'Lemon Law' (Car Industry) - Its potential accounting impact
With effect from 01 September 2012, ‘Lemon Law’ comes into force for Singapore’s consumers. This law is aimed at protecting the interests of consumers against defective goods that fail to conform to contract, or meet satisfactory quality or performance standards at the time of purchase (known as ‘lemons’). This will encompass all general consumer products purchased inSingapore, including big ticket items like motor vehicles, but does not cover properties and buildings.
As part of this change in legislation, the Consumer Protection (Fair Trading) Act (CPFTA), the Hire Purchase Act (HPA) and Road Traffic Act have been amended accordingly. This is to enhance consumer protection for high-value goods e.g. motor vehicles. It is likely that vehicle buyers will assert their rights to seek recourse for defects found in times of sky-high COE and car prices.
Impact of the ‘Lemon Law’ varies for accounting and provision practices of different sectors of the car industry. Parallel importers and used car dealers will bear the brunt of impact from this law as they are saddled with the challenge of having to incur additional business costs (e.g. increased man-hours, repair costs) and/or finding suitable replacements for their customers and at the same time, facing the risk of having to write off supposedly defective cars and little chance of recourse from the car manufacturers. This may be especially true in times when COE prices drop sharply and consumers attempt to return ‘lemon cars’ for full refunds, thinking that they have overpaid for their purchases.
On the other end of the spectrum, official new car distributors is least affected by introduction of the ‘Lemon Law’ as new cars are covered by manufacturer warranties. For defects not falling under the warranties, new car distributors may make accounting provisions in their books to cater for potential repair / replacement costs which are done out of goodwill even though they are not contractually obliged to do so. The ‘Lemon Law’ is seen to be a stronger reason for making provisions for additional business costs in accordance with Singapore accounting standards, even though these may sometimes be questioned by their Company auditors.
The ‘Lemon Law’ has far-reaching consequences, both for consumers and sellers. The former is better protected against defective consumer products. Sellers have more incentive to examine the efficiency of their existing processes and post-sales strategies lest they encounter increased costs due to weaknesses in their current business policies. It is hoped that theSingaporeretail experience will be further enhanced for both global and local consumers with the introduction of the ‘Lemon Law’, which will in turn promote Singapore’s reputation as a shopping paradise.
Adapted from CPA Singapore Sep 2012 issue