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I understand that under IAS37, the provision may result from constructive obligation or legal obligation. However, I am unclear regarding the constructive obligation.
What I understand that constructive obligation is the practical requirements, for example: You sell the iphone, you must incurred the warranty expenses and therefore should make the provision for this warranty expense.
What is other examples of constructive obligation except for warranty? Does the repairment cost should be provided as in practice, the machine would be subject to reduction in capacity after long years of use.
Legal obligation – if company offers a warranty because it is required to do by law
Constructive obligation – if a company offers to repair your phone even though not obliged to
In the UK, there’s a shop called Marks and Spencer – if I buy a shirt there, I can take back it back within 30 days even if it’s not faulty – they aren’t obliged to but, they do because they are a nice company – it’s just that (using the words from IAS 37) the company has a PAST PRACTICE of giving refunds creating a VALID EXPECTATION for the customer.
@stephenwidberg said:
Legal obligation – if company offers a warranty because it is required to do by lawConstructive obligation – if a company offers to repair your phone even though not obliged to
In the UK, there’s a shop called Marks and Spencer – if I buy a shirt there, I can take back it back within 30 days even if it’s not faulty – they aren’t obliged to but, they do because they are a nice company – it’s just that (using the words from IAS 37) the company has a PAST PRACTICE of giving refunds creating a VALID EXPECTATION for the customer.
Dear Sir,
I just think that your mentioned cases, as there exists the right of return, IFRS15 would be applied rather than IAS37. I understand that at the time you buy the shirt, the company would recognize the revenue:
Dr. Cash/Cr. Revenue: 7,000 (for example) with the total revenue of sales of the shirts in month.
And if the Company has evidence that 10% of the sale would be returned, they will record:
Dr. Revenue: 700
Cr. Refund liability: 700Is my understanding is correct?
The standards have the same effect – the concept is the same – it is a constructive obligation – liability if relatively certain, provision if less certain
@stephenwidberg said:
The standards have the same effect – the concept is the same – it is a constructive obligation – liability if relatively certain, provision if less certainI understand properly. Thank you very much
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