Expected value approach
An expected value is a probability-weighted average of possible outcomes. Multiply each outcome by its probability and add the results. Under IAS 37 it is often appropriate for estimating a provision involving a large population, such as warranty claims. For a single obligation, the most likely outcome may be the starting point, with other outcomes also considered.
Worked example
For 1,000 products, 5% are expected to require $20 repairs and 2% $100 repairs: expected warranty cost is $1,000 + $2,000 = $3,000.
Common mistake
The calculated average need not be one actual outcome, and probabilities must cover the possible outcomes consistently without double counting.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FA | Direct | September 2026–June 2027 |
| ACCA | K1 | Supporting | July 2027–August 2028 |
| CIMA | F2 | Direct | Official assessment-window verification pending |
| FIA | FFA | Direct | September 2026–June 2027 |
Related terms
Also called: Probability-weighted approach