A product warranty is a cost of the year in which the sale is made
28 October 2026, 07:57
A warranty is the commitment, made to the customer at the time of sale, to repair or replace at one's own expense a product that fails within a given period. When the contract is signed it does not take a single euro out of the company, and that is why it is among the most common sales arguments when orders slow down. On 27 October Ferretti, the Italian group that builds yachts and superyachts, presented its results for the first nine months of 2026: among the initiatives that supported orders is a one-year extension of the standard warranty, and the group also lists it among the causes of lower profitability. That an extra year of warranty weighs on the accounts before it has even begun depends on how the financial statements record the repairs promised.
The cost of a warranty arises when the sale is made, even if it is paid later
The real expense comes later, when the customer calls and someone has to step in: technicians' hours, spare parts, travel. It may come after six months or after three years. The Italian Civil Code, however, in Article 2423-bis requires each financial year to record the costs that pertain to it, regardless of the payment date, and under the accounting standards a cost belongs to the year of the revenue that made it necessary. Warranty repairs are therefore a cost of the year of the sale: without that commitment the customer would have paid less or bought elsewhere.
The tool with which the accounts respect this rule is called a provision. At year end the company estimates how much it will spend in the following years on warranty work on products already sold, records that amount among the costs in the profit and loss account and carries it, on the liabilities side of the balance sheet, in a provision for risks and charges: an estimated commitment towards customers, not money set aside. The Italian accounting standard OIC 31 provides for this in the case of certain or probable liabilities whose amount or date is not yet known at year end. When the technician later steps in, the expense no longer touches the profit and loss account: it is taken from the provision created earlier.
A provision, therefore, does not take money out of the current account. Payment happens when the repairs are carried out; the provision ensures that the margin of the year of the sale already includes that expense.
The estimate starts from repairs already carried out
The company takes the warranty work of recent years, at its full cost of labour, spare parts and travel, and links it to the products repaired and to the date on which they had been sold. Comparing what was spent with what had been invoiced for those products gives a percentage. Applied to the sales still under warranty, net of what has already been spent on them, it gives the amount to set aside in the provision. When the products are few and of high value, such as a boat or an industrial plant, the estimate is also made job order by job order, looking at the defects already reported.
Extending the duration of the warranty adds a period in which faults may appear, and it is usually the one in which components are most worn. For this reason the percentage drawn from the years with the shorter warranty is no longer enough: it has to be revised with the data on out-of-warranty faults, which the after-sales service normally records and invoices to customers.
The provision does not lower the year's taxes
In the accounts of smaller companies the product warranty provision may be missing, and there is a reason. Article 107, paragraph 4, of Italy's consolidated income tax law does not allow the deduction of provisions other than those expressly provided for, and the one for warranties is not among them: the cost reduces taxable income only in the year in which the repair is actually carried out. Whoever prepares the accounts with an eye mainly on tax is inclined not to make it, since in the year of the sale it brings no saving.
The result is a profit and loss account that, when sales grow, shows margins higher than the real ones and that in the following years is loaded with repairs without the revenue from the sales they relate to. The error matters most when the company uses the warranty as a commercial argument: the extra year convinces the customer, the future expense does not appear in that year's accounts, and the cost analysis carried out on those figures attributes to the products a margin they do not have.
In one's own accounts the check begins on the liabilities side of the financial statements, under provisions for risks and charges, and in the notes to the accounts, which must state what each provision contains. Then comes the management software: if warranty work is recorded with the product and the sale date it refers to, the percentage can be calculated; if it ends up mixed in with the general costs of after-sales service, the first step is to separate it.
This article was prompted by a news item published in Milano Finanza on 27 October 2026.