
Accounting Policy of Microsoft Inc for warranty cost.
(Ref. Annual Report of 2011)
We provide for the estimated costs of fulfilling our obligations under hardware and software warranties at the time the related revenue is recognized. (Refer Explanation 1)
For hardware warranties, we estimate the costs based on historical and projected product failure rates, historical and projected repair costs, and knowledge of specific product failures (if any). The specific hardware warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to three years.
For software warranties, we estimate the costs to provide bug fixes, such as security patches, over the estimated life of the software. We regularly reevaluate our estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
Author’s Remarks for Product Warranty:
Explanation 1
Para 19 of IAS 18 states that:
“Revenue and expenses that relate to the same transaction or other event are recognized simultaneously; this process is commonly referred to as the matching of revenues and expenses. Expenses, including warranties and other costs to be incurred after the shipment of the goods can normally be measured reliably when the other conditions for the recognition of revenue have been satisfied.”
1.1 Thus warranty has to be recognized as an expense in the revenue statement as per the provisions of IAS 18 in order to match the costs with the revenue.
1.2 Unless the costs are properly estimated company cannot recognize revenue as per the stipulations of para 14 of IAS 18 which is states as under:
“Revenue from the goods shall be recognized only when following conditions have been satisfied:
(e)……the costs incurred or to be incurred in respect of the transaction can be measured reliably….”
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