When to recognize a warranty provision
I do understand that we have to make provision for expenses for warranty repairs if we are obliged to make repairs of defects on the product within 5 years after making a sale.
But why do we make a provision for all 5 years in Year 1?
I am referring to the example Expenses for warranty (LINK HERE). The provision it total amount of CU 77.61 million was made in Year 1.
I believe it should only be CU 8.35 million for year 1, because only CU 8.35 million pertains to the 1st year of sale of Car. In the Year 2 we should make provision for CU 12.16 and so on.
Could please explain?
You are making a provision related to past event and time apportionment of making that provision should relate to that past event.
Thus, the sale happened in Year 1, therefore you are liable in 5 subsequent years as a result of that sale in Year 1. In other words, the past event creating an obligation happened in Year 1.
It does not matter when the defect happens – whether in Year 1, Year 2 … Year 5 after making a sale. Your obligation to pay for that repaid was created at the moment of making that sale.
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