Sale Of Hardware And Installation Services – FAQ | IFRS

Sale of hardware and installation services

Two very similar sales transactions/contracts but one with only one single performance obligation and the other with separate performance obligations.

Case 1 – separate performance obligations Performance obligation hardware and installation sale

Vendor enters into a contract to provide hardware and installation services to Customer. Vendor always sells the hardware with the installation service, but the installation is not complex such that Customer could perform the installation on its own or use other third parties.


Does the transaction consist of one or more performance obligations?

More than one – Vendor should account for the hardware and installation services as separate performance obligations.


How do we come to this conclusion?

Vendor does not sell the hardware and installation services separately. So not looking at IFRS it is one sale for the Vendor. However, IFRS requires that management evaluates whether the customer can benefit from the hardware on its own or together with readily available resources. Because Customer can either perform the installation on his/her own or use another third party, Customer can benefit from:

  1. the hardware on its own, and Performance obligation hardware and installation sale
  2. the installation services in connection with the hardware already received.

The installation service does not significantly integrate, modify, or customize the equipment; therefore, Vendor’s promise to transfer the equipment is separately identifiable from Vendor’s promise to perform the installation service. Accordingly, the equipment and the installation are distinct and accounted for as separate performance obligations.

The conclusion would not change if the Vendor contractually required Customer to use Vendor’s installation services because absent the contractual requirements, Customer could perform the installation itself or use another third party. Performance obligation hardware and installation sale

Vendor should recognize revenue allocated to the hardware when it transfers control of the hardware to Customer. Vendor should assess whether the performance obligation for installation services is satisfied over time or at a point time, and recognize the allocated revenue accordingly.

Case 2: Single performance obligation

Vendor enters into a contract to provide hardware and installation services to Customer. Vendor also provides the customer with a license to software that is embedded on the hardware that is integral to the functionality of the hardware. The installation services significantly customize and integrate the hardware into Customer’s information technology environment. Only Vendor can provide this customization and integration service.


Does the transaction consist of one or more performance obligations?

One: Vendor should account for the hardware with embedded software and installation services together as a single performance obligation.


How do we come to this conclusion?

The guidance on licence revenue states that a license that:

  1. forms a component of a tangible good, and
  2. is integral to the functionality of the good….

is not distinct from the other promised goods or services in the contract.

Therefore, the license to embedded software is not distinct from the hardware. Vendor is also providing a significant service of integrating the hardware and the installation services into the combined item in the contract (a customized hardware system). Therefore, the hardware with embedded software and the installation services are inputs into the combined item and are not separately identifiable. Performance obligation hardware and installation sale

Performance obligation hardware and installation sale

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