What is important in these scenarios is to find answers to the following questions:

Is there a present obligation as a result of a past obligating event?

Is a transfer of economic benefits probable during the settlement of the obligation?

Can a reliable estimate be made of the amount of the obligation?

If the answer to all questions is "yes", then a provision should be recognised in the

financial statements under IAS $37.$

a$)$ Plant overhaul costs

On $1$ January $2014,$ the company acquired new plant costing $10$ million. This plant

will require a complete overhaul after five years of use, at an estimated cost of $1$

million. Accordingly, the company wishes to make a provision of $200,000$ for plant

overhaul costs in its financial statements for the year to $31$ December $2014$ and then

to increase this provision by $200,000$ in each of the next four years. This will have the

effect of spreading the overhaul costs evenly over the years $2014$ to $2018.$

b$)$ An onerous contract?

On $31$ December $2013,$ the company moved from leased premises into new freehold

premises. The lease on the old premises will continue for three more years at an annual

cost of $100,000.$ The lease cannot be cancelled and the premises cannot be sublet

or used for any other purpose. The company wishes to make a provision of $300,000$

in its financial statements for the year to $31$ December $2013.$

c$)$ Warranties

A manufacturer gives warranties at the time of sale to purchasers of its product. Under

the terms of the contract for sale the manufacturer undertakes to make good, by repair

or replacement, manufacturing defects that become apparent within three years from

the date of sale. On past experience, it is probable that there will be some claims under

the warranties.

d$)$ Warranties for a large population of items

A company sells goods with a six$-$month warranty. If minor defects were defected in all

of the goods covered by warranties at the end of the reporting period, the company

would incur costs of $1$ million. If major defects were detected in all of these goods, the

company would incur costs of $4$ million. Experience shows that $75\%$ of goods sold

have no defects, $20\%$ have minor defects and $5\%$ have major defects.