Question

The following items pertain to possible provisions:

1. A company uses a part manufactured in Germany in its automobile manufacturing plant. There has been a concern about the failure of this part in cars manufactured in Germany. No failures have occurred to date in Canada. The company decided to do a voluntary recall of all cars manufactured with this part. The recall is 40% complete and has cost $1,220,000 to date.
2. A company self-insures for floods. That is, it pays no insurance but is liable to replace assets lost through flood damage. No losses have been incurred this year, but there have been $210,000 of losses in most other years, and the company is concerned that there might well be $420,000 of losses next year, evening out the pattern.
3. A company offers a three-year guarantee over parts and labour for products sold to ensure that parts work as expected. There were no payments this year, and only 5% of products sold this year are expected to need repairs in the next year. The cost of this work would be in the range of $110,000.
4. A company has been sued by a customer for $1,020,000. The customer slipped on ice coming out of the store and claims the store did not put salt down or clear the stairs properly. The company’s lawyer has indicated that there is a 10% chance that the company will lose the lawsuit based on past history. The company, though, has decided to settle to avoid negative publicity. The costs of settling are estimated to range between $260,000 and $520,000.
5. A company is required by legislation to undertake environmental remediation for a mining site that is currently active. The site will not be cleaned up until the mine closes, which is now scheduled for 2032. It is not certain how much the cleanup will cost at that time, or how long it will take.

Required:
In each of the above cases, indicate whether a liability is recorded or not.

Answer 1

a. Since this is voluntary call to check and get it good this is not obligation to company since no liability will be recorded.

b. Insurance company has always probability to pay the insured whether in terms of money or goods. Hence provision must made against the insurance . This provision is not liability untill obligation to pay wil be arises . How ever provision will be shown liability side under provisions.

c. Again this is not obligation to pay it is kind of provision which is expected to pay if it occurs.

d. Expected to loss or win any lawsuit is keep in contingent liabilities. How ever for avoiding negative publicity the company has deceide to settlement which is again not certain in terms of money. This can be taken as provision.

e. Here event is occured in past so liability wil be taken as lump sump. This will be called as liability.