Revenue Recognition Principle Warranties

Under existing gaap a separately priced extended warranty is accounted for as a separate accounting unit for which revenue is recognized over the extended warranty period similar to the approach under asc 606.

Revenue recognition principle warranties. If expenses relating to warranties can be measured reliably revenue can be recognized equivalent to the value of goods sold as only an insignificant risk is retained by the seller. The new revenue recognition standard asc 606 revenue from contracts with customers specifically addresses defining warranties within a contract and determining if they should be accounted for as a separate performance obligation. The revenue recognition principle using accrual accounting requires that revenues are recognized when realized and earned not when cash is received. The amount allocated to a service type warranty should depict the amount that the vendor expects to receive for providing the service which is usually based on its estimated standalone selling price asc 606 10 32 28.

However sometimes warranties includes a service element that provides protection beyond defects that existed at the time of sale such as protecting against wear and tear for a period of time after sale or against certain types of damage. These types of warranties will continue to be accounted for as a cost accrual under the new revenue standard. Revenue recognition on the service warranty should commence starting with the end of the assurance warranty period.