A manufacturer sells a machine with two warranties attached: one promises that the machine will operate as specified for one year and simply obliges the manufacturer to repair or replace defective parts existing at the time of sale; the other, purchased separately by the customer for an additional fee, provides routine maintenance visits and covers accidental damage regardless of any manufacturing defect. Under IFRS 15's guidance on warranties in paragraphs B28-B33, how should the manufacturer account for each warranty?
- Both warranties are assurance-type warranties accounted for under IAS 37, because both were offered in connection with the sale of the same machine and neither can be purchased or evaluated independently of the other
- Both warranties are service-type warranties accounted for as separate performance obligations under IFRS 15, because any warranty priced or described separately from the base product automatically qualifies as a distinct service
- The first warranty is a service-type warranty because it is included in the sale price, and the second is an assurance-type warranty because it merely extends the coverage period of the first
- The first warranty is an assurance-type warranty accounted for under IAS 37 because it only confirms the machine meets agreed specifications; the second is a service-type warranty accounted for as a separate performance obligation under IFRS 15 because it provides a service beyond fixing defects existing at the time of sale
Why D? And why not the others?
Correct answer: D. The first warranty is an assurance-type warranty accounted for under IAS 37 because it only confirms the machine meets agreed specifications; the second is a service-type warranty accounted for as a separate performance obligation under IFRS 15 because it provides a service beyond fixing defects existing at the time of sale
IFRS 15 paragraphs B28-B33 distinguish an assurance-type warranty, which merely promises that a product meets agreed specifications and is accounted for under IAS 37, from a service-type warranty, which provides the customer with a service beyond fixing defects existing at the time of sale and is accounted for as a separate performance obligation under IFRS 15; the first warranty here only confirms specification compliance, while the second, purchased separately and covering maintenance and accidental damage regardless of any manufacturing defect, clearly provides an additional service. The option classifying both as assurance-type is wrong because being offered alongside the same product does not, by itself, determine warranty type; the substance of what each warranty promises is what matters. The option classifying both as service-type merely because one is priced separately is wrong because separate pricing is only one indicator, and it does not apply to the first warranty here, which is bundled into the base sale and promises nothing beyond defect-free performance. The option swapping the two classifications is wrong because it inverts the substance of each warranty: the bundled, defects-only promise is the assurance-type warranty, and the separately purchased, broader-coverage promise is the service-type warranty.
Source: IFRS 15 Revenue from Contracts with Customers, paragraphs B28-B33 (warranties)