QUESTION 11 Illustration 11 Entity A, a specialty construction firm, enters into a contract with Entity B to design and construct a multi-level shopping center with a customer car parking facility located in sub-levels underneath the shopping center. Entity B solicited bids from multiple firms on both phases of the project — design and construction. The design and construction of the shopping center and parking facility involves multiple goods and services from architectural consultation and engineering through procurement and installation of all of the materials. Several of these goods and services could be considered separate performance obligations because Entity A frequently sells the services, such as architectural consulting and engineering services, as well as standalone construction services based on third party design, separately. Entity A may require to continually alter the design of the shopping center and parking facility during construction as well as continually assess the propriety of the materials initially selected for the project. Determine how many performance obligations does the entity A have?

Solution

Entity A has at least two performance obligations in this contract:

  1. The design phase - This includes the architectural consulting and engineering services. These are distinct services as they are often sold separately and they provide value to the customer on their own or together with other readily available resources.
  2. The construction phase - This involves procurement and installation of all the materials to build the multi-level shopping center and the parking facility. This is a distinct service as it can be sold separately and it provides value to the customer on its own.

However, the constant alterations and assessments during the construction phase might result in the design and construction phases being considered a single performance obligation if the design is significantly modified throughout the construction process. This is because under IFRS 15, a good or service is distinct if the entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. In this case, if the design and construction phases are highly interrelated and the design cannot be separated from the construction, they would be considered as a single performance obligation.

Therefore, it will depend on the exact facts and circumstances, particularly the extent to which the design is modified during construction, whether Entity A has two or only one performance obligation

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