Year-End Control Transfer and Bundled Maintenance
Northline Controls Ltd, a calendar-year-end manufacturer, finished 12 custom control panels for a customer on 20 December 20X5. The contract price is $2.4 million; cost incurred is $1.5 million. The panels are complete, tested, and stored in a segregated area marked for the customer. The customer inspected them on 28 December and asked Northline to hold them until 15 January 20X6 because its site is not ready. The contract states that title passes on delivery and the balance is due on delivery; the customer has paid a 20% deposit and cannot cancel. Separately, Northline sold a three-year maintenance plan for $180,000 with the panels. Standalone selling prices are $2.4 million for the panels and $240,000 for maintenance. The CFO wants to recognize the full $2.58 million in 20X5 to protect the year's profit target. The auditor has asked for a control-transfer analysis and a revenue allocation.
1. Should Northline recognize the $2.4 million panel revenue at 31 December 20X5? Analyse the control-transfer indicators and the bill-and-hold conditions, and conclude.
Read the worked answer
Revenue is recognized when control of the promised goods transfers, not when production is complete or when the customer is invoiced. The key indicators here are mixed. Supporting transfer: the panels are identified to the contract, tested, segregated, non-cancellable, and the customer has inspected them; the delay is at the customer's request, which can be a substantive business reason for a bill-and-hold arrangement. Against transfer: title passes only on delivery, the balance is due on delivery, and there is no written bill-and-hold agreement showing that the customer has accepted control. A bill-and-hold arrangement normally requires all of the following: a substantive reason, goods separately identified as belonging to the customer, goods ready for delivery, goods not usable for other customers, and customer acceptance of control. On these facts, the title and payment terms are strong contrary evidence. The safer conclusion is to defer the $2.4 million unless management can document that every bill-and-hold condition is met and that the customer has accepted the risks and rewards of ownership. Profit-target pressure is not relevant to the accounting conclusion.
2. Allocate the $2.58 million transaction price between the panels and the maintenance plan, and state the 20X5 revenue if the panels are delivered on 15 January 20X6.
Read the worked answer
The contract contains two performance obligations: panels and maintenance. Total consideration is $2.4m + $0.18m = $2.58m. Total standalone selling price is $2.4m + $0.24m = $2.64m. Allocate pro rata: panels = $2.58m × ($2.4m/$2.64m) = $2.345m; maintenance = $2.58m × ($0.24m/$2.64m) = $0.235m. The maintenance amount is recognized over the three-year service period, not at once. If the panels are delivered on 15 January 20X6, control has not transferred by 31 December 20X5 under the title and payment terms. Therefore 20X5 revenue is $0 for both the panels and the maintenance. The $2.345m panel revenue would be recognized on 15 January 20X6, and the $0.235m maintenance revenue would be recognized over the service period beginning at that point. Recognizing $2.58m in 20X5 would overstate revenue and profit and would create a liability for unperformed maintenance.