Bundled Equipment Sale with Bill-and-Hold Terms and a Customer Advance
Verdant Agro Machinery Inc. (VAMI) contracts with a sugar cooperative on 1 October 2025 to deliver a milling machine for ₱9,600,000, with 40% payable on signing and the balance on completion of installation. VAMI will also install the machine, train the cooperative's operators, and provide a two-year maintenance plan. VAMI regularly sells these items separately: the machine for ₱8,200,000, installation for ₱900,000, training for ₱400,000, and a two-year maintenance plan for ₱1,000,000. The machine cannot operate to the cooperative's specifications until VAMI's engineers calibrate it on site. Because the cooperative's plant is not yet built, it asks VAMI to keep the machine in VAMI's warehouse until March 2026; the cooperative pays in full in October 2025, the machine is separately identified and ready for delivery, and VAMI cannot redirect it to another customer. In a separate contract signed in October 2025, VAMI receives a ₱3,000,000 down payment for a machine to be delivered in April 2027, the delay being needed for the customer's site works.
1. Identify the performance obligations in the ₱9,600,000 contract and allocate the transaction price. State and defend your treatment of the installation activity.
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Standalone prices total ₱10,500,000 (8,200,000 + 900,000 + 400,000 + 1,000,000), so the ₱9,600,000 price is allocated on a relative standalone basis:
| Item | Standalone | Allocation |
|---|---|---|
| Machine | 8,200,000 | 9,600,000 × 8,200/10,500 = 7,497,143 |
| Installation | 900,000 | 822,857 |
| Training | 400,000 | 365,714 |
| Maintenance (2 yrs) | 1,000,000 | 914,286 |
| Total | 10,500,000 | 9,600,000 |
Training and maintenance are clearly distinct: the customer can benefit from them with its own resources and they are separately sold.
The installation is the judgement point. The fact that VAMI sells installation separately supports a separate obligation, but distinctness also requires that the customer can benefit from the machine together with other readily available resources. Here the machine cannot operate to specification until VAMI's engineers calibrate it, which indicates significant integration: the machine and calibration together are the combined output the customer contracted for. I would treat machine plus installation as one performance obligation of ₱8,320,000, satisfied when calibration is complete. If VAMI could show that calibration is routine and performable by any qualified third party, separate treatment (7,497,143 and 822,857) would be supportable, but the stated facts point to integration.
2. When, if at all, should VAMI recognise revenue on the machine held in its warehouse? Does your answer change if installation is a separate performance obligation?
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Bill-and-hold recognition is permitted only when control has passed despite physical possession. The indicators are: a substantive business reason for the arrangement (the customer's plant is not built), the product is separately identified as belonging to the customer, it is ready for delivery, and the seller cannot use it or direct it to another customer. All four are satisfied here, and the customer has paid in full. Physical possession is therefore not decisive, and the machine is not inventory of VAMI at year-end.
The amount recognised, however, depends on the unit of account chosen in Task 1. If machine and installation are a single combined obligation, no revenue is recognised in October: the combined obligation is satisfied only when calibration is complete, so the whole ₱8,320,000 is deferred to 2026 even though control of the physical unit has passed. If installation is a separate obligation, the machine's allocated ₱7,497,143 is recognised in October under the bill-and-hold criteria and only ₱822,857 waits for installation.
Either way, the 40% cash receipt is not the driver - revenue follows satisfaction of the obligation, not collection. The examination trap is to recognise ₱3,840,000 (40% of price) on receipt, which is wrong under PFRS 15.
3. Should VAMI adjust the ₱3,000,000 advance on the 2027 machine for a significant financing component? Show the mechanics and identify the judgemental inputs.
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The practical expedient permits ignoring financing when the period between transfer and payment is 12 months or less. Here the gap is 18 months (October 2025 to April 2027), so the expedient is unavailable and a financing component must be assessed. The two stated exemptions do not fit: the consideration is not variable, and the timing of transfer is fixed by contract rather than being at the customer's discretion - the delay is driven by the customer's site works, not by a right to call for delivery at any time.
The transaction price is therefore the present value of the ₱3,000,000, discounted at the rate that would be used in a separate financing transaction between VAMI and the customer. Illustratively at 12%: PV = 3,000,000 ÷ 1.12^1.5 ≈ ₱2,530,996. VAMI recognises ₱2,530,996 of revenue when the machine transfers and accrues approximately ₱469,004 of interest expense over the 18 months, unwinding the discount.
If the advance is better characterised as a deposit securing supply, the conclusion is unchanged - the assessment turns on the timing gap, not the label. Judgemental inputs are the discount rate (customer's incremental borrowing rate is the usual proxy) and whether the delay is genuinely at the customer's discretion.