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BPP in its page of 224 said :
Quote:1.4 Example of sales returns
Apple Co has noticed that sales returns average 5% of sales during a year. It has decided to make a provision for these sales returns. During the year ended 30 April 20X8, sales are $500,000 and sales for the year ended 30 April 20X9 are projected to be $750,000. Set up a provision as at 30 April 20X8.
Solution
The provision is to be set up to meet future liabilities. It is likely that any returns for the year ended 30 April 20X8 have already been made. Therefore the provision must be based on projected sales for the following year ie 5% * $750,000 ($37,500).First issue :
According to the IAS37 , a provision is a present obligation and this criteria is based on definition of liability given in the framework, so why the BPP stated that the provision should be set up to meet future liabilities ???!!!second one:
We know that a provision is a liability under uncertainty condition of its amount or maturity, therefor the business have to estimate it reliably. it’s clear that the basic of estimation should be reliable, so I think it’s not true we rely on projected and planned amount of next years sales while we have a certain amount of current year’s sale which is realised.
Now it’s possible to be argued why the current sales’ figure should be base ?
Actually that is why I said it’s not future liability, of course it is a present liability in respect of past and realised sales not an obligation in respect of future unrealised sales.I’m looking forward to having your kindly opinion.
Hi,
IAS 37 defines a provision as ‘a liability of uncertain timing or amount.
With a provison, there is a uncertainty about the timing or the amount of the future payment that will be required to settle this obligation. But we are almost sure the settlement will take place and we give the best esti of the future obligation. That’s why in BPP’s answer: the calculation is based on next year’s projected sales number.
I think we have deducted the sales return from the total sales of this year. Think of the T account of sales.
May be BPP just wants to show us how to calcuate the provistion amount. I can’t picture any where in the FS indicates the provision of sales return. it doesn’t make any sense at all. Unless this number neees to be shown in the forest report.
Does it make sense?
Cheers,
@sue888 said:
With a provison, there is a uncertainty about the timing or the amount of the future payment that will be required to settle this obligation. But we are almost sure the settlement will take place and we give the best esti of the future obligation.Actually, you repeated again the main point of my referred problem ( future obligation ).
@sue888 said:
That’s why in BPP’s answer: the calculation is based on next year’s projected sales number.I’m so sorry, honestly, I didn’t understand your reason about “that’s why …”
@sue888 said:
I think we have deducted the sales return from the total sales of this year. Think of the T account of sales.No, I don’t agree with you in this point because if we have deducted all the sales returns of this year’s sales we will not have any returns later in respect of this year’s sales while probably we will have returns later in respect of sales revenue of this year.
so please tell me which one of the sales figures is reliable for calculation of provision of sales return of this year’s sales , current certain sales or future uncertain sales?good luck
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