Samsung Note 7 Recall May Mean More Provisions

Dominic G. Diongson
Published Date:
Oct 11, 2016

1000_North_Korean_WonSamsung Electronics will halt sales of its Galaxy Note 7 phones after the unit’s battery was discovered to be prone to catch on fire — a move that will cause the South Korean-based company to set aside money for its recall.

There is a precedent for recalls. When Samsung recalled batteries for Galaxy S4 smartphones three years ago, in its 2013 financial statement it put the costs for recalls in provisions. In that 2013 report—which it says was prepared in accordance with Korean International Financial Reporting Standards—Samsung defined provisions as: “A provision is recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are not recognized for future operating losses.“

It also continued by saying: “When it is probable that an outflow of economic benefits will occur due to a present obligation resulting from a past event, and the amount is reasonably estimable, a corresponding provision is recognized in the financial statements.”

Samsung said in a statement today that it is asking all of its carrier and retail partners to stop sales and exchanges of the Note 7 while there’s an investigation on reported cases. It is also advising Note 7 users to stop using their handset, which is reported to be a recall of 2.5 million smartphones sold. Samsung officially put the phone on sale on Aug. 19, and a few weeks later there were some cases of the battery causing the fire while charging. The company then offered to replace those handsets but the new batch of phones were also found to catch on fire.

At about $800 per handset, the phone with the latest features was set to compete against Apple’s iPhone. The Wall Street Journal quoted an analyst from Macquarie Group as saying that Samsung’s potential losses in the October-December period could reach 3.1 trillion won, or $2.8 billion, which is enough to erase operating profit of its mobile division for the fourth quarter.










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