The Dilemma between Quality Reputation and Risk Prevention: Warranty Provisions of Car Manufacturers

Chapter 2.3, Provision versus Accrual:
Outstanding obligations of a company which will have to be paid in the future mean a certain risk for the liquidity of a business if the amount or time of the obligation is unknown. Due to that reason a provision or accrual can be created which serves as a type of reserve for an obligation in a future period. But the important difference to an actual reserve is that the amount of the provision and the accrual become a part of the liabilities. The reserve is considered part of the assets.
In the annual report, the provision for warranty or guarantee is, according to the International Accounting Standards (IAS) 37.10, part of uncertain obligations but accruals are shown in other liabilities together with the accruals for pensions and tax payments. Literature shows that the definition of accrual and provision is not always easily discernable. According to IAS 37.11, an accrual is used for future debits, the occurrence of which is almost confirmed and is comparable to the Statement of Financial Accounting Standards (SFAS) 5 which requests a probability of 80 % - 90 %. An example for the accrual is the payment of personnel debits as vacation allowance or Christmas bonuses. Also, pending invoices for material already received from suppliers are mentioned as accruals because the uncertainty is very low.
Differing from the accrual, the provision is used for future obligations which are less probable in regards to period and amount. According to the International Financial Reporting Standards (IFRS) probable means a probability of more than 50 %, possible if the risk is lower or equal to 50 % and remote if it is not very probable. IAS 37 says more likely than not and means a mathematical-statistical probability of more than 50 %. The United States - Generally Accepted Accounting Principles (U.S.-GAAP) only mention probable as required for the creation of a provision. The probability more likely than not for provisions seems to be

Daniel Siebert was born in Frankfurt-Main in 1974. After his apprenticeship in Industrial Electronics and first work experiences on the shop floor in the automotive industry he continued his education with studies of Mechatronics. After some years in the supplier quality and purchasing departments of an automotive company he spent three years as an Expatriate in Mexico being in charge for the development of suppliers. After his return to Germany he continued his career in the quality department of an automotive company being responsible for quality audits, process management and quality costs. Due to his intercultural experiences in Mexico and the increasing responsibility for financial figures he decided to study International Management beside the job and graduated as Bachelor of Arts in 2014.