A warranty can create a provision, a performance obligation or both
Under Ind AS 115 B28–B33, a separately purchasable warranty is a distinct service. A warranty bundled with the product generally follows Ind AS 37 unless the promise includes a service beyond assurance of agreed specifications. If both are promised and they cannot reasonably be accounted for separately, B32 requires a single performance obligation for the combined warranties. Determine the applicable Ind AS framework before using this guide.
Read the applicable text: MCA: Ind AS 115, paragraphs 31–45, 73–86 and B27–B33 MCA: Ind AS 37, recognition and measurement of provisions.
Read the promise from the customer's position
Use statutory requirements, coverage length and promised tasks as indicators under B31. Defect rectification and shipping a defective product back can be assurance activities. Scheduled preventive maintenance, unrelated to defects at sale, can evidence additional service. An unusually long term is an indicator; it does not fix the classification. Include promises arising from customary business practice where applicable, alongside written terms.
Allocate and release service consideration
Use the allocation objective and relative stand-alone selling prices under paragraphs 73–80, subject to the standard's exceptions for particular discounts and variable amounts. A catalogue list price is evidence to test, not an automatic stand-alone selling price. If the customer pays before the service transfers, track the associated contract liability. Under paragraphs 31–45, assess the pattern of transfer. An evenly delivered stand-ready service may justify a time-based measure; a later start or different pattern must be reflected in the schedule.
Measure assurance on its own basis
Under Ind AS 37 paragraphs 14, 24 and 36–40, assess a present legal or constructive obligation from a past event, probable outflow and reliable measurement. Where the time value of money is material, apply the discounting requirements in paragraphs 45–47. For a population of warranties, assess probability for the class and use a supportable expected-value model where appropriate. The provision measures fulfilment cost, not a share of the product selling price. Under B33, compensation for product-caused harm and specified IP infringement indemnities are evaluated under Ind AS 37 rather than treated as performance obligations.
Close using two separate reconciliations
For service cover, reconcile opening contract liability, new consideration allocated, service revenue and closing balance. For assurance, reconcile the provision through new charges, usage, estimate changes and closing balance. If B32 requires combining the warranty promises, document why a reasonable split was unavailable and keep related service accounting separate from any independently assessed product-harm exposure.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Assurance only for a population
An entity sells 2,000 identical units with defect-only cover. Assume mutually exclusive repair outcomes: 4% at ₹750 and 1% at ₹3,000 per unit, with the remaining 95% requiring no cost. Under the stated recognition assumptions, the undiscounted estimate is ₹1,20,000.
Illustrative example 2: Bundle allocation with a discount
The product and service have stand-alone prices of ₹90,000 and ₹10,000. The contract price is ₹95,000 and no exception applies. Allocate ₹85,500 to the product and ₹9,500 to service.
Illustrative example 3: Six months of a stand-ready service
A 24-month warranty service has ₹48,000 allocated and paid upfront. After six months of even service, recognised revenue is ₹12,000 and the remaining contract liability ₹36,000.
Illustrative example 4: Coverage starts after a waiting period
₹18,000 is allocated to 12 months of evenly provided service beginning 1 February. At 31 March after two months, recognise ₹3,000, leaving ₹15,000.
Illustrative example 5: Separate assurance and service ledgers
For a separable service component, ₹60,000 was allocated and paid upfront and ₹15,000 has been earned. Separately, assurance opened at ₹25,000, with ₹12,000 new provision and ₹7,000 qualifying costs applied. Close the service liability at ₹45,000 and assurance provision at ₹30,000.
Illustrative example 6: An inseparable combined warranty promise
A ₹2,20,000 contract covers equipment and a combined B32 warranty. Assume stand-alone prices of ₹2,00,000 and ₹50,000 and no allocation exception. Allocate ₹1,76,000 to equipment and ₹44,000 to the combined warranty performance obligation.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Confirm reporting framework | Ind AS applicability record |
| 2 | Collect all promises | Contract, statutory requirements and service materials |
| 3 | Identify separate purchase options | Offers and contract price lists |
| 4 | Compare actual covered tasks | Defect and service coverage matrix |
| 5 | Document any B32 combination | Reasonable separation analysis |
| 6 | Support stand-alone prices | Observable pricing or estimate model |
| 7 | Determine when service transfers | Coverage dates and progress policy |
| 8 | Measure separately recognised assurance | Claims experience and expected costs |
| 9 | Reconcile both closing balances | Revenue and provision roll-forwards |
| 10 | Review exceptions and disclosures | Controller approval and reporting file |
Sixteen practitioner FAQs
1. Does a separately negotiated warranty count as a distinct service?
Yes where the customer can purchase it separately, as described in B29.
2. Can an included warranty still be a service?
Yes. Evaluate whether it promises something beyond assurance of agreed product specifications.
3. Does a longer term automatically change classification?
No. Length is one indicator considered alongside the tasks and legal requirement.
4. How do I classify freight to return a defective product?
A task necessary to give assurance is unlikely to create a separate performance obligation merely because it has a cost.
5. Does free routine servicing necessarily have zero allocated revenue?
No. Test the promise and apply the allocation rules even when the invoice labels it free.
6. How is a basic defect-only warranty measured?
Use the applicable Ind AS 37 recognition and best-estimate requirements rather than a percentage of revenue by default.
7. Do few individual claims mean no provision is needed?
Evaluate probability for the population of similar obligations when that is the relevant class.
8. How should an extended warranty start date be evidenced?
Keep the contractual dates and evidence of activation; recognise service as it is provided.
9. Does an upfront receipt create immediate service revenue?
Not when the service is still owed. It generally creates a contract liability for that part.
10. When does time elapsed make sense?
When it faithfully depicts even transfer of the promised stand-ready service.
11. What if the product and warranty invoice prices differ from standalone prices?
Apply the standard’s allocation rules and test any exception before using the stated lines as allocation.
12. Can I combine components because the ERP has only one warranty code?
B32 turns on whether the promises can reasonably be accounted for separately; a system label alone is insufficient.
13. What if a customer exchanges a defective product for a functioning unit?
B27 sends the fact pattern to the warranty guidance in B28–B33.
14. How should claims for injury caused by a product be analysed?
Use B33 and assess the relevant obligation under Ind AS 37.
15. Can claims paid under assurance be released as service revenue?
No. Keep settlement of the provision separate from transfer of service.
16. What if the latest claims data changes expected repair costs?
Reassess the assurance provision at the reporting date using current evidence and separately explain the movement.
Official sources
MCA: Ind AS 115, paragraphs 31–45, 73–86 and B27–B33 MCA: Ind AS 37, recognition and measurement of provisions