A contractor promises to deliver various off-the-shelf building components (wiring, piping, fixtures) to a customer along with an engineering and integration service that combines those components, along with additional materials, into a single functioning building on the customer's site. Individually, some of the components could be used by another contractor on a different project, but the contractor's engineering and integration service is what transforms the separate components and materials into the single combined building the customer contracted for. Under ASC 606-10-25-21(a), why are the components and the integration service NOT distinct within the context of the contract?
- Because the components were manufactured by a third party rather than by the contractor itself
- Because the customer paid a single combined price for all the components and the integration service together
- Because the contractor provides a significant service of integrating the components and other materials into the combined output the customer contracted for, so the individual items are inputs to a single combined item rather than separately identifiable promises
- Because the contract does not specify a separate price for each individual component
Why C? And why not the others?
Correct answer: C. Because the contractor provides a significant service of integrating the components and other materials into the combined output the customer contracted for, so the individual items are inputs to a single combined item rather than separately identifiable promises
ASC 606-10-25-21(a) identifies a significant integration service as one of the factors indicating that promised goods or services are not separately identifiable, and therefore not distinct within the context of the contract: when the entity uses the goods or services as inputs to produce a combined output that the customer contracted for, the individual items are not separately identifiable even if each one, viewed alone, is capable of being distinct. Here, the contractor's engineering and integration work is precisely that kind of significant integration service, transforming individually usable components into the single building the customer actually bargained for, which is why the components and the service form one combined performance obligation rather than several separate ones. Where the components were manufactured is irrelevant to the separately-identifiable analysis, which looks at how the entity uses the promised items in fulfilling the contract, not at who originally produced them. A single combined invoice price is a pricing and administrative fact, not a substantive indicator the standard uses to assess distinctness; entities can bundle pricing for either combined or genuinely separate performance obligations. Similarly, the absence of an itemized price for each component does not drive the analysis; ASC 606-10-25-21 asks whether the entity is providing a significant integration service, a modification or customization relationship, or high interdependence, not whether prices happen to be itemized in the contract.
Source: FASB Accounting Standards Codification: ASC 606-10-25-21(a), Revenue from Contracts with Customers — Determining Whether Goods or Services Are Distinct