How is a warranty accounted for under revenue recognition rules?
Warranties can either be purchased separately or will result as a component of the sale of an inventory item. If the warranty is purchased separately from the inventory (an additional purchase), they will need to be accounted for accordingly. If the warranty is purchased separately from inventory, it should be considered a separate service or item. This will be recorded by the issuer of the warranty as a separate obligation (liability).
However, if the warranty cannot be purchased separately, it will not be considered a separate obligation. Often times, companies will offer customers assurance that the product or services that they are purchasing will work or be delivered as understood.
For example, if a company sold a product for $100 and it includes a 2 year warranty that has a value of $20, the company would recognize $80 of revenue and $20 would be recorded to unearned warranty revenue. The warranty revenue would then be recognized over the 2-year period.
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