Recognition of Warranty Expenses and Long Service Leave Expenses

This article discusses the recognition of warranty expenses and long service leave expenses as per Australian accounting standards. It explains the conditions that need to be met for recognizing provisions and the treatment of contingent liabilities. It also covers the accounting treatment of long-term employee benefits.

ANSWER
RECOGNITION OF WARRANTY EXPENSES AND LONG SERVICE LEAVE EXPENSES
Bartlett Limited, a company listed in the Australian Stock exchange has been facing the
challenge for recording of the warranty expense and the long service. The same has to be
accounted for on the basis of the standard issued by the standard board of Australia on provision
and contingent liabilities having number one hundred and thirty seven.
As per accounting standard, the company shall recognize the provision in the books of accounts
for an expense only if it satisfies the following:
- The company concerned shall have the obligation in current period and that obligation
shall be the result of the event that have occurred in the past;
- The company will have the high chances of having the benefits in future in economic
terms from the available resources which will further help in settling the current
obligation and
- The company shall have the procedures to estimate the amount of the liabilities in the
reliable terms (AASB 137, 2017).
In case if any of the conditions are not met then the required provision will not accounted for in
the books.
Further the contingent liability can never be recognized in the books of accounts. Contingent
liability is defined as the liability which can be defined only because of the presence of the
events that may occur in future. It is not necessary that the company shall have control in this
regard. The necessary as per the accounting standard shall be made in the notes to accounts with
name, nature of liability and amount.
In the given case, the company – Bartlett Limited will make the provision of the warranty
expenses in the statement showing the surplus and deficit and correspondingly accounts for
liability of the company. It is because it has arisen because of the events that have occurred in the
past. The amount will be measured on the basis of the past experiences.

As per AASB 119 on benefits to employees, it consists of not only the smaller period employee
benefits but also the longer period benefits to the employee (AASB 119, 2017).
Employee benefits are the benefit that is extended by the employer in lieu of the service rendered
by the employees. It includes the benefits on account of the termination of the services of the
employee. The employee benefit includes the short period as well as the long period benefits. In
the given case of the Bartlett Limited, only long term employee benefits are included and not the
short term benefits. In long term benefits, the liability will not be probably to be settled before
the period of one year after the close of financial year at which reporting is required to be made
and that too in which the employee has rendered the service.
As per the provisions of the accounting standard number 119, company is required to state the
net defined liability under the head of the liabilities in the table of the financial position and
correspondingly expense consisting of the service cost and interest has to be debited to the
income of that year.
REFERENCES
AASB 137, (2017), “Provisions, Contingent Liabilities and Contingent Assets”, available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPjun14_04-14.pdf
accessed on 06-05-2018.
AASB 119, (2017), “Employee Benefits”, available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB119_09-11.pdf accessed on 06-05-
2018.