1. Warranties

CarProd is a car manufacturer who gives warranties to its clients at the time of purchase. Under the terms of sale contract, CarProd undertakes to repair manufacturing defects or replacedefective parts that become apparent within 5 years from the date of sale.

Based on previous experience, it is probable that there will be some claims under warranties.

Should CarProd recognize any provision?

2. Contaminated land

A. Legislation to be enacted

PhthalateCorp operating in chemical industry worldwide regularly causes contamination of land , but cleans up only when is required so under the laws of particular country. Country Cleanlandia has had no such legislation and PhthalateCorp has been contaminating land for several years.

As at 31 December 20X1 it is certain that draft of law requiring clean-up of contaminated land(no matter when) will be enacted after the year-end in Cleanlandia.

Should PhthalateCorp recognize any provision?

B. Constructive obligation

BenzCorp operating in chemical industry worldwide regularly causes contamination of land , but has widely published its environmental policy in which it undertakes to clean up all contamination. Benz Corp operates also in the countries without any environmental legislation.

Should BenzCorp recognize any provision for clean-up of land also in countries without applicable laws?

3. Refunds policy

Tracy's Co, home appliances retailer, has a generally known policy of refunding purchases by unhappy customers even though it is not required by law.

Should Tracy's recognize any provisions for refunds?

4. Legal requirement to fit smoke filters

Under new legislation, PaperCo is required to fit smoke filters to its factories by 31 March 20X2. Paper Co has not fitted smoke filters yet.

Should PaperCo recognize any provision as at 31 December 20X1 and 20X2?

5. Repairs and maintenance

SkyBeings, an airline, needs to replace seats in its aircraft every 5 years. At the end of 20X1, the seats have been in use for 3 years.

Also, SkyBeings is required by law to overhaul its aircraft once every 3 years.

Should SkyBeings recognize provision for replacement of seats or overhauling as at 31 December 20X1?

6. Staff retraining

Government introduces a number of changes to the income tax system. As a result of these changes, Taxexperts Co will need to retrain a large number of its financial services staff in order to continue providing up-to-date information and advices to its clients.

Should Taxexperts recognize provision for retraining?

HamburgerPrince, fast food company, organized birthday party for 20 children where burgers from mincedbeef meat were served. After the party, 8 children came to hospital suffering from food poisoning and their parents believe that it is due to burgers not fried properly.

Parents are now suing HamburgerPrince. Lawyer of this company believes that based on past similar court casesand insufficient evidence against HamburgerPrince there is 40% chance of losing the case and HamburgerPrice would have to pay 160 000 EUR to indemnify children for poisoning.

What should HamburgerPrince do in its financial statements in relation to this claim?

A few months later, court case proceeded further where one employee of HamburgerPrince , acting as a witness, stated that frozen beef burgers supplied by local meat processing company Beefers showed signs of potential bacterial infection. Judge ordered immediate inspection in Beefers to verify its' hygienic and work standards. Inspection proved presence of several bacteria in half products. Court case against HamburgerPrince has not been closed yet.

Based on this new evidence, lawyer believes that chance to lose the case increased to 80% .

HamburgerPrince then decided to sue Beefers for supplying contaminated burgers and causing them damage. However, Beefers argue that if HamburgerPrince would have fried burgers properly, every possible infection would be destroyed. Lawyer believes that HamburgerPrince has 90% chance of winning this case with compensation of 160 000 EUR from Beefers.

What should HamburgerPrince do in its financial statements in relation to new events?