Revenue – ifrs 15 handbook

Example 1 – Sale of a product with a warranty
IFRS 15.IE223–IE229
Manufacturer M grants its customers a standard warranty with the purchase 
of its product. Under the warranty, M provides assurance that the product 
complies with agreed specifications and will operate as promised for three 
years from the date of purchase.
Customer C also chooses to purchase an extended warranty for two 
additional years.
In this example, M concludes that there are two performance obligations in the 
contract.
Contract
Performance
obligations
Not a performance
obligation
Transfer
of the
product
Extended
warranty
Standard
warranty
The extended warranty is a performance obligation because it can be purchased 
separately and is distinct based on the Step 2 criteria (see 
Chapter 2
). 
The component of the standard warranty that provides assurance that the 
product complies with stated specifications is an assurance-type warranty, 
and therefore is not a performance obligation. As a consequence, M accounts 
for the standard warranty under the provisions standard when control of the 
product transfers to the customer.
A refund for defective services may be variable consideration 
rather than a warranty
IFRS 15.B20–B27
The guidance in the standard on warranties is intended to apply to services as 
well as goods. However, it does not further explain how the concept should be 
applied to services.
In a contract for the delivery of services, an entity may offer to ‘make good’ or 
offer a refund. If an entity offers to ‘make good’ – e.g. to repaint an area that 
a customer was not pleased with – then it considers this in determining the 
timing of the transfer of control and revenue recognition. 
If an entity offers a refund to customers who are dissatisfied with the service 
provided, then it applies the guidance on a sale with a right of return (see 
Section 10.1
) and follows the guidance on estimating variable consideration in 
determining the transaction price for the service being provided (see 
Chapter 3
).

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10 Other application issues | 241
10.2 Warranties
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