Warranties: assurance or service

Almost every manufactured product comes with a warranty, and many manufacturers also sell extended cover. The two are accounted for very differently: one is a cost provided for at the sale, the other is revenue earned over time. This guide sets out the test, works through both, and covers supplier recoveries and estimate changes.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 3 minute read.

Short answer

Manufacturing warranties are accounted for in two ways. An assurance-type warranty, which promises only that the product works as agreed, is not a separate service: the manufacturer provides for the expected cost of repairs under IAS 37 when the product is sold. A service-type warranty, one the customer can buy separately or that provides a service beyond that assurance, is a separate performance obligation under IFRS 15, so part of the price is deferred and recognised over the warranty period. In this guide's example, a 1.5% expected claim rate on 10,000,000 of sales needs a provision of 150,000, and 2,000 extended warranties sold at 100 each defer 200,000.

At a glance

Assurance-type
Product works as specified
Accounting
IAS 37 provision at sale
Service-type
Sold separately or extra service
Accounting
IFRS 15 deferred revenue
Supplier recoveries
Asset only if virtually certain
Estimates
Reviewed against claims history
Warranties: assurance or serviceAssurance-type: Product works as specified; Accounting: IAS 37 provision at sale; Service-type: Sold separately or extra service; Accounting: IFRS 15 deferred revenue; Supplier recoveries: Asset only if virtually certain; Estimates: Reviewed against claims history.KEY FACTS AT A GLANCEWarranties: assurance or serviceAssurance-typeProduct works asspecifiedAccountingIAS 37 provision at saleService-typeSold separately or extraserviceAccountingIFRS 15 deferred revenueSupplier recoveriesAsset only if virtuallycertainEstimatesReviewed against claimshistoryTax BakersWarranties: assurance or serviceAssurance-type: Product works as specified; Accounting: IAS 37 provision at sale; Service-type: Sold separately or extra service; Accounting: IFRS 15 deferred revenue; Supplier recoveries: Asset only if virtually certain; Estimates: Reviewed against claims history.KEY FACTS AT A GLANCEWarranties: assurance or serviceAssurance-typeProduct works as specifiedAccountingIAS 37 provision at saleService-typeSold separately or extra serviceAccountingIFRS 15 deferred revenueSupplier recoveriesAsset only if virtually certainEstimatesReviewed against claims historyTax Bakers
Key facts at a glance, as set out in this guide.

Is a warranty assurance-type or service-type?

Assurance or service warranty?Assurance or service warranty?Can the customer buy thewarranty separately?YesService: IFRS 15performance obligationNoDoes it provide a service beyondassurance that the product works?YesService element:IFRS 15NoAssurance: IAS 37 provision
Most standard warranties are assurance-type.

Factors pointing to a service element include a long coverage period relative to what is usual for the product, cover for problems beyond manufacturing defects, such as accidental damage, and tasks the manufacturer performs beyond fixing defects. A warranty required by law is generally assurance-type. If a warranty has both elements and they cannot reasonably be separated, the whole is treated as a service.

Manufacturing warranties: an example

A manufacturer sells appliances for 10,000,000 in the year, each with a two-year standard warranty covering defects. Claims history shows repair costs of about 1.5% of sales over the two years. It also sells 2,000 three-year extended warranties, starting when the standard warranty ends, for 100 each.

Standard warrantyExtended warranty
TypeAssuranceService, sold separately
At the saleDr Warranty expense 150,000, Cr Provision 150,000Dr Cash 200,000, Cr Contract liability 200,000
LaterRepair costs charged against the provisionRevenue over years 3 to 5, as the cover is provided

The standard warranty does not reduce revenue; it is a cost of the sale. The extended warranty earns no revenue until its cover starts in year 3, because until then the standard warranty applies.

How are warranty provisions estimated?

From claims history by product, adjusted for known issues, design changes and the age profile of products in the field, using the expected value across many products. Long warranty periods are discounted where the effect is material. Each period, the provision is compared with actual claims and updated; a recall or a known defect affecting a batch may need a separate, larger provision.

How are product recalls treated?

A recall to fix a defect, whether required by a regulator or announced voluntarily, creates an obligation when the recall is announced or a legal or constructive obligation arises. The cost of collecting, repairing or replacing products is provided for then, separately from the routine warranty provision, which assumes normal failure rates.

What if claims run higher than expected?

If a new model's claims run at 2.5% of sales instead of the expected 1.5%, the provision for products still under warranty is increased, with the extra cost in the period, and the higher rate is used for new sales until the cause is fixed.

What about recoveries from suppliers?

When a defect is caused by a component and the supplier must reimburse the cost, the reimbursement is recognised as a separate asset only when it is virtually certain to be received, and never netted against the provision in the balance sheet, although the expense can be shown net in profit or loss.

What if the manufacturer only arranges third-party cover?

If extended warranties are provided and serviced by an insurer, and the manufacturer simply sells them for a commission, it is an agent and recognises only its commission. Some extended warranties may also be insurance contracts within IFRS 17, although manufacturers providing fixed-fee service contracts can often apply IFRS 15 instead.

Warranty costs are generally presented in cost of sales, so changes in claim rates show up directly in gross margin, which is why manufacturers explain significant movements in their results commentary.

What do manufacturers disclose?

The warranty provision and its movements, the main assumptions, and contract liabilities for extended warranties. See IAS 37 explained and manufacturing accounting.

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Questions people ask

What is the difference between assurance-type and service-type warranties?

Assurance warranties promise the product works as agreed and are provided for under IAS 37; service warranties are sold separately or give extra services and are performance obligations under IFRS 15.

How is an extended warranty accounted for?

As a separate performance obligation: the price is a contract liability recognised as revenue over the period of cover.

When is a warranty provision recognised?

When the product is sold, for the expected cost of repairs under the assurance warranty.

Can supplier reimbursements be netted against warranty provisions?

No. They are a separate asset, recognised only when virtually certain.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers
  2. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

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