February 1st, 2011

Revenue recognition. The FASB and the IASB continued their deliberations of the Exposure Draft, Revenue from Contracts with Customers, by discussing the accounting for warranties.

The Boards decided that an entity should account for some warranties as a warranty obligation (that is, as a cost accrual) in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, or FASB Accounting Standards Codification^® Topic 450, Contingencies. To determine which warranties an entity would account for as a cost accrual, the Boards decided that:

1. If a customer has the option to purchase a warranty separately from the entity, the entity should account for the warranty as a separate performance obligation. Hence, the entity would allocate revenue to the warranty service.
2. If a customer does not have the option to purchase a warranty separately from the entity, the entity should account for the warranty as a cost accrual unless the warranty provides a service to the customer in addition to assurance that the entity’s past performance was as specified in the contract (in which case the entity would account for the warranty service as a separate performance obligation).

The Boards also decided to develop implementation guidance to help an entity determine when a warranty provides a service to the customer in addition to assurance that the entity’s past performance was as specified in the contract.

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