A warranty is not the same as a product recall. A warranty is a seller’s promise, made at the time of sale, that a product will perform as intended. This promise creates an obligation for the company to repair or replace the product. When issued by a seller, a warranty is a contingent liability. If warranty costs are probable and the amount can be reasonably estimated, it is recorded at the time of sale as a debit to a warranty expense and a credit to a related warranty liability. In contrast, a product recall is issued when a product is determined to be potentially unsafe. Thus, a contingent liability is not recorded until the recall is issued, which may be in a period other than the period the sale is made.
When a product recall is issued, the estimated costs of the recall should be recorded if they can be reasonably estimated. These estimated costs are recorded as a recall expense and related recall liability. Samsung’s (SSNLS) recall of its Galaxy Note 7 phones cost approximately $5.3 billion.