Brenner Industrial: Allocating a Discounted Multi-Element Contract
On 1 January, Year 1, Brenner Industrial Contracts (BIC) signs one contract with a customer combining equipment ($480,000), installation ($60,000) and three years of maintenance ($90,000) - a stated price of $630,000, billed in three equal annual installments. BIC's standalone selling prices are: equipment $500,000; installation $50,000 (routine work that any qualified third party can perform and that does not alter the equipment); maintenance $100,000 over three years. The contract also offers a $40,000 all-or-nothing bonus if installation is complete by 31 March. On comparable jobs BIC has finished on time 6 of the last 10 times, and its cost of installation is essentially fixed. Equipment is delivered and installation finished on 31 March; maintenance begins 1 April. BIC reports under IFRS 15 / ASC 606.
1. How many performance obligations are in this contract, and how should the $630,000 transaction price be allocated? Show the amounts and defend the judgment on installation.
Read the worked answer
Performance obligations - three.
- Equipment: a good, distinct because the customer can benefit from it with other readily available resources.
- Installation: distinct. It is routine, does not significantly modify or customize the equipment, and other entities perform it. If the installation had significantly integrated or customized the equipment, the two would be combined into one obligation.
- Maintenance: distinct. The customer can obtain maintenance from other providers and the service is not highly interrelated with the equipment sale.
Allocate on relative standalone selling price (SSP).
| Obligation | SSP | Weight | Allocation |
|---|---|---|---|
| Equipment | 500,000 | 500/650 | 484,615 |
| Installation | 50,000 | 50/650 | 48,462 |
| Maintenance | 100,000 | 100/650 | 96,923 |
| Total | 650,000 | 630,000 |
The $20,000 discount (3.08% of SSP) is not attributable to one element, so it is spread proportionately. The judgment the exam is testing: do not simply use the stated $480,000/$60,000/$90,000 lines - the stated price is not the allocation basis once a discount exists.
2. How should the $40,000 on-time bonus be treated at inception, and what if by 28 February BIC concludes completion by 31 March is highly probable?
Read the worked answer
The bonus is variable consideration with two possible outcomes, so BIC estimates it using the most likely amount: $0 or $40,000.
At inception, constrain it to $0. Variable consideration is included only to the extent it is highly probable (IFRS) / probable (ASC 606) that no significant reversal will occur when the uncertainty resolves. A 6-of-10 on-time history is roughly a 60% likelihood - well short of highly probable, and the all-or-nothing structure means a reversal would be the full $40,000. Zero is the defensible estimate.
If by 28 February the work is nearly complete with only routine steps left, the uncertainty has largely resolved and the constraint no longer applies. BIC then includes the $40,000 and allocates it entirely to installation, because the variable consideration relates specifically to that performance obligation (the bonus is earned by on-time completion of installation). Installation revenue becomes 48,462 + 40,000 = $88,462. The allocation is revisited, not retroactively restated as an error - it is a change in estimate applied to the unresolved portion.
3. Compute the revenue BIC recognizes in Year 1 by obligation and in total, first without and then with the bonus conclusion reached on 28 February. Note any timing judgment.
Read the worked answer
Without the bonus
- Equipment: $484,615 recognized when control transfers (delivery, 31 March).
- Installation: $48,462 recognized when installation is complete, 31 March.
- Maintenance: $96,923 over 36 months starting 1 April = 96,923 × 9/36 = $24,231 for Year 1.
- Total Year 1: 484,615 + 48,462 + 24,231 = $557,308
With the bonus included as of 28 February
- Equipment $484,615; Installation 48,462 + 40,000 = $88,462; Maintenance $24,231.
- Total: $597,308
Timing judgments to state:
- Equipment and installation revenue land on the same date only because both happen to complete 31 March; they are separate obligations and would split across periods if installation ran into April.
- Maintenance is a stand-ready obligation satisfied over time; do not start the 36 months at contract signing (1 January) - the customer does not receive the service until installation is complete.
- The remaining $630,000 − $557,308 = $72,692 (or $72,692 including bonus-adjusted amounts) sits in contract liability, consistent with billing in three annual installments.