The formulas
- Accrual = sales x expected cost rate
- Closing = opening + accruals - settlements +/- changes in estimate
How it works
Under ASC 606-10-55-30 to 55-35 a warranty that only assures the product meets agreed specifications is not a performance obligation; its cost is accrued under ASC 460-10. A warranty sold separately, or one that provides a service beyond assurance, is a performance obligation and gets an allocation of the transaction price instead.
ASC 460-10-50-8 requires a tabular reconciliation of the product warranty liability: opening balance, accruals for warranties issued, changes for preexisting warranties including changes in estimate, and settlements.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
What if the warranty can be bought separately?
Then it is a service-type warranty and a separate performance obligation (ASC 606-10-55-31).
How do I set the rate?
From claims history by product line, adjusted for known defects and changes in product or coverage.
Why separate changes in estimate?
The disclosure reconciliation shows them separately from accruals for warranties issued in the period.
Sources
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.