If a company can reasonably estimate the amount of warranty claims likely to arise then it should accrue an expense that reflects the cost of these anticipated claims.
What is an accrual?
Some businesses provide warranties or other guarantees with their products, promising to repair, replace or refund in the event of certain failures, damages, or events. The selling company usually records a liability on its books for the future expected costs of such promises in order to properly match costs with revenues. This booked amount is often referred to as an accrual.
What is the value of estimating Warranty and Other Accruals?
Warranties and other guarantees provided or sold by a company can represent significant future liabilities. A material misrepresentation on your balance sheet can distort your financial statements and hinder management’s decision-making abilities. Huggins has performed valuation for various accruals, including:
- Recall accruals
- Product warranty accruals
- Service contracts
- Guaranteed Asset Protection (“GAP”) coverage
- Maintenance contracts
- Tire and wheel damage
- Cosmetic vehicle damage insurance (“ding and dent”)
- Unemployment repossession coverage
How can Huggins help?
We combine years of warranty and other accrual experience with actuarial processes to generate estimates of accrual values that comply with actuarial standards of practice. Huggins can assist with:
We can advise you regarding the type of data and specific data elements to collect and in what detail to properly manage and monitor your accruals. We can also assist you in developing data reporting processes that takes your data architecture into consideration and enables you to efficiently and accurately evaluate warranty accruals.
Estimating Accrual Values
Using a variety of actuarial methodologies, we can project the value of your warranty and/or other accruals. We can provide a point estimate, a range of reasonable estimates and/or confidence levels. We can also project estimates of accrual values per unit of exposure or sale.
Opining on the Reasonableness of Booked Accruals
We can review your accrual exposures, employing actuarial methodologies to derive an independent estimate, and opine on whether we think your booked accruals make a reasonable provision for your liability obligations.
The Huggins Advantage
Our firm’s philosophy centers on our commitment to the highest level of quality service delivered by quality people. Our long tradition of providing responsive, technical excellence to our clients’ needs through an integrated team approach requires that we focus on quality in every aspect of every engagement.