Revenue Recognition for Extended Warranty Contracts

If you are an insurance company this falls under FASB ASC 944, and you can skip this. If you help account for a non-insurance entity with extended warranty contracts you need to pay attention.

On February 1, 2017 the Insurance Entities Revenue Recognition Task Force (of which JLK Rosenberger is a member) issued “Working Draft: Accounting for Third Party Extended Warranty Contracts (Applicable to Non-Insurance Entities) – Revenue Recognition Implementation Issue #9-3 – Accounting for third-party extended service warranty contracts within the scope of FASB ASC 606.

The guidance in FASB 606-10-55-31 states in part, “If a customer has the option to purchase a warranty separately (for example, because the warranty is priced or negotiated separately), 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.”

Boiled down, the issue paper discusses the treatment of the following items: Promised Goods or Services, Satisfaction of Performance Obligation, Methods for Measuring Progress, Reasonable Measures of Progress, Portfolio Approach and Cost Guidance – Incremental and Acquisition.

It is important to know that the issue paper… “does not cover extended warranty contracts that only provide for the indemnification of or reimbursement to the customer for unscheduled repairs or replacement of the item (i.e., where the company is not obligated to perform a service or engage others to perform a service, but merely to reimburse the customer).”