Question

A firm considers its regular warranty liability to be an existing liability of uncertain amount. At year-end, the firm estimates that the amount required to extinguish its warranty liability in the future is in the range of $20 to $60 million, with no amount more likely than any other. Under the two sets of standards, what amount will be recognized?

Answer 1

Answer:

The US GAAP recognizes $20 million.

The IFRS recognizes $40 million.

Explanation:

When a liability is uncertain, it is referred to as a contingent liability. Contingent liabilities are only recorded if the company believes that they will actually happen, e.g. warranty liabilities, lawsuits, etc. The US GAAP is rules-based and the IFRS is principles-based, so their approach on recording contingent liabilities varies a lot.

The US GAAP which is the accounting standard used in the US, generally includes in the balance sheet the lowest estimated unfavorable outcome. In this case that would equal $20 million.

The International Financial Reporting Standards (IFRS) which are used in more than 140 countries and even in the US under certain circumstances, states that the midpoint value should be used. In this case that would = ($20 million + $60 million) / 2 = $40 million.

Answer 2

Answer:

$40 and $20

Explanation:

Based on the information provided within the question it can be said that in this scenario there would be two sets of standards. The first would be the international accounting standards which recognizes the midpoint of the range, which in this case is $40. While the second is the U.S standard which recognizes the low point of the range, which in this case is $20.