Assurance-type and service-type warranties

Learning objectives

• Determine whether a warranty is a mere assurance that the product complies with agreed specifications (accounted for under IAS 37) or provides an additional service (a separate performance obligation), including when the customer can purchase it separately.L2, L3
• Allocate the price between the good and a service-type warranty.L2, L3

Normative references

• IFRS 15 §B28It is common to provide a warranty with the sale of a product, the nature of which varies across industries and contracts: some provide only assurance that the product complies with agreed-upon specifications, others provide an additional service.
• IFRS 15 §B29If the customer has the option to purchase the warranty separately (priced or negotiated separately), it is a distinct service and therefore a performance obligation to which part of the transaction price is allocated.
• IFRS 15 §B30If the customer does not have the option to purchase the warranty separately, it is accounted for in accordance with IAS 37, unless it provides a service in addition to the assurance that the product complies with agreed-upon specifications.
• IFRS 15In assessing whether a warranty provides a service in addition to the assurance, the entity considers in particular: whether the warranty is required by law (which suggests that it is not a performance obligation), the length of the coverage period (the longer it is, the more likely a service) and the nature of the tasks promised (tasks needed to provide the assurance, such as return shipping of a defective product, probably do not create a performance obligation).
• IFRS 15 §B32If a warranty, or part of it, provides a service in addition to the assurance, that service is a performance obligation to which part of the price is allocated. If the entity cannot reasonably account for the two components separately, it accounts for them together as a single performance obligation.
• IFRS 15A law that requires an entity to pay compensation if its products cause harm or damage does not give rise to a performance obligation; it falls under IAS 37. The same applies to a promise to indemnify the customer for liabilities and damages arising from claims of infringement (patent, copyright, trademark).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

15 questions

• Ferrane sells boilers with a two-year warranty required by law. The fact that this warranty is required by law is an indication that it is not a performance obligation.L2
• The longer the coverage period of a warranty, the less likely it is that the warranty provides a service in addition to the assurance that the product complies with agreed-upon specifications.L2
• In assessing whether a warranty provides a service in addition to the assurance of compliance with agreed-upon specifications, which of the following makes such a service more likely?L2
• Hydrelle sells heat pumps with a warranty. Which of the following are indications that this warranty only provides assurance that the pumps comply with agreed-upon specifications?L3
• Ventamar sells electric bicycles. All bicycles come with the two-year legal warranty covering compliance defects. For its top-of-the-range model, Ventamar also grants six-year coverage including a full annual service and the replacement of wear parts. Which analysis complies with IFRS 15?L3
• Thermaline sells a restaurant, for a total price of {total_price}, a professional coffee machine and a three-year extended warranty including quarterly preventive maintenance. After analysing the relevant factors, Thermaline concluded (conclusion given by the case) that the extension provides a service in addition to the assurance of compliance and is a performance obligation separate from the machine. The observed stand-alone selling prices are {machine_ssp} for the machine and {warranty_ssp} for the extended warranty. Allocate the transaction price.L3
• Sablier sells diving watches. Its customers may, if they wish, purchase separately a 3-year extended warranty offered at a separate price. When a customer buys a watch with that extension, the extension is a performance obligation to which Sablier allocates part of the transaction price.L2
• Vélo Ardent grants on each bicycle a 2-year warranty covering manufacturing defects. The warranty cannot be purchased separately and only provides assurance that the bicycle complies with the agreed specifications. How does Vélo Ardent account for this warranty?L2
• Robotique Vernier sells household robots. Which of the following promises made to its customers do NOT create a performance obligation?L3
• Torréfacteur Brun sells a professional coffee machine with a 3-year extended warranty for a total price of EUR {contract_price}. It also sells the machine separately, at a stand-alone selling price of EUR {machine_ssp}, and the extended warranty, at a stand-alone selling price of EUR {warranty_ssp} (case data). Calculate the share of the transaction price allocated to the extended warranty and the share allocated to the machine.L2
• Imprimerie Lagune buys from Encre Vive an industrial printer for a total price of EUR {contract_price}. The price covers: the printer, with the 1-year statutory warranty of conformity, which cannot be purchased separately and only provides assurance that the printer complies with agreed specifications; and a 2-year extended warranty, which Encre Vive also sells separately. The stand-alone selling prices are EUR {printer_ssp} for the printer and EUR {extension_ssp} for the extension (case data). Calculate the share of the transaction price allocated to the extended warranty and the share allocated to the printer.L3
• Chaudières Brasier installs boilers with a 5-year warranty that is not sold separately. The warranty provides assurance of the boiler's compliance and also includes an annual preventive visit, which is a service in addition to the assurance of compliance. The two parts are so intertwined that Chaudières Brasier cannot reasonably account for them separately (case data). Which treatment should be applied?L3
• Climatiseurs Boréal sells air conditioners with a warranty, not sold separately, that has two parts: an assurance of compliance for 1 year and a technical assistance service for 4 years, which goes beyond that assurance. Climatiseurs Boréal can reasonably account for the two parts separately (case data). What is the appropriate treatment?L3
• Électroménager Saule sells washing machines with the 2-year warranty required by the law of its country, which cannot be purchased separately. Saule also undertakes to bear the cost of shipping any defective appliance back to its workshop during that period. No other service is promised. Its analyst concludes that the warranty and the shipping promise only provide assurance of compliance. Which treatment follows?L3
• Logiciels Sentinelle sells security units and contractually undertakes to indemnify its customers if a third party sues them for infringement of a trademark or patent used in the units. This promise of indemnification is a performance obligation to which Sentinelle must allocate part of the transaction price.L3