Q. A company sells a product with a three-year warranty included in the price. According to IFRS, which of the following is the most appropriate accounting treatment for the warranty?
- Fully recognizing the revenue at the time of the sale but waiting until the actual warranty costs are incurred to recognize the expense.
- Fully recognizing the revenue and estimated warranty expense at the time of the sale and updating the expense as indicated by experience over the life of the warranty.
- Deferring all of the revenue and recognizing it over the life of the warranty period.
Solution
B is correct. Under the matching principle, a company is required to estimate the amount of future expenses resulting from its warranties and to update the expense as indicated by experience over the life of the warranty. Waiting until actual costs are incurred will not match the expense with the associated revenue.
A is incorrect because waiting until actual expenses are incurred will not match the expense with the associated revenue.
C is incorrect because it is appropriate to record the estimated expense at the time of the sale.
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