Thursday, July 6, 2023

Not long ago the Securities and Exchange Commission gave a rap on the knuckles to View Inc. ($VIEW) for poor accounting of its product warranties; View had reported warranty liabilities in the range of $22 million to $25 million, when its actual warranty liabilities were closer to $50 million.

Hey! Product warranty disclosures — we’ve got that!

Warranty disclosures are one of those niche accounting items that can bite a company (or financial analyst) in the rear if you’re not paying attention to them. The amount for such warranties is typically reported as a footnote unto itself, although in some instances the disclosure might be tucked away in another footnote about financial operations or Management Discussion & Analysis or some such thing.

Or you can use the Calcbench database super powers, where we track warranty disclosures for you!

First let’s discuss what happened at View, to give you a sense of why warranties can be important. As described in its settlement order with the SEC, View makes those “smart windows” that get progressively darker tint as sunlight strikes them. In 2019, View discovered a manufacturing defect in its windows and knew it had to replace existing windows it had already sold to customers.

View had promised customers a 10-year warranty on its windows, so this was going to cost the company some serious coin. That wasn’t a big deal unto itself, however, because — like any good company offering product warranties — View had systematically accrued money over the years to cover those potential liabilities. By early 2021, View had accrued and disclosed an estimated warranty liability of $22 million to $25 million.

Except, those accrued liabilities only covered the costs of manufacturing replacement windows. When the window scandal broke (no pun intended), View management decided it would also cover the cost of shipping and installing replacement windows — and View hadn’t accrued liabilities for that extra cost.

So in reality, View’s product warranty liabilities were $48 million to $53 million. Because the company hadn’t accounted for those extra costs, it had to restate financials for 2021, which is about as pleasant as passing a kidney stone. (View also came clean to the SEC about its poor accounting controls and agreed to improve things, so it won a cease-and-desist order from the SEC but didn’t have to pay any additional fine.)

Now back to Calcbench and our tracking of warranty disclosures.

We Guarantee It

One place to find warranty disclosures is our Multi-Company Search page. Just choose whatever sample group you want to research, and then select “Warranty Accrual” from the standard disclosure metrics field on the left side of your screen. For example, we searched warranty accruals for the S&P 500 in 2022; the results are in Figure 1, below.

From there, you could then hold your mouse over any specific disclosure to use our Nobel Prize-winning Trace feature, to trace that warranty disclosure amount back to the original disclosure in the actual footnote.

You can also search individual companies on our Interactive Disclosures page by typing the word “warranties” into the text search field at the top of the page. That will whisk you away to whatever footnote contains warranty disclosures. For example, Figure 2, below, shows the warranty disclosure for View itself in 2021.

Remember, however, that numbers alone aren’t necessarily enough for a financial analyst to reach proper conclusions. View had already been making warranty accruals for years when its defect came to light, and then management made a policy choice (to cover shipping and installation costs too) that left the warranty accruals insufficient.

Astute financial analysts would have asked about that: “View, you just suffered a major warranty issue. Are you sure that the accruals you previously set aside will cover all expected costs?”

Most of the time, the answer will be yes. In fact, most of the time, the products will be working just fine and warranty accruals will never be a point of concern. But for those rare occasions when warranty accruals do matter, you need to be prepared with the right questions and the right data.

The questions are your responsibility. The data, we have for you.

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