This is an example in a small series for illustrating the concepts in What is a good or service that is distinct? Identify Equipment and consumables industry obligations
A vendor enters into a contract to supply a customer with an item of equipment and consumables that are required to operate the equipment. The contract also requires the vendor to provide replacement consumables on specified dates over the next three years. The consumables are specific to the equipment and only produced by the vendor, although they are sold separately to customers who have bought the equipment second hand. Identify Equipment and consumables industry obligations
The item of equipment and the consumables are both capable of being distinct, because each of them are regularly sold separately by the vendor. The customer can benefit from the consumables that will be delivered under the contract together with the item of equipment. Identify Equipment and consumables industry obligations
The item of equipment and the consumables are also distinct in the context of the contract. This conclusion is based on the following:
- There is no service being provided that integrates and transforms the equipment and consumables into a single combined output;
- Neither the equipment nor the consumables are significantly customised or modified by the other;
- The equipment and consumables are not highly inter-related because they do not significantly affect each other.
Consequently, although there is a functional relationship between the equipment and the consumables because the consumables are needed in order to make the equipment work, the absence of any transformation (or integration) of the two components means that they represent separate performance obligations.
The vendor would be able to fulfil each of its promises in the contract independently of each other; it could transfer the equipment to the customer even if the customer did not purchase any consumables, and could transfer consumables to the customer separately if the customer had acquired the equipment from another third party.