A vendor promises to deliver specialized equipment and also to perform installation services that require significant customization only the vendor can perform, such that the installation significantly modifies the equipment's functionality. Under ASC 606-10-25-19, what determines whether the equipment and the installation service are accounted for as two separate performance obligations rather than one combined obligation?
- Whether the customer can benefit from each good or service on its own or with readily available resources, AND whether the entity's promise to transfer each one is separately identifiable from the other promises in the contract
- Whether the equipment and the installation service are invoiced on the same invoice
- Whether the equipment and the installation service are delivered within the same reporting period
- Whether the total contract price for both items combined exceeds a fixed dollar threshold set by the standard
Correct answer: A. Whether the customer can benefit from each good or service on its own or with readily available resources, AND whether the entity's promise to transfer each one is separately identifiable from the other promises in the contract
ASC 606-10-25-19 requires both criteria to be met before a promised good or service is distinct: it must be capable of being distinct (the customer can benefit from it on its own or together with readily available resources) and it must be distinct within the context of the contract (the entity's promise to transfer it is separately identifiable from other promises). In the scenario described, the significant customization integrates the installation with the equipment so that the vendor is really providing one combined output, which is exactly the kind of interdependence that fails the separately-identifiable half of the test even if the equipment alone could theoretically be used by another customer. Invoicing presentation and the timing of delivery are administrative or scheduling facts that the standard does not use to determine distinctness, so building the answer around a single invoice or a shared reporting period misapplies the test. ASC 606 also contains no dollar-threshold rule for this determination; the standard's guidance is entirely about the nature of the promises, not their combined price.
Source: FASB Accounting Standards Codification: ASC 606-10-25-19, Revenue from Contracts with Customers — Identifying Performance Obligations