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ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue

Delta Co sells a phone with a standard 12-month warranty required by law, and also sells for an extra $30 an optional extended warranty covering a further 24 months. How should Delta treat these warranties under IFRS 15 and IAS 37?

The legally required warranty is an assurance-type warranty accounted for under IAS 37, while the optional extended warranty is sold separately and is a distinct service, so it is a separate performance obligation with revenue recognised over the warranty period.

  1. ABoth are separate performance obligations
  2. BNeither is a performance obligation; both are provisions under IAS 37
  3. CThe legally required warranty is accounted for under IAS 37; the optional extended warranty is a separate performance obligationCorrect
  4. DThe extended warranty is a provision, and the legal warranty is a separate performance obligation

Explanation

A warranty the customer can buy separately, or that provides a service beyond assuring the product meets specification, is a distinct service and a performance obligation. A warranty required by law that only assures compliance with agreed specifications is accounted for under IAS 37. Treating both alike ignores this distinction.

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