What is Warranty Accounting?
Warranty accounting is the recognition, measurement, and disclosure of the obligation a seller has to repair or replace defective products under warranty terms. The treatment depends on whether the warranty is an assurance type or a service type.
How It Works
- Classify the warranty — assurance type (basic) or service type (extended).
- For assurance warranties, recognise a provision under IAS 37 based on expected repair cost.
- For service warranties, allocate part of the transaction price as a separate performance obligation under IFRS 15.
- Estimate the warranty liability using historical claim rates and product mix.
- Reassess the liability at each reporting date and disclose movements in the notes.
Saudi Context
Saudi consumer electronics, automotive, and construction businesses recognise warranty provisions under SOCPA-adopted IFRS. ZATCA accepts well-supported warranty provisions as a deductible expense for income tax when the estimate is consistent with claims history.
Example
A company sells 10,000 units at SAR 500 each with a one-year assurance warranty. Historical claim rate is 4% with an average repair cost of SAR 200. Warranty provision = 10,000 × 4% × 200 = SAR 80,000.