Estimate at the sale; true up the tax; accrue when likely and estimable
◈ 14 cardsAccrue a warranty at the time of sale and charge claims to the liability, true up income tax against instalments, and apply ASPE s.3290’s contingency rule — accrue, disclose, or nothing — in its vocabulary.
Warranty: the cost belongs to the sale
Bramble Lane Outfitters Ltd. sells 340,000 of gear in the year with a one-year warranty, and experience says claims run about 2 % of sales. The claims will arrive next year, but the cause is this year’s sales, so the expense is this year’s — matching. At year end:
Warranty Expense 6,800
Warranty Liability 6,800When claims are honoured — 4,100 in the year: 2,600 of replacement parts from inventory and 1,500 of labour paid in cash — they are charged to the liability, not to expense: Dr Warranty Liability 4,100 / Cr Inventory 2,600 / Cr Cash 1,500. The expense was recognised at the sale; the claim merely settles it. Expensing claims as they arrive puts next year’s cost against this year’s sales in reverse, and leaves no liability on the balance sheet for claims still to come. With an opening balance of 1,900, the year-end liability is 1,900 + 6,800 − 4,100 = 4,600. One point of vocabulary: a warranty is an estimated liability recorded under the matching principle — it is not a s.3290 contingency, although a Grade-12 text may file it there.
Income tax: the true-up
A corporation pays income tax in instalments during the year — Bramble Lane paid four of 2,000, each debited to Income Tax Expense when paid. The year’s actual tax, once net income is known, is 9,640 (L6.6). The difference is accrued at year end: Dr Income Tax Expense 1,640 / Cr Income Tax Payable 1,640, bringing the expense to 9,640 and leaving 1,640 owing. Two traps: recording 9,640 again (the 8,000 is already in the expense), and using Employee Income Tax Payable — that account is the staff’s withheld tax from L12.2, a different liability.
Contingencies: ASPE s.3290
A contingency is an existing condition whose outcome — a gain or a loss — depends on a future event. Northlake Nordic Centre Inc. faces three at year end, and the standard sorts them by two questions: how likely is the loss, and can it be estimated?
| Estimable | Not estimable | |
|---|---|---|
| Likely | accrue (and disclose) | disclose in a note |
| Not determinable | disclose | disclose |
| Unlikely | nothing | nothing |
Claim one. A skier fell on an icy step; counsel says a loss is likely and puts it at about 20,000. Likely and estimable — accrue:
Loss from Lawsuit 20,000
Estimated Lawsuit Liability 20,000If counsel had given a range — 15,000 to 30,000 with no best estimate — ASPE accrues the minimum of the range and discloses the rest of the exposure. Claim two. A second customer has threatened to sue but no claim is filed and counsel cannot estimate an amount: likely or not determinable, but not estimable — disclose in a note, no entry. Claim three. A supplier’s complaint counsel considers unlikely to succeed — nothing (disclose only if it could be material).
Contingent gains
Northlake itself is suing a supplier over a failed pump and expects to win about 15,000. A contingent gain is never accrued — conservatism: a gain is recognised when realised, not when hoped for. If it is likely, it is disclosed in a note; nothing more. Recording a receivable and a gain now would book income the court has not yet awarded.
The words
ASPE’s words are contingency and likely (with unlikely and not determinable). IFRS says provision and probable (more likely than not); US texts say probable / reasonably possible / remote. The appendix will use ASPE’s words and so must you — and “likely” is a higher bar than IFRS’s “more likely than not”, which is why the same claim can be accrued under IFRS and only disclosed under ASPE.