Page 6 - 13. COMPILER QB - INDAS 37

Q5 (May 21)

A manufacturer gives warranties to the purchasers of its goods. Under the terms of the warranty, the
manufacturer undertakes to make good, by repair or replacement, manufacturing defects that become apparent
within three years from the date of sale to the purchasers.
On 30 April 20X1, a manufacturing defect was detected in the goods manufactured by the entity between 1

March 20X1 and 30 April 20X1.
At 31 March 20X1 (the entity‖s reporting date), the entity held approximately one week‖s sales in inventories.
The entity‖s financial statements for the year ended 31 March 20X1 have not yet been finalised.
Three separate categories of goods require separate consideration:
Category 1 — defective goods sold on or before 31 March 20X1

Category 2 — defective goods held on 31 March 20X1
Category 3 — defective goods manufactured in 20X1-20X2
State the accounting treatment of the above categories in accordance with relevant Ind AS.
Solution

Category 1—defective goods sold on or before 31 March 20X1
If a customer has the option to purchase a warranty separately, the warranty is a distinct service because the
entity promises to provide the service to the customer in addition to the product that has the functionality
described in the contract. In that case, the entity shall account for the promised warranty as a performance
obligation and allocate a portion of the transaction price to that performance obligation.
If a customer does not have the option to purchase a warranty separately, an entity shall account for the
warranty in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, unless it
provides the customer with a service in addition to the assurance that the product complies with agreed-upon
specifications. If that is the case, then, the promised service is a performance obligation. Entity shall allocate
the transaction price to the product and the service.

If an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably
account for them separately, the entity shall account for both of the warranties together as a single
performance obligation.
A law that requires an entity to pay compensation if its products cause harm or damage does not give rise to
a performance obligation. The entity shall account for such obligations in accordance with Ind AS 37

Category 2—defective goods held on 31 March 20X1
At 31 March 20X1 the entity did not have a present obligation to make any defective goods that it might
manufacture in the future. Accordingly, at 31 March 20X1 the entity should not recognise a provision in
respect of the defective inventories.
For this category, the detection of the manufacturing defect in April 20X1 is an adjusting event after the end
of the reporting period as per Ind AS 10, Events after the End of the Reporting Period. It provides evidence of
a manufacturing defect in inventories held on 31st March 20X1.

Category 3—defective goods manufactured in 20X1-20X2
At31 March 20X1 the entity did not have a present obligation to make any defective goods that it might
manufacture in the future. Accordingly, at 31 March 20X1 the entity should not recognise a provision in
respect of the defective goods manufactured in 20X1-20X2.
For this category, the detection of the manufacturing defect in April 20X1 is a non-adjusting event after the
end of the reporting period as per Ind AS 10, Events after the End of the Reporting Period.

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