What is Assurance-type and service-type warranties?
In short
An assurance-type warranty only promises that a product works as agreed, and its expected cost is accrued as a liability. A service-type warranty gives an extra service, such as an extended warranty, and is a separate performance obligation.
Key takeaways
- Revenue allocated to a service-type warranty is deferred and recognized over the coverage period.
- A warranty sold separately is always service-type.
- Longer coverage than required by law points to a service component.
Where it's tested
BAR: Revenue for Specific Arrangements — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A contractor's fixed-price contract of $5,000,000 now has total estimated costs of $5,600,000. Costs incurred to date are $2,800,000. How should the expected loss be recognized?