QUESTION 9 Illustration 9 An entity enters into a contract to build a power plant for a customer. The entity will be responsible for the overall management of the project including services to be provided like engineering, site clearance, foundation, procurement and construction of the structure, piping and wiring, installation of equipment and finishing. Determine how many performance obligations does the entity have.

Solution

The scenario presents a situation where the entity is offering a bundle of goods and services that are highly interrelated and dependent on each other to deliver the final project, i.e., the power plant. This includes:

  1. Project management
  2. Engineering services
  3. Site clearance
  4. Foundation work
  5. Procurement
  6. Construction of the structure
  7. Piping and wiring
  8. Installation of equipment
  9. Finishing

Under IFRS 15, a performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. If the goods or services are distinct, they should be treated as separate performance obligations.

However, in this case, all the services are highly interrelated, and they are working together to fulfill a single promise - the construction of the power plant. Each individual service is not distinct within the context of the contract, as none of the services can be delivered independently without affecting the final outcome. Thus, these are not separate performance obligations but rather inputs into the combined output, which is the completed power plant.

Therefore, the entity has one performance obligation in this contract, which is to build the power plant for the customer.

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