Practice Activity 13.14 Determination of the distinctiveness of the goods or services in a contract

A customer and contractor agree to a contract for the construction of a house (4-bedroom duplex) and a compound fence. The contractor will build the house: walls, roof, install the plumbing pipes and accessories; install the electricity fittings, and accessories. The contractor will also build the compound fence and install an entrance gate. The construction of the 4-bedroom duplex and compound fence will commence on 20 May 2019. The house and compound fence are expected to be delivered by the contractor on 31 October 2020.

Required:

i. Determine whether the goods or services are distinct using IFRS 15 criteria.

ii. How should the contractor account for all the goods or services in the contract?

See the suggested answer to practice activity 13.14 here.

Suggested answer to practice activity 13.14

i. Determination of the distinctiveness of the goods or services promised in a contract based on IFRS 15:

Step 1: Is the good or service capable of being distinct? In other words, can the customer benefit from the good or service either on its own or together with other readily available resources?

The answer is yes. The customer can benefit from the house on its own. The customer can benefit from the fence on its own. However, if the house is ready without the compound fence, the customer can approach another contractor to build the fence and still benefit from it.

Step 2: Is the good or service distinct within the context of the contract?

Based on the criteria in IFRS 15, the goods and services in a bundle of promised goods and services would not be combined as one performance obligation, implying that they are separately identifiable.

The house and compound fence are distinct in the context of the contract. The contractor agreed to deliver or transfer the house and compound fence in the contract. The nature of promise in the contract is to transfer integrate the walls, roof, install the plumbing pipes and accessories; install the electricity fittings, and accessories in the 4-bedroom duplex (the combined output) and the entrance gate in the fence (the combined output). The 4-bedroom duplex and compound fence are separate outputs rather than inputs used to produce a single output.

The promised compound fence and 4-bedroom duplex are distinct.

ii. The contractor should account for all the goods or services in the contract as follows:

The distinct compound fence and 4-bedroom duplex should be accounted for as two separate performance obligations.