Warranties In Technology Industry – FAQ | IFRS

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. 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.

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). Warranties in technology industry

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