Product warranties: a repair provision or a separate service?
A seller collects £1,080 for a product bundled with 24 months of separately purchasable warranty service. Recognising the whole receipt as product revenue would ignore a promise still to be performed. In the hypothetical example below, £900 belongs to the product and £180 to the service, with the latter earned over the coverage period. A promise only to assure agreed product specifications raises a different question under IAS 37. Under UK-adopted IFRS, the warranty terms decide which accounting applies.
Begin with the customer's purchase option
IFRS 15 paragraphs B28 and B29 give a direct starting point. If the customer can buy the warranty separately, it is a distinct service and a performance obligation. The seller allocates part of the transaction price to that promise under the revenue allocation requirements.
Without that option, paragraph B30 points to IAS 37 unless the warranty, or part of it, provides a service beyond assuring that the product meets agreed specifications. The words free, standard or extended do not resolve that question. A warranty included in the advertised price can still contain an additional service.
This analysis concerns a seller's warranty connected with its own product sale under UK-adopted full IFRS. It does not establish customers' statutory rights or the treatment of a stand-alone insurance contract issued by another provider.
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Read the work promised
Paragraph B31 asks the seller to consider whether law requires the warranty, the coverage length and the nature of the tasks promised. A legally required warranty indicates assurance. Longer coverage makes an additional service more likely. Neither consideration is an automatic classification rule, and IFRS 15 sets no universal two-year dividing line.
Look at what happens when a product fails. Returning a defective item at the seller's expense may be necessary to assure compliance with specifications, rather than an additional service. Other promises can provide service beyond that assurance. The assessment needs the actual terms and sales promises, not a standard account code.
Paragraph B32 deals with a combined assurance and service warranty that cannot reasonably be accounted for separately. The seller accounts for both together as one performance obligation. Paragraph B33 treats obligations to compensate for product harm or indemnify against intellectual-property infringement under IAS 37 rather than as service performance obligations.
Allocate the £1,080 receipt
Assume a product has a stand-alone selling price of £1,000 and the separately purchasable 24-month service warranty has a stand-alone price of £200. The customer buys the bundle for £1,080 and pays immediately. There is no evidence that the discount belongs to only one promise, and no tax, financing or variable consideration.
IFRS 15 ordinarily allocates price using relative stand-alone selling prices, subject to its allocation exceptions. Here the £120 discount is shared proportionately. The product receives £1,080 × £1,000 / £1,200 = £900. The service receives £1,080 × £200 / £1,200 = £180.
Assume control of the product passes at the sale. The entry is Dr bank £1,080; Cr product revenue £900; Cr contract liability £180. Any assurance promise is assessed separately and is not quantified in this example.
| Promise | Stand-alone price | Allocated revenue |
|---|---|---|
| Product | £1,000 | £900 |
| 24-month service warranty | £200 | £180 |
| Total | £1,200 | £1,080 |
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Earn the service amount as service transfers
Assume service starts immediately and the seller stands ready evenly throughout the 24 months. On those facts, elapsed time faithfully measures the service transferred, so each completed month releases £180 / 24 = £7.50. The entry is Dr contract liability £7.50; Cr service revenue £7.50.
After six completed months, £45 of service revenue has been recognised and £135 remains a contract liability, assuming no other movements. Straight-line recognition follows the assumed pattern of service. It is not a rule for every warranty; IFRS 15 requires a progress method that faithfully measures performance.
The £180 is allocated sales consideration. It is not the seller's expected repair bill. Costs and any assurance provision need their own accounting, so a repair-cost estimate cannot replace the revenue allocation.
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Give finance the terms before the sale is mapped
For a new warranty offer, collect the purchase option, coverage dates, tasks, product-transfer point and evidence for each stand-alone price. Record the assurance or service conclusion before creating the ledger mapping. Then keep the service liability rollforward separate from any repair provision, so a change in expected repair costs cannot silently change unearned revenue.