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08. March 2022 | Provisions for guarantee in the annual accounts: Practical tips (this article)

When preparing the annual financial statements, manufacturing companies in particular must set aside provisions for any warranty claims on the part of their contractual partners. However, at the time of the balance sheet date, it is not possible to predict whether and to what extent guarantees must be provided. Therefore, the formation of provisions is often problematic in practice. We explain how you make provisions for warranty.

Even in the case of provisions for warranties, the individual evaluation principle of § 252 (1) no. 3 HGB applies in principle. Notices of deficiencies not yet collected at the balance sheet date can therefore justify the recognition of a provision from a liability for warranties on a value-enhancing basis. A deficiency already present at the balance sheet date constitutes an objective starting point for the provision. Nevertheless, the use of the taxable person must also be seriously expected. However, the latter is not obvious if the deficiency is not visible at all on the balance sheet date. This mutual ignorance is usually due to the fact that the deficiency on the balance sheet date has not yet had an adverse effect on operations. Then the deficiency cannot be clearly specified, so that as a rule no individual provision has to be set.

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Accounting?

An individual provision is therefore not to be made if the defect is not yet recognizable and thus not concrete. Consequently, it is regularly not to be formed. Nevertheless, future claims from warranty must also appear in the balance sheet. Therefore, according to § 249 (1) sentence 1 HGB, a lump-sum provision must be made if the merchant has to reckon with a certain probability of claims from warranties on the basis of his experience in the past. For the formation of this lump-sum provision for warranty claims, the turnover and a loss ratio still guaranteed on the balance sheet date are required. The latter is based on company-specific experience from the past. However, it is necessary to check whether the past figures can still be regarded as decisive for the future or whether they need to be corrected as a result of changes in the meantime.

Expenses for warranty claims are, however, regularly recognised in practice in various positions as part of a profit and loss offset. Consequently, the determination of the injury rate is difficult and cannot be taken directly from the financial accounts. Therefore, the quality management of the company must regularly determine these costs. Based on the quality management records, the average loss rate can then be determined by relating the annual warranty costs to the annual turnover. Then a corresponding percentage can be formed, which represents the injury rate. The relevant loss ratio for the financial year shall be the average of the last five financial years. Only if such an established injury rate is manifestly incorrect does the calculation have to be corrected. This is done by determining the damage rate for each individual product or product group individually.

Due to the warranty, you can also regularly assert recourse claims against third parties such as the pre-supplier or against your insurance. According to H 6.11 EStH, these are to be taken into account if they are not to be activated as an independent claim, are undisputed and full value.

The provision calculation shall not include warranties that have already been executed. In addition, the further back the year of turnover, the less likely it is to be used. Practically, the average complaint time is of course significantly lower than the legal period of the warranty. Therefore, you should accurately calculate this actual complaint time for your company. Only for transactions that took place within this period before the balance sheet date is still seriously attributable to the use of the warranty. If this period is less than one year, a discount shall not be applied under tax and commercial law. According to § 6 (1) no. 3a letter e EStG, the same shall not apply even if the remaining term is more than one year.