Warranty Accounting: Expense or Separate Revenue?
First determine whether the warranty merely assures product quality or provides an additional service.
Assurance warranty
An assurance warranty generally promises that a product complies with agreed specifications. Expected costs are typically accrued through warranty expense and a warranty liability.
Service warranty
A service warranty provides an additional service beyond basic assurance and can create a distinct performance obligation.
Optional warranty
If the customer can purchase the warranty separately, that is a strong clue that a service component exists.
Exam strategy
Ask whether the seller is correcting defects that should never have existed or providing an extra service over time.
The takeaway
Assurance warranties usually create an estimated expense and liability. Service warranties can create deferred revenue and a separate performance obligation.
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FAQ
Does every warranty create deferred revenue?
No.
Does assurance warranty accounting involve estimates?
Yes.
Can one warranty contain both components?
Potentially.