QUESTION 52 Illustration 52 An entity enters into a contract with a customer on 1 April 2016 for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years. Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On 31 March 2018, the customer pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity's warehouse because of its close proximity to the customer's factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer's request. The entity expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts or direct them to another customer. How will the Company recognize revenue for sale of machine and spare parts? Is there any other performance obligation attached to this sale of goods?

According to IFRS 15, a company recognizes revenue when it satisfies a performance obligation by transferring control of a promised good or service to a customer. Control is considered to be transferred over time if any one of the following criteria is met:

  1. The customer simultaneously receives and consumes the benefits provided by the company's performance as the company performs.
  2. The company's performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
  3. The company's performance does not create an asset with an alternative use to the company, and the company has an enforceable right to payment for performance completed to date.

In the given case, the control of the machine is transferred to the customer once the payment is made and physical possession is taken, so the revenue related to the machine is recognized at that point.

For the spare parts, even though the physical possession of the spare parts remains with the entity, the customer has legal title to the spare parts and they are clearly identified as belonging to the customer. This indicates that the control of the spare parts has been transferred to the customer. Therefore, the revenue related to the spare parts is recognized when the customer pays for and inspects and accepts them, not when the spare parts are physically transferred.

Regarding the question about any other performance obligations attached to this sale of goods, the entity also seems to have taken on a warehousing service for the spare parts on behalf of the customer. If this service is a separately identifiable component of the contract, then it represents a separate performance obligation. The entity would need to allocate a portion of the transaction price to this obligation and recognize revenue for this service over time, as the service is provided. This revenue recognition would continue for the duration of the storage period (2-4 years).

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