a) Five Star Motors have been selling luxury cars for the past 5 years. Many customers have remained loyal to Five Star Motors over this time and have purchased many cars from them. As at I January 2020, all customers are given a 3-year warranty for any mechanical repairs required on their vehicle.

Required Using the 2020 Conceptual Framework Liability guidance discuss, for the year ended 31 December 2020, whether this warranty meets the 3 definition criteria?

b.) Five Star Motors decided that due to the recent COVID crisis in Victoria they would provide extra benefits to their customers in the hope of improving customer loyalty. On 1 July 2020, Five Star Motors decided to increase the mechanical repairs warranty for vehicles from 3 years to 5 years. Five Star Motors is not 100% sure how this will impact on warranty claims as older cars do require more repairs. Also, as cars are now travelling less, Five Star Motors has found in recent months that few cars have been needing repairs. Five Star Motors estimates that this loyalty offer will make an overall 10% increase in warranty costs.

Required

Using the 2020 Conceptual Framework Liability guidance discuss, for the year ended 31 December 2020 whether this warranty meets the criteria for faithful representation?

c) Based on your discussion in part a. and part b., provide a conclusion as to whether Five Star Motors warranty should be recorded as a liability in their balance sheet?