliable manner. It is essential that all the above conditions need to be met and failure of even one condition would lead to non-recognition as a provision (Deegan, 2014). In relation to the given case including Shire Pty Ltd, the following points are noteworthy in relation to the recognition of provisions. A present obligation does exist for the company as there is a warranty that the company offers whereby it would repair or replace the tools which tend to become dysfunctional within 12 months of purchase. This clearly provides legal rights to the customers and a legal obligation for the company which it has to meet on account of the commitment it has given.Since, the company would need to either repair or replace the tools under warranty, therefore, it is apparent that there would be outflow in terms of financial resources. This is because both in repair or providing a new tool, economic resources would be utilised. With regards to reliable estimation, till recently the warranty was pegged at 3% of the sales which was a reliable estimation. However, offlate this is proving to be less as the machine is getting older and hence the tools quality is not as good as before. Further, as the machine is getting older, there is risk of more dip in quality. Besides, between the two partners, there is lack of clarity on the future course of action regarding this problem. As a result, reliable estimation of warranties is difficult in the present scenario. On account of the above discussion, it is apparent that provisions cannot be recognised. A better way to capture the likely outflow of economic resources would be in the form of contingent liability as the increasing warranty outflow cannot be reliably estimated. Also this would also have adverse impact on the reputation of the business. This problem is further compounded due to inherent differences between the partners. Also, the accountant Brooke is not of much help in this regard considering the lack of experience. Thus, recognition of contingent liability currently would be appropriate (Deegan, 2014). Reference AASB (2010), Provisions, Contingent Liabilities and Contingent Assets, AASB Website, [online] management at https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPoct10_01-11.pdf [Accessed September 9, 2017] Deegan, C. (2014). Financial Accounting Theory, 4th edn. Sydney: McGraw-Hill