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  3. Just bit confused with M&S example. When the customer returns the wine stain dress purchased for £500 and return to us. Now we will put back in stock may be lower than cost say £200. You said there isn’t outflow of economics resources as changing £500 dress with £200 wine stain dress . But we have loss £300 on this dress which we can’t sell for £500 now??? Is outflow economic resources means future losses ?? In M&S company could make provision that we may get some damage products?

    • I never said that there we son outflow of economic resource! And if I did, it was trying to lead the students into agreeing and then I say “Ah, but yes, there is an outflow” and therefore a provision IS appropriate

    • A trade payable is a certain creditor arising from us having received goods or services for which we have not yet paid. A provision is a probable liability / obligation(not a “possible” one, a “probable “one) We foresee that a probable obligation exists so, prudently, we make provision for it. In fact, the obligation may not actually occur so we would then release the provision back into retained earnings.

    • A legal obligation (not a legal provision as you have described it) is an obligation arising from the operation of law. Thus manufacturers have a legal obligation when they sell their products with a guarantee. they are legally obliged to honour that guarantee. Similarly, when you enter into a contract, you have a legal obligation to honour your part of that contract.

      A constructive obligation arises because you have raised in the minds of those affected the reasonable expectation that you will continue to operate in the future in the way that you have always acted in the past. If you are a department store and you have developed a reputation of refunding money on goods which you previously sold but which the buyer is now returning, you have a constructive obligation to refund money for future returns. It’s not an obligation in law and the buyer would likely not be successful if they were to sue you in Court. But your refusal this time to refund would damage your reputation and that is potentially far more expensive than simply refunding the cash

  8. Hi Mr Little,

    Just a quick question – Are we gonna make a provision of $1,350? But this is a future loss, are we allowed to make a provision for operating future losses, or is it because it is a onerous contract, that’s why?

    So I get from this example that the only case where we can make a provision for operating future losses is the case of onerous contracts, other than that, it has to be either a legal or construction obligation?

    Many tanks,

    Maha

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