EV battery warranties

Are EV battery warranties assurance or service?

A warranty that the battery will be free of defects and keep a minimum capacity for the period commonly offered in the market assures the customer that the vehicle meets its agreed specifications, so it is assurance-type, provided for under IAS 37 rather than a separate performance obligation. Some jurisdictions require long warranties on high-voltage batteries, which points the same way. Coverage well beyond the market norm, extended battery plans sold separately, or battery-as-a-service subscriptions are services under IFRS 15, with revenue spread over the period. See vehicle warranties.

EV battery warranties: building the provision

A carmaker sells 50,000 electric vehicles with an eight-year battery warranty. Based on its engineering data and early field experience, it expects 3% of the batteries to need replacement, most of them in years five to eight, and another 2% to need a module repair costing US$ 2,000. A replacement battery costs 12,000 today; the carmaker has supply contracts and cell-maker roadmaps showing that a replacement will cost about 8,000 by the time most claims arise.

The carmaker recognises a provision of 11.3 million when the vehicles are sold and unwinds the discount over the warranty period as a finance cost. If it had used today's battery cost of 12,000, the replacement element alone would be 18.0 million undiscounted.

Can expected falls in battery costs be included?

IAS 37 reflects future events that may affect the amount needed to settle an obligation only where there is sufficient objective evidence that they will occur, such as supply contracts already signed or cost reductions already demonstrated. A general expectation that batteries will get cheaper is not enough. Carmakers document the evidence for any cost path they assume and show the sensitivity of the provision to it, because a slower fall in costs or a higher failure rate raises the provision for every vehicle already sold.

How is the claim rate estimated with little history?

Early in a model's life, carmakers rely on accelerated laboratory testing, data from vehicles' battery management systems on state of health and degradation, experience with earlier chemistries, and the cell supplier's data. Connected vehicles report battery health continuously, which helps. Estimates are updated as real claims arrive, with changes recognised in profit or loss for all vehicles in the warranty population. A defect affecting a specific batch, such as a cell manufacturing fault, is provided for separately and may lead to a recall; see recall provisions.

What about the value of returned batteries and supplier recoveries?

A replaced battery still has value, for second-life storage or for recycling its materials. IAS 37 does not allow gains from the expected disposal of assets to reduce a provision, so this value is not deducted; it is recognised when the battery is sold or reused. Cell suppliers often give back-to-back warranties; a reimbursement is recognised as a separate asset only when it is virtually certain, typically once the supplier accepts a claim. See IAS 37 provisions.

How does US GAAP differ?

US GAAP also accrues assurance-type warranties at the time of sale and requires a reconciliation of warranty liabilities, but warranty accruals are generally not discounted, so the same EV fleet would carry a higher liability under US GAAP, 14.0 million in the example. Extended battery plans are accounted for under ASC 606 as services. See automotive accounting.

This guide is general information. It is not tax or legal advice for your situation.