An engineering firm contracts to both design a custom, one-of-a-kind bridge and construct it. The design work is created specifically around site conditions and construction methods that only become clear as construction proceeds, and the construction plans are continually revised based on issues encountered during building; neither the design deliverable nor the construction work could be used, changed, or evaluated in isolation from the other without substantially reworking both. Under ASC 606-10-25-21(c), why are the design and construction promises NOT distinct within the context of the contract?
- Because the firm invoices the customer using a single combined line item for both design and construction
- Because the design and construction are each significantly affected by the other, meaning they are highly interdependent and highly interrelated, so neither promise can be fulfilled independently without substantially reworking the other
- Because a single firm is performing both the design work and the construction work rather than subcontracting one of them
- Because the total contract price for the bridge exceeds a materiality threshold set by the customer's internal policy
Why B? And why not the others?
Correct answer: B. Because the design and construction are each significantly affected by the other, meaning they are highly interdependent and highly interrelated, so neither promise can be fulfilled independently without substantially reworking the other
ASC 606-10-25-21(c) identifies high interdependence or high interrelation as a factor indicating that promised goods or services are not separately identifiable: when each good or service is significantly affected by one or more of the other goods or services promised in the contract, such that the entity would not be able to fulfill its promise by transferring each independently, the promises are not distinct within the context of the contract. Here, the design continually depends on construction realities and the construction plans continually depend on design revisions, so neither can be delivered or evaluated on its own without substantially reworking the other, which is exactly the high-interdependence relationship the paragraph describes. A single combined invoice line item is a billing presentation choice, not a substantive fact the standard uses to test separate identifiability, since a single invoice can just as easily cover genuinely distinct performance obligations. Whether one firm performs both roles instead of subcontracting one of them speaks to who does the work, not to whether the promises are interdependent; a firm could perform both roles on genuinely separable design and construction with no interdependence at all. An internal customer materiality threshold on total contract price has no bearing on this analysis whatsoever; ASC 606-10-25-21 evaluates the nature of the relationship between the promised goods and services, not the customer's own internal accounting policies.
Source: FASB Accounting Standards Codification: ASC 606-10-25-21(c), Revenue from Contracts with Customers — Determining Whether Goods or Services Are Distinct