Safe Vehicle  Pty Ltd has been operating a successful business for many years specializing in servicing and providing replacement parts for vintage cars. 5% of customers who received a replacement part found that it broke within one month. On 1 July 2020, the owner decided to offer customers a warranty on replacement parts that are installed in the cars and requests that the Accounting Department set up a provision account to cover future warranty expenses. The manager asked you, the company accountant, whether the provision for warranty account can be disclosed as a contingent liability in the Notes to the Financial Statements as of 30 June 2021.

Required

What is a contingent liability, and does it apply in this situation? Can provision for warranty be recognized as a contingent liability according to the Notes to the Financial Statements? What would you recommend to the manager the item be recorded as?

In your response, ensure you reference the Conceptual Framework definition and recognition criteria of liability, and AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.