Chapter 2

Premium Liability

Instructor: Alyssa D. Colobong, CPA

Premiums

Premiums are articles of value given to customers as

result of past sales or promotion activites.
 Estimated Premium Liability
When a merchandise is sold,
a liability for future distribution of premium arises

Premiums are purchased

Premiums are distributed
Premiums xx Premium expense xx Premiums outstanding
Cash xx Cash, if any xx
Premiums xx Premium expense xx
Cash, if any xx Est. premium liab xx
current asset
current liability
Net Cost of a Premium
Acquisition cost per item xx
Distribution cost per item xx
Remittance of customer (xx)
Net cost of a premium xx
Premium expense xx
Cash, if any xx
Premium expense is a distribution cost.
Premiums xx
Cash, if any xx
Free Product, Discount and Rebate

When an entity offers customer incentives such as free

product, discount and rebate coupons, the entity shall identify
as a performance obligation each promise to transfer to the
customer either a distinct good or a series of distinct good
that are substantially the same and that have the same
pattern of transfer. The seller's obligation is 1) to deliver the
goods sold, and 2) to satisfy the customer options for coupons.
Deferred Revenue
Sales revenue
Transaction Price
allocated based on relative
Deferred revenue
stand-alone selling price
recognized as income when points
are exercised or when points expire
Notes:
The customer in effect pays the seller in advance
for "future delivery of goods or services.
Stand-Alone Selling Prices
Free Product Coupons: Selling price of the free product
adjusted by the expected redemption.

Discount Coupons: Amount of discount on future purchases

adjusted by the expected redemption.

Rebate Coupons: Amount of discount on the products sold

during the year adjusted by the expected redemption.
Free Product, Discount and Rebate

at point of sale
Cash xx
Sales xx
Deferred revenue xx

at point of redemption
Cash, if any xx
Deferred revenue xx
Sales xx
Customer Loyalty Program

Advantage Cards Loyalty Cards

Customers are granted award credits Customers get a "stamp" every purchase
or points every time they buy goods to the entity. A reward awaits when
or services to the entity. stamps are completed.
Measurement of Points or Award Credits

Treatment:
Award credits are accounted as "future
delivery of goods or services."

Sales revenue
Fair value of based on stand-alone selling price
consideration
received Award credits
deferred revenue (only recorded
as revenue when redeemed)
Chapter 3
Warranty Liability

Instructor: Alyssa D. Colobong, CPA

 Warranties

Warranty is the guarantee a manufacturer gives to the

customer regarding the quality of their product and what
compensation will be given if the product does not
perform as advertised.
Estimated Warranty Liability
PAS 37: Provision is recognized when the entity has a present
obligation; it is probable that there will be an outflow of
resources; and the amount can be measured reliably.

Two approaches:
Accrual approach
Expense as incurred approach
Accrual approach
there is proper matching of costs and revenues

To record estimated cost

To record actual cost
Warranty expense xx
Est. warranty liability xx
Est. warranty liability xx
Cash xx
Accrual approach
there is proper matching of costs and revenues

actual > estimated cost

actual < estimated cost
Warranty expense xx
Est. warranty liability xx
Est. warranty liability xx
Warranty expense xx
Expense as incurred approach
expensed only when actually incurred

To record estimated cost

To record actual cost

no entry
Warranty expense xx
Cash xx
Sale of Warranty
warranty is sold separately from the item (e.g. extended)

To record the proceeds

Cash xx
Unearned warranty revenue xx To record revenue

Unearned warranty revenue xx

Warranty revenue xx
Chapter 4
Provisions and Contingencies

Instructor: Alyssa D. Colobong, CPA

Provision

A provision is an existing liability of uncertain timing or

uncertain amount.

an estimated liability or loss contingency

accrued when it is probable and measurable
Provision vs. Contingent Liability
CONTINGENT
PROVISION
LIABILITY

a present obligation a possible obligation

probable and measurable probable or measurable
recognized in the FS disclosed in the notes
Degree of Occurrence

Contingent Contingent
Occurrence Meaning
Liability Asset
more than 50%
Probable likely to occur Provision Disclosure

50% or less likely

Possible Disclosure Ignore
to occur

Remote 10% or less likely

Ignore Ignore
to occur
Measurement of Provision
best estimate (judgment of the entity's management)

What is the best estimate?

for single obligations - most likely outcome
with range of possible outcomes - midpoint of the range
with large population of items - expected value method
(weighing all possible outcomes by their probabilities)
Measurement of Provision
Other Measurement Considerations
Risks and uncertainties
Present value of obligation
Future events
Expected disposal of assets
Reimbursements
Changes in provision
Future operating losses
Onerous contract
Examples of Provisions
1. Warranties
2. Environmental contamination
3. Decommissioning or abandonment costs
4. Court case
5. Guarantee
6. Restructuring
Restructuring
a program that changes the scope of business or the manner of
conducting the business
a provision arises when 1) entity has a detailed plan for
restructuring and 2) entity has announced such plan
Amount of Provision
Only direct expenditures arising from the restructuring is
recognized (exclude expenses for ongoing or continuing
activities of the entity)
 Decommissioning Liability
an obligation to dismantle, remove and restore a PPE
also known as asset retirement obligation
initially measured at present value then amortized

Property xx Interest expense xx

Decommissioning liability xx Decommissioning liability xx

capitalized
Decommissioning Liability
derecognized when liability is settled
Decommissioning liability xx
Loss on settlement, if any xx
Cash xx

decrease in liability - deducted from cost of asset

but if the decrease > CA of asset, excess is recognized in P/L
increase in liability - added to the cost of asset
but is subject to test of impairment
Thank you!
For questions and clarifications,
don't hesitate to get in touch.