warranty

The standard identifies two types of warranties: • Warranties that provide a service to the customer in addition to assurance that the delivered product is as specified in the contract (called ‘service-type warranties’) • Warranties that promise the customer that the delivered product is as specified in the contract (called ‘assurance-type warranties’) Service-type warranties If the customer has the option to purchase the warranty separately or if the warranty provides a service to the customer beyond fixing defects that existed at the time of sale, the entity is providing a service-type warranty. The Boards determined that this type of warranty represents a distinct service and is a separate performance obligation. Therefore, using the estimated stand-alone selling price of the warranty, the entity allocates a portion of the transaction price to the warranty. The entity then recognises the allocated revenue over the period the warranty service is provided. Assurance-type warranties The Boards concluded that assurance-type warranties do not provide an additional good or service to the customer (i.e., they are not separate performance obligations). By providing this type of warranty, the selling entity has effectively provided a guarantee of quality. Under the standard, these types of warranties are accounted for as warranty obligations and the estimated cost of satisfying them is accrued in accordance with the requirements in IAS 37. Does that answer it?

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