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

China Yuchai International Limited – Annual report – 31 December 2021

Industry: manufacturing


2.3 Summary of significant 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 3 to 36 months) or mileage (generally 5,000 to 300,000 kilometers), whichever materializes first. For other applications engines, warranties extend for a duration of generally 3 to 36 months or running hours of 300 to 4,000 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.

6.2 Contract balances (extract)

Trade receivables are non-interest bearing and are generally on terms of 60 – 90 days.

The contract liabilities comprise short-term advance received from customers and unfulfilled service-type 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 service-type maintenance service) at the year-end is expected to be satisfied within 2 years.

The significant decrease in contract liabilities as at December 31, 2021 was mainly due to lower advance payment from customers as of the year-end for future product deliveries.

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

6.3 Performance obligations (extract)

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

As of December 31, 2020, the remaining performance obligations (unfulfilled maintenance service) were expected to be satisfied within three years.

In 2021, the Group has reassessed the future satisfaction period relating to the remaining performance obligations related to the unfulfilled service-type maintenance service. Based on the business development and latest data, the Group expects that the remaining performance obligation as of December 31, 2021, to be recognized within 2 years, and accordingly has applied the change of management estimation prospectively. As a result, RMB 36.7 million (US$ 5.8 million) was credited to consolidated statement of profit or loss under “revenue” and lower the contract liability (current) by RMB 36.7 million (US$ 5.8 million).