IFRS 115/IND AS 115 — Revenue from Contracts with Customers — Warranties (Relevant Extract)

Warranties and revenue recognition - Yes

What is the co-relation
In today’s day and age, we love EXTRA or SOMETHING ADDITIONAL. Hence, many companies offer products along-with this additional element to appear more lucrative than others. Once the product offered has this extra element in it than the original product then it means there is scope that price charged is inclusive of these additional benefits offered. Hence, the need to bring-in warranties under revenue recognition.

1. IFRS 115/IND AS 115 - Is applicable to warranties?
Yes, in case the product being sold has an element of service in it which otherwise not necessary required to be part of product then it has to accounted as per this standard.

2. How to account for warranties if it has separate performance obligation?
-Evaluate all the performance obligation in the contract
-Allocate transaction price of the product to all the performance obligation
-Recognize revenue as and when the performance is satisfied

3. What if the warranties are just an assurance that product sold is as per the specifications promised?
-Great, no need to come under this revenue standard for warranties then. Refer IAS 37/ IND AS 37 Provisions, Contingent Liabilities and Contingent Assets for making provision for repairs.

4. How to identify whether warranties are assurance or separate performance obligations in itself?
-Major difficulties lies here
-All it requires it pure study of the scenario , business and lot of judgement.
-Below table for more details on identification of the type of warranty :

How to identify whether warranty is just an assurance or loaded with extra element of service in it. Are there any factors? Standard provides few factors to consider while evaluating it.

Factors for evaluation :
1. Required by law - This is more sought of an protection to customer that supplier don’t sell faulty products. Hence if this is the case then we need to treat it as a assurance based warranty.
2. Length of warranty - Generally, if warranty is of longer period then it means that it has service element in it apart from sale of main product as is. If so, then you need to account for service element separately as per IFRS 115/ IND AS 115.
3. Nature of tasks - 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.

However, ultimate judgement lies with the person in -charge. As you can see it is very much depending on the business and practices company is in and needs to be evaluated strictly in those parameters. What seems warranty for one company mayn't be necessarily warranty for other.

What if defective product are returned - Then it is considered as “right to return” and not the warranty. For sale with right to return refer the below detailed discussion -
https://medium.com/@nilutjain/ifrs-115-ind-as-115-revenue-from-contracts-with-customers-sale-with-rights-to-return-425a94fa3c05?s

5. What if an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably account for them separately?
-Then the entity shall account for both of the warranties together as a single performance obligation.

Thank you👍✔