Warranty in a customer contract

A warranty can assure that a product complies with agreed specifications, provide an additional service, or contain both components. Classification comes before measurement. ASC 606-10-55-30 through 55-32 sets the main boundary.

Identify a service promise

A warranty sold or negotiated separately is a distinct service and therefore a performance obligation. Allocate transaction price to it and recognize that amount as the service transfers. When the customer cannot buy the warranty separately, consider whether it still provides service beyond assurance.

Relevant facts include legal requirements, coverage length, and promised tasks. A legal requirement often protects the customer against a defective product. Longer coverage is more likely to include added service. Tasks needed only to repair defects can remain assurance. ASC 606-10-55-33 explains these factors; none is a stand-alone bright line.

Route each component

An assurance component follows the applicable product-warranty liability and disclosure guidance. A service component follows the performance-obligation, allocation, and recognition model. A combined warranty may contain both. If its components cannot be measured apart on a reasonable basis, treat the full warranty as one service performance obligation under ASC 606-10-55-34.

Product-harm compensation and infringement indemnities may route to contingency guidance rather than create a performance obligation. See ASC 606-10-55-35. Topic 460 confirms the routing. ASC 460-10-15-9 describes separately priced service warranties. It also describes warranty obligations tied to the product sale. ASC 460-10-25-8 routes the service promise back to Topic 606.

Follow each accounting lane

For assurance coverage, continue to the assurance-warranty liability and then build its expected-cost estimate. For a service promise, allocate transaction price under the revenue model and recognize revenue as that service transfers. Do not place the service price in an assurance-warranty liability.

Use the special-arrangement lesson places warranty scope within the broader revenue model. The assurance-warranty lesson continues from scope to liability measurement. Finally, the warranty-type task tests an included assurance promise and a separately sold service plan.

The classification memo does not establish an expected claim cost or a service recognition pattern. Those conclusions need their own supplied facts and calculations.