Accounting for standard and extended warranties

 Accounting for standard warranties by product seller or manufacturer

Standard warranties are provided when a product is sold (or service is provided).  Such warranties may cover the product’s defects, malfunction, etc. for a period of time from a few months to multiple years.

Warranties represent an uncertainty because one doesn't know for sure when customers will submit warranty claims.  As such, warranties fall within the definition of uncertainty and warranty reserves (accrual) should be recorded when two conditions are met.  The conditions are presented below:

Condition	Comment
Information available before the financial statements are issued or are available to be issued indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements.	This condition is considered to be met if, based on available information, it is probable that customers will make claims under warranties relating to goods or services that have been sold.
The amount of loss can be reasonably estimated.	This condition is considered met if management of a company can reasonably estimate warranty claims for products sold or services provided based on historical information, reference to other companies within the industry, etc.

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