Reference no: EM133119593

Question - Safe Vehicle Pty Ltd has been a successful business for many years specialising in servicing and providing replacement parts for vintage cars. According to the past experience, 5% of the replacement parts break down within one month after sale. On 1st July 2020, the owner decided to offer customers a warranty on replacement parts and requested the Accounting Department to set up a provision account to cover future warranty expenses. The manager is considering whether the provision for warranty account should be disclosed as a contingent liability in the Notes to the Financial Statements as at 30th June 2021.

Required - Should the provision for warranty be disclosed/recognised as a contingent liability in the Notes to the Financial Statements? If not, what should the item be recorded as? Explain your answer with reference to the Conceptual Framework definition and recognition criteria of a liability and AASB 137Provisions, Contingent Liabilities, and Contingent Assets.