Warranties

Warranties are frequently offered when selling a product. They can be explicitly stated in a customer contract, arise from an entity’s standard business practices, or be mandated by law.

Sometimes, a warranty acts as a distinct service and should be viewed as a separate performance obligation. This is true if the warranty can be bought separately or if it goes beyond merely guaranteeing that the product is free from defects and meets the specified requirements. Conversely, if a warranty solely ensures the product’s quality and adherence to stipulated specifications for the legally mandated period, it isn’t viewed as a separate performance obligation.

The duration of the warranty can also be indicative. A longer period suggests a likely performance obligation as it may offer extra services. Lastly, if the entity commits to specific tasks to confirm product compliance (like return shipping for faulty items), these tasks probably don’t constitute a performance obligation (IFRS 15.B28-B31).

Seller’s perspective

When a warranty is deemed a distinct service (labelled as a service-type warranty), it is recognised under IFRS 15 as a separate performance obligation. If not, it’s accounted for under IAS 37 as both a provision and an expense (IFRS 15.B30).

If an entity commits to both an assurance-type and service-type warranty and cannot reasonably account for them distinctly, both warranties are jointly viewed as a single performance obligation (IFRS 15.B32).

It’s vital to highlight that warranties not provided in connection with the sale of goods or services should be accounted for as insurance contracts under IFRS 17 (IFRS 17.7(a)).

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Buyer’s perspective

From the buyer’s viewpoint, a warranty regarded as a distinct service is excluded from the cost of an acquired asset. Instead, it’s recognised as a revenue expense over the warranty’s duration.

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