ACCA Strategic Professional · Strategic Business Reporting (International) · Revenue
Zenith Ltd enters into a contract to sell a machine to a customer for $500,000 and to install it. The installation is a simple task that other entities could perform and does not significantly modify the machine. Under IFRS 15, how should Zenith treat the machine and installation?
The machine and the installation are two separate performance obligations. The installation is simple, can be done by other entities and does not significantly modify the machine, so each is distinct. Having one contract does not require combining them into a single obligation.
- AAs two separate performance obligations, because the installation is distinct from the machineCorrect
- BAs a single performance obligation, because both are covered by one contract
- CAs a single performance obligation, because the installation is performed after delivery
- DAs one performance obligation, with revenue recognised only when installation is complete
Explanation
IFRS 15 requires goods or services to be accounted for separately if they are capable of being distinct and distinct within the context of the contract. Simple installation not significantly modifying the machine is distinct. A single contract does not mean a single performance obligation, so the combination options are wrong.
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