Entities may need to exercise significant judgment when determining whether a

Entities may need to exercise significant judgment

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Entities may need to exercise significant judgment when determining whether a warranty is an assurance-type warranty (accounted for using a cost accrual approach) or a service-type warranty (accounted for as a performance obligation). An entity’s evaluation may be affected by several factors, including common warranty practices within its industry and the entity’s business practices related to warranties.
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EY AccountingLink | ey.com/us/accountinglink 22 | Technical Line How the new revenue standard affects retail and consumer products entities For example, a manufacturer of televisions may provide a three-year warranty on its high-end 4K HD televisions and a one-year warranty on its low-end televisions. The manufacturer may conclude that the longer warranty period on the high-end televisions is not an additional service because it believes the materials used to construct them are of higher quality, and latent defects would take longer to appear. In contrast, the manufacturer might consider the length of the warranty period and the nature of the services provided by the warranty and conclude the three-year warranty period, or some portion of it, is an additional service that should be accounted for as a service-type warranty. Example 44 in the standard 26 illustrates the accounting for an assurance-type warranty. How we see it Judgment may be required to determine whether a warranty is an assurance-type or service- type warranty. Retail and consumer products entities may find it challenging to estimate the standalone selling price of a service-type warranty when the warranty is not sold separately. Advertising costs, including direct-response advertising Retail and consumer products entities may use direct-response advertising to generate sales from a customer (e.g., catalogs that include order coupons for an entity’s products). Legacy guidance in ASC 340-20 allowed entities to capitalize the costs of direct-response advertising and certain tangible assets, such as blimps or billboards that may be used for several advertising campaigns, if certain criteria were met. That guidance in ASC 340-20 has been superseded by the standard. Under the guidance in ASC 720-35, Other Expenses Advertising Costs , the cost of advertising (excluding direct-response advertising and advertising costs capitalized under ASC 340-20) is expensed either as incurred or the first time the advertising takes place (e.g., advertisement is printed, broadcast, or posted on a website), depending on the accounting policy election the entity makes. An entity also accrues the costs of advertising when these costs are incurred after an entity recognizes revenue (e.g., in cooperative advertising arrangements). How we see it Retail and consumer products entities typically are not able to capitalize direct-response advertising costs under the standard. Instead, these costs are typically expensed as incurred or the first time the advertising takes place.
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  • Fall '17
  • meenakshi

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