IFRS 15 adopted, paras B28-33 warranties, assurance-types and service-types

China Yuchai International Limited – Annual report – 31 December 2019

Industry: manufacturing

2. BASIS OF PREPARATION AND ACCOUNTING POLICIES (extract)

(f) Revenue from Contracts with Customers (extract)

Warranty obligations

The Group typically provides warranties for general repairs of defects as part of the sale of engines. These assurance-type warranties are accounted for as warranty provisions. Refer to the accounting policy on warranty provisions in Section (s) Provisions.

Certain contracts provide a customer with maintenance service, i.e. a distinct service to the customer in addition to the assurance that the product complies with agreed upon specification. These service-type warranties are bundled together with the sale of engines. Contracts for bundled sale of engines and a service-type warranty comprise two performance obligations because the promises to transfer the engines and to provide the service-type warranty are capable of being distinct. Using a combination of expected cost-plus margin and residual approaches, the transaction price is allocated to the service-type warranty and engines with the former performance obligation recognizing a corresponding contract liability. Revenue for service-type warranties is recognized at the point in time when the service-type warranty is provided.

(s) Provisions (extract)

Product warranty

The Group recognizes a liability at the time the product is sold, for the estimated future costs relating to the assurance-type warranties, to be incurred under the lower of a warranty period or warranty mileage on various engine models, on which the Group provides free repair and replacement. For on-road applications engines, warranties extend for a duration (generally 12 to 60 months) or mileage (generally 50,000 to 360,000 kilometers), whichever materializes first. For other applications engines, warranties extend for a duration of generally 12 to 28 months or running hours of 1,000 to 3,500 hours, whichever materializes first. Provisions for warranty are primarily determined based on historical warranty cost per unit of engines sold adjusted for specific conditions that may arise and the number of engines under warranty at each financial year. If the nature, frequency and average cost of warranty claims change, the accrued liability for product warranty will be adjusted accordingly.

7.2 Contract balances (extract)

Trade receivables are non-interest bearing and are generally on terms of 60 days.

The contract liabilities comprise short-term advance received from customers and unfulfilled maintenance service. The advance received from customers is recognized as revenue upon the delivery of goods, and the contract liability arising from unfulfilled service-type warranty is recognized upon the completion of the maintenance services. According to the business customary practice, the remaining performance obligations (unfulfilled maintenance service) at the year-end is expected to be satisfied within 1-3 years.

The significant increase in contract liabilities in 2019 was mainly due to increase in advance payment from customers as at December 31, 2019 for future product deliveries.

(a) Set out below is the amount of revenue recognized from:

7.3 Performance obligations

The transaction price allocated to the remaining unsatisfied performance obligations as at 31 December are, as follows:

The remaining performance obligations expected to be recognized in more than one year relate to the unfulfilled maintenance service that is to be satisfied within 3 years.

26. CONTRACT LIABILITIES

25. PROVISION