Products are often sold with standard warranties that provide protection to the buyer that the product will work as intended for a period of time. Many companies also offer extended warranties that cover faults that arise after the initial warranty period has expired. Standard warranties have historically been accounted for as a cost accrual while extended warranties result in the deferral of revenue. The revenue standard draws a distinction between product warranties that the customer has the option to purchase separately (for example, warranties that are negotiated or priced separately) and product warranties that the customer does not have the option to purchase separately. Management will need to exercise judgment when assessing a warranty that is not sold separately to determine if there is a service component embedded in the warranty that should be accounted for as a separate performance obligation.

Requirements

Review the applicable ASC sections related to warranties and answer the following questions:

Example 1 - Warranty, cost accrual

Facts: Osman, a Latvian manufacturer sells custom/contract electronic equipment. The manufacturer also provides a 60-day warranty that covers certain components of the equipment. The warranty is not sold separately by the entity. How should Osman account for the warranty?

Example 2 Warranty, separate performance obligation

Facts: Osman, a Latvian manufacturer, sells custom/contract electronics equipment. A customer has elected to also purchase the optional 12-month extended warranty. How should the Osman account for the warranty?