Warranties in technology industry

Warranties in technology industry

A customer may have the option to separately purchase a warranty on a product (e.g., computer hardware, networking equipment) for a period of time at the point of sale or the warranty may be explicitly stated in the contract. IFRS 15  identifies two types of warranties: Warranties in technology industry

  • Warranties that provide a service to the customer in addition to assurance that the delivered product is as specified in the contract (service-type warranties)
  • Warranties that promise the customer that the delivered product is as specified in the contract (assurance-type warranties)

If the customer has the option to purchase the warranty separately or if the warranty is not separately priced or negotiated, but provides a service to the customer beyond fixing defects that existed at the time of sale, the entity is providing a service-type warranty. Warranties in technology industry

This type of warranty represents a distinct service and is a separate performance obligation. Revenue related to the warranty is recognised over the period the warranty service is provided. This may represent a change from current practice, particularly in relation to the amount of transaction price that is allocated to the warranty performance obligation.

Currently, entities that provide separate extended warranties may often defer an amount equal to the stated price of the warranty and record that amount as revenue evenly over the warranty period. IFRS 15 requires an entity to defer an allocated amount, based on a relative stand-alone selling price allocation, which, in most cases, will increase judgement and complexity. Warranties in technology industry

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 on quality (e.g., to replace or repair a defective product). Such warranties will continue to be accounted for in accordance with IAS 37.

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If an entity provides both assurance-type and service-type warranties within an arrangement, it is required to accrue for the expected costs associated with the assurance-type warranty and account for the service-type warranty as a performance obligation. If the entity cannot reasonably account for them separately, the warranties are accounted for as a single performance obligation (i.e., revenue would be allocated to the combined warranty and recognised over the period the warranty services are provided).

Additional considerations – Warranties – Tech or No Tech

It is important to note that a warranty does not have to be sold separately or specifically negotiated to be considered a performance obligation. Other factors to consider when assessing whether a warranty provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications:

  • Whether the warranty is required by law — If the entity is required by law to provide a warranty, the existence of that law indicates that the promised warranty is not a performance obligation because such requirements typically exist to protect customers from the risk of purchasing defective products.
  • The length of the warranty coverage period — The longer the coverage period, the more likely it is that the promised warranty is a performance obligation because it is more likely to provide a service in addition to the assurance that the product complies with agreed-upon specifications. Warranties in technology industry
  • The nature of the tasks that the entity promises to perform — If it is necessary for an entity to perform specified tasks to provide the assurance that a product complies with agreed-upon specifications (for example, a return shipping service for a defective product), then those tasks likely do not give rise to a performance obligation. Warranties in technology industry

Should the entity determine that there is no separate performance obligation, the warranty should be accounted for as it has been under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, and it is not affected by IFRS 15 revenue recognition standard.

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Warranties in technology industry

Warranties in technology industry

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