4.14 Warranty Obligations

When an entity sells a product to its customer, it may also provide the customer with a warranty on that product. The warranty might be described as a manufacturer’s warranty, a standard warranty, or an extended warranty. Some warranties protect the customer from defects that exist when the product is sold, while others protect the customer from faults that arise after the product has been received. In substance, an entity’s warranty obligation represents a promise to stand ready to replace or repair the product in accordance with the terms and conditions of the warranty.

ASC 460-10-25-5 states that warranty obligations incurred in connection with the sale of goods or services represent contingent liabilities and that an entity should therefore accrue losses from warranty obligations when the criteria in ASC 450-20-25-2 are met. The liability recognized for an entity’s warranty obligation represents a nonmonetary liability under ASC 830 (since it will not be settled in cash) and therefore would not be subject to remeasurement in each period.