Hello
I need advice from experts on this forum-
Please advise the best method / accounting treatment to reverse provision for warranty.
Our company is dealing in UAV’s. We had bought few units on which the supplier provided only a year’s warranty whereas our customer was expecting 3 years warranty. We provided them 3 years warranty taking additional risks on ourselves. I had to take 100% provision for warranty because the liabilities are not covered by insurance or the manufacturer, if the UAV is in flying mode and cause any damage/loss of life- due to any reason.
This warranty period will be over in July2015. Please advise the best way to reverse the provision- in case nothing bad happens till that time.
Thanks
Vic Sam
Replies (12)
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@Portia, you do? I always reverse the HTG and ensure its not FRG, or you end up getting a lowish PAI in your DLT. What legislation are you reading? I know you always beat me up on the legislation, but its there in black and white. s1272a.
Not sure what you mean
by "100% provision for warranty" or whether that was an appropriate initial treatment but just reverse it by debiting the provision and crediting whichever account was originally debited.
What set of Accounting standards
are you reporting under? There are so many questions posed by your answer that I think the best thing would be for you to read the relevant standard. In general, the provision should be based on expectations not worst case scenario. On the face of it the level of provision seems too much (or else you are anticipating a loss of $80 on each unit so why are you in that business?). Why should you be held responsible for pilot error; are you providing the pilots or training them? Etc., etc. etc.
In answer to your specific question; once there is no exposure to a warranty claim, the provision must be released.
Try IAS37 as a starting point.
I suggest it
might also be worth looking at published accounts for others in your sector to see what policies they adopt.
I understand your one failure example but a few points:
a) if it was after 3 months, this was presumably covered by your supplier's warranty
b) you are assuming a 100% failure rate in your provisioning
c) I would not have thought public liability is a warranty issue
Yes but
in general one can only provide for costs arising from a past event. Hence one would provide for warranty costs for repairs to the units, on a probability basis, as a result of the sales you have made. It seems difficult to argue that there is 100% probability that all of the units sold will fail within the warranty period you have offered or else we get back to my question of why you are in business.
Further one would not provide for potential costs from some unspecified future event (incompetent pilots, killing a civilain, etc.) even if the liability fell upon your company (something in itself which may be questionable).
I don't know what regime you operate under but I suspect your taxman might not be impressed.
Interesting additional information
Thank you.
However the wrarranty provision still assumes the total loss of both units. Now I can understand it being a total loss if the unit is lost in operation. However most aviation failures/warranty issues are identified on the ground during regular servicing or during pre flight checks. This would rarely result in the total replacement of the aircraft.
Operational mistakes by the pilot are of course also possible but I would expect you/the supplier to require examination of the wreckage to determine whther mechanical/electronic failure was the cause.
I think we could argue the toss for ages and we have probably gone as far as is possible in this forum. I still feel a provision for total replacement for those units where you are underwriting the warranty is probably excessive but you know far more about the specifics of your buisness than I. So I suggest we leave it there!