(IFRS) for Small and Medium-sized Entities (SMEs)

IFRS FOR SMES – JULY 2009bonds with the same term as the expected cash outflows (6 per cent for one-yearbonds and 7 per cent for two-year and three-year bonds). Calculation of thepresent value, at the end of 20X0, of the estimated cash flows related to thewarranties for products sold in 20X0 is as follows:Year1 60% ×CU46,0002 30% ×CU46,0003 10% ×CU46,000The entity will recognise a warranty obligation of CU41,846 at the end of 20X0 forproducts sold in 20X0.Example 5 Refunds policyExpectedcashpayments(CU)Discountrate21A.5 A retail store has a policy of refunding purchases by dissatisfied customers, eventhough it is under no legal obligation to do so. Its policy of making refunds isgenerally known.Present obligation as a result of a past obligating event—The obligating event isthe sale of the product, which gives rise to a constructive obligation because theconduct of the store has created a valid expectation on the part of its customersthat the store will refund purchases.An outflow of resources embodying economic benefits in settlement—Probablethat a proportion of goods will be returned for refund.Conclusion—The entity recognises a provision for the best estimate of the amountrequired to settle the refunds.Example 6 Closure of a division—no implementation before end ofreporting period21A.6 On 12 December 20X0 the board of an entity decided to close down a division.Before the end of the reporting period (31 December 20X0) the decision was notcommunicated to any of those affected and no other steps were taken toimplement the decision.Present obligation as a result of a past obligating event—There has been noobligating event, and so there is no obligation.Conclusion—The entity does not recognise a provision.Discountfactor27,600 6% 0.9434(at 6% for 1year)13,800 7% 0.8734(at 7% for 2years)4,600 7% 0.8163(at 7% for 3years)Presentvalue(CU)26,03812,0533,755Total 41,846124 © IASCF