memo To: Daphne Duquesne | | From: Sarah Smith CC: Patricia Derrick | | Date: July 25, 2014 | | Re: Accounting for Warranties Sold Separately | | | |
Dear Ms. Duquesne,
Thank you for reaching out to me about the accounting standards involved in the type of warranty that you hope to sell along with your newest line of products. First, I would like to provide a little background on accounting for warranties and then I will discuss the treatment of warranties, hopefully answering all of your questions. A warranty puts two obligations on the issuer; preparedness to perform and pay for agreed upon services (FASB 460-10-25-2). According to FASB 460-10-25-5 “because of the uncertainty surrounding claims that may be made under warranties, warranty obligations fall within the definition of a contingency.” This means that we accrue losses from warranty obligation that are considered “probable”. A. A lot of new literature has been published by FASB regarding the recognition of separately priced warranties. These new items will take effect between 2015 and 2018, just in time to launch our new product. I strongly suggest complying with the newest guidelines when projecting our sales figures for the new line of products. I encourage you to review FASB 606-10-55-30 through 606-10-55-35 for a full review of upcoming changes. B. This asks the question: when is a warranty considered separately priced? Do their need to be two receipts? Can their be a range of options? According to FASB 606-10-55-31 all that is required is that the warranty is an option, not a requirement upon purchase. The reasoning is that “the warranty is a distinct service because the entity promises to provide the service to the customer in addition to the product that has the functionality described in the contract”. When this occurs, the warranty is a performance obligation that