Sell a printing machine with extended warranty
In this example, I’d like to describe a way how to cope with warranties under IFRS15/ASC606. The accounting standard claims to distinguish between legally required (“assurance-type warranty”) and “service-type” warranty. The later could be, for example, a warranty that extends the duration of the legal warranty by another year, and this is what I’d like to describe here. Per the accounting standard, it is required to treat them as a separate performance obligation.
A printing machine is sold to customer Palo Alto Printing House for 180.000 USD at January 1st, 2018. It is agreed that the regular, legal warranty will be extended by another year for free. The warranty starts after delivery and ends at December 31st, 2019.
Hence, the accountant assesses:
- The printing machine forms a distinct performance obligation, to be realized at delivery.
- The first year of the warranty is an “assurance-type” warranty and is being accounted for in accordance with IAS37. A provision is to be calculated at fiscal year end for all machines sold this year.
- The second year of the warranty is a “service-type” warranty. It forms a distinct performance obligation, revenue is to be allocated and to be realized over time in the second year.
To prepare the business scenario, these master data are required:
Product Type ID Description Accrual Method Determination Material STP120 Printing Machine At Delivery Entitlement (Contract Sales) STP301 Extended Warranty n/a Service (Fixed Price w/o Actuals) STP229 Extended Warranty Straight Line (Even Periods)
- Contract template for entitlement STP301 with duration one year and item STP229.
The sales unit of the Contract Template must match those of the sales order’s sales unit (see next paragraph).
Sales order creation
To enter the agreement into ByDesign, a sales order is being created with two line items: The printing machine and the entitlement. For the entitlement, no price or performance obligation will be shown. You may find this at the customer contract created at the next step.
By setting the “Requested Date” for the entitlement, you can set the beginning of the extended warranty already in this document. It will be used as the “Start Date” of the customer contract.
Sales order item for the printing machine:
Sales order item for the extended warranty:
Release the sales order, write down it’s ID and the revenue accounting contract ID. The customer contract ID is shown at the bottom of the screen after release. Write it down as well for the next step. You will have to put your mouse arrow at the messages at the bottom of the screen to see them.
A customer contract has been created, but not yet released. It has been automatically assigned to the same revenue accounting contract. You can check it and release it.
In this case, it has only a single item. It forms the second performance obligation of the agreement. Give 100% discount.
The printing machine is being delivered on January 1st.
In the customer invoicing work center, you should now find two customer invoice requests. They can be selected at same time and put at the same customer invoice (button Invoice).
Period end close January 2018
Before executing the fiscal period, the revenue accountant checks the revenue accounting contract and the accrual method assignment.
The revenue accounting contract has two performance obligations. The transaction price is being allocated using standalone selling prices:
- POB 10 is the printing machine with an agreed price of 180.000 USD. Transaction value and standalone selling price is the same.
- POB 20 is the extended warranty, which has been given for free. Hence, it has a transaction price of 0 USD (24.000 USD minus 100% discount).
If necessary, the standalone selling price can be adjusted in the “Manual Changes” tab.
The accrual methods are to be checked as well:
- For the sales order item, the printing machine, it should be “Recognize at Delivery”.
- For the customer contract item, it should be “Straight Line – Even Periods”.
- In period 1/2018, when the machine has been delivered, the allocated amount for POB 10 gets realized: 158.823,53 USD.
- From period 2/2018 to 12/2018, no further revenue will be realized. The remaining amount will stay deferred as “Contract Liability”.
- Starting with period 1/2019, 1/12 of the allocated amount of POB 20 gets realized, 21.176,47 USD / 12 = approx. 1.764,71 USD.
Having checked all settings, the revenue recognition run is being started.
Period end close January 2019 through December 2019
The revenue recognition run realizes 1/12 of POB 20.
With fiscal year end of 2019, the last 1/12 gets realized, the process has ended.
Overview of results and postings
Report: Revenue Accounting Contract – POB Structure with Key Figures
Report: Sales documents – Line Items
Discussion of the Scenario
The scenario automates the process of revenue recognition for extended warranty. It allows to keep track of the expenses for the warranty, in this case this could be repairs executed by own or external service engineers (hours, spare parts, travel cost). The customer contract is capable of handling registered products and is integrated in the process of service orders, if a planning of maintenance activities is needed.
Nevertheless, not all customers may have price lists maintained and need to manually update the revenue accounting contract once.