What is the treatment for extended warranties under IFRS 15?

The treatment for extended warranties under IFRS 15 is to recognize them as separate performance obligations. When a company sells an extended warranty in conjunction with a product, the extended warranty provides a distinct service that is separate from the primary product sold.

According to IFRS 15, performance obligations are promises to transfer distinct goods or services to customers. Because the extended warranty offers additional coverage beyond the manufacturer's warranty and is often at a different level of service (additional time, specific repairs, etc.), it meets the criteria for being a separate performance obligation.

This approach requires the company to allocate part of the transaction price specifically to the extended warranty and recognize revenue for the warranty over the period that the warranty is active. By doing this, the revenue reflects the timing of when the company fulfills its obligation to provide warranty services, aligning revenue recognition with the actual delivery of these services.

This treatment ensure that financial statements more accurately reflect the economic reality of the transaction, making it clear to users how much revenue is generated from product sales versus additional services such as warranties.