Revenue – ifrs 15 handbook

Defective product returns in exchange for compensation 
IFRS 15.B20–B27
An entity may offer compensation in the form of cash or credit to a customer, 
rather than repairing or replacing the defective product. Unlike returns of faulty 
goods or replacements, this refund is generally accounted for using the right of 
return guidance (see 
Section 10.1
) and not the guidance on warranties.
Liquidated damages and similar types of contractual terms
IFRS 15.51
Many contracts contain terms providing for liquidated damages and similar 
compensation to the customer on the occurrence or non-occurrence of certain 
events. These terms may be considered variable consideration, given that the 
standard identifies penalties as variable consideration. 
However, in some circumstances the terms may be similar to a warranty 
provision. For example, if a third party fixes a defective product sold by an entity 
and the entity reimburses the customer for costs incurred, then that term may 
be similar to a warranty provision. 
Amounts considered closer in nature to a warranty provision are accounted for 
as an assurance- or service-type warranty.
Judgement is required to distinguish those terms that are accounted for as 
warranties from the more common scenarios in which the terms give rise to 
variable consideration.
Some warranty arrangements may be in the scope of the 
insurance standard
IFRS 15.BC373, 4.4(a)
Product warranties issued directly by a manufacturer, dealer or retailer are in 
the scope of the warranty guidance in the revenue standard. Warranties issued 
directly by a third party are in the scope of the insurance standard.
In more complex cases, an entity sells a warranty separately but the 
arrangement involves a third party or multiple covers. In these cases, the entity 
may need to apply judgement to determine which party issues the warranty and 
whether the arrangement, or a component of it, is in the scope of the insurance 
standard.

---

© 2019 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
242 | Revenue – IFRS 15 handbook