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Warranty Provision

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I have a small Ltd Co client, (y/e 30 09 2016 - FRSSE Jan 2015).

In recent years there has been a large provision for  warranties.   As a new clietn I have asked for the basis of the provisions and it would seem that there is none.  Its been increased when profits are high and decreased when profits are low.

I;ve asked to see the contracts with clients to establish what warranty is given. There are none.  I;ve asked what has been spent post year end on warranty claims and he has no idea, its never been tracked.

Its H&W Ltd Co on £11k salary. Surely the provision should only cover his actual expenses to rectify an issue - not a high hourly rate. If a product failed he would drop everything and travel to the client (overseas) and fix the problem, If the issue was the parts then the parts cost would be covered under his supplier guarantees so the only cost would be the travel expenses and time.

 

How does this work with your clients?  What evidence would you want on file?  Im not being unreasonable asking for some justification am I? 

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06th Jul 2017 13:57

Are you just preparing the accounts or carrying out an audit? Just that obviously more evidence would be required for an audit.

How much you want to see for an accounts job is up to you based on the risk of it being wrong.

If I was auditing it I would want to see evidence that there was an obligation to fixed or repair the product. This could be written or more based on history and reputation of the firm.

There should be a calculation of how the provision was arrived at. It should be linked to sales and amount that are still under warranty and shouldn't be a profit smoothing exercise.

I would also want to see evidence that there had been costs of doing this. Generally as warranty if a provision you have a look at last years and compare it to actual costs in the year.

From what you say in your question I think you would struggle to justify it under audit as reasonable.

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By thomas
to mike_uk_1983
06th Jul 2017 14:57

Its accounts only, no audit. The risk really is more to do with HMRC and the effect this provision could have on CT. I want my accounting treatment to be reasonable and justifiable, based on something rather than just because 'that's how its always been done'.

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By Matrix
06th Jul 2017 15:04

Well the provision would only be deductible if it was a specific provision and not a general provision.

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to Matrix
06th Jul 2017 15:19

That's just historic HMRC b0llox, that even they now accept is [email protected] If a provision is correctly calculated for accounting purposes, then no adjustment to the accounting profits should be made for tax purposes.

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By thomas
07th Jul 2017 10:09

How would you calculate the provision? The director wants to use a % of sales. I'd like to see that backed up by some actual cost incurred as a % of sales. However the current provision is about 10% of sales. The travel costs for all work (not just remedial work) are only about 4% of sales.

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to thomas
07th Jul 2017 15:39

A % of sales is the correct treatment and need to consider term of warranty.

I have seen a case where there is 5 year warranty and provision is calculated current years sales at say 5% previous years 4% year before 3% year before 2% and final year 1%.

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07th Jul 2017 15:58

What you need to assess is the probabilty of there being a cost and, as the company appears to have been trading for a few years, you should have a track record from which to make a decent stab at such an assessment.

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