If the dealer is just the reseller, then from his point of view, only the commission on the sale of a guarantee enters into the total transaction price since he is acting as an agent. Dear Silvia, Thank you so much for your nice explanation.
The answer and article above are very useful for me. Dear Silvia, Please advise how cost shall be recognized for the extended warranty, What shall be the accounting entries of contract cost. And do we need to make provision at the inception of the contract, as estimation may be recorded on the basis of past practice?
Question Manufacturer A sells laptop computers with a month warranty which assures that the laptops will work as intended for 12 months. The warranty is not sold separately. How should Manufacturer A account for the warranty? As a assurance warranty. In other words, the warranty in question is not treated as a separate performance obligation and is not accounted for under IFRS 15 but the expected or estimated costs of warranty expenses will be provided for under IAS If the estimated cost of warranty was provided under IAS 37 over the period of warranty of 1 year and it was not utilised , how do I reverse it after 1 year?
If my insurer wants to stand in for me as the party that will satisfy the performance obligation during the extended period, can I then recognize the full revenue from the sale of the extended warrantee on day of sale?
I will on the day of sale pay a premium to the insurer to cover this warrantee in X number of years if there is a claim. This expense will be recognised on day of sale. Obviously the premium takes into account the likelihood of a claim, which in theory should be lower than the asking price from the customer.
By using our website, you agree to the use of our cookies. Learn more Got it! Podcast , Revenue recognition Check your inbox or spam folder now to confirm your subscription. Aravind August 2, at pm Thanks for the Beautiful Clarification! Ahmed Mansour January 3, at am Allow me to suggest an answer to your inquiry, the performance obligation related to the service type warranty is a performance obligation that qualifies for over time recognition as it enhances an asset that is controlled by the customer at the time of performance 2 years.
Silvia January 1, at pm Yes, sure — I did not bother with it this time. Ahmed Mansour January 2, at pm clarification required please for the estimated cost of repair for the second 2 years. However, such as policy is against the matching principle. If FD had opted for this accounting policy, it would not make the journal entries shown above, thereby not reporting any warranty payable.
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Definition Calculation Example and Journal Entries. All Chapters in Accounting. Current Chapter. Vestas accrues for the estimated cost of the warranty upon recognition of the sale of the product.
The costs are estimated based on actual historical costs incurred and on estimated future costs related to current sales, and are updated periodically. Actual warranty costs are charged against the provision for warranty. Restructuring costs are recognised as liabilities when a detailed, formal restructuring plan has been announced to those affected no later than the balance sheet date.
A provision for loss-making contracts is made where the expected benefits to Vestas from the contract are lower than the unavoidable costs of meeting obligations under the contract. Loss making construction contracts in progress are, however, recognised in construction contracts in progress. Provision for legal disputes are recognised where a legal or constructive obligation has been incurred as a result of past events and it is possible that there will be an outflow of resources that can be reliably estimated.
In this case, Vestas arrives at an estimate on the basis of an evaluation of the most likely outcome. Disputes for which no reliable estimate can be made are disclosed as contingent liabilities, ref. The product warranties, which in the great majority of cases includes component defects and functional errors and agreed financial losses suffered by the customer in connection with unplanned suspension of operations, are usually granted for a two-year period from legal transfer of the wind turbine.
In certain cases, a warranty of up to five years is provided. For the customer, the specific warranty period and the specific warranty terms are part of the basis of the individual contract. Warranty provisions include only standard warranty, whereas services purchased in addition to the standard warranty are included in the service contracts.
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