they integrate their software into the system of Jones Inc., the installation services do not significantly affect their customer’s ability to use and benefit from the software license because the installation services are routine and can be obtained from alternate software providers.
The software updates do not significantly affect Jones Inc.’s ability to use and benefit from the software license because the software updates in this contract are not necessary to ensure that the software maintains a high level of utility to Jones Inc. during the license period.
Ace Partners observes that none of the promised goods or services significantly modifies or customizes one another and that they are not providing a significant service of integrating the software and the services into a combined output.
Conclusion
Based on Ace Partners’ assessment, the following four performance obligations have been identified in the contract with Jones Inc.:
The software license
An installation service
Software updates
Technical support
Ace Partners reached the above conclusion because of the following
Jones Inc. can benefit from the updates together with the software license transferred at the outset of the contract. Thus, Ace Partners concludes that its customer, Jones Inc., can benefit from each of the goods and services either on its own or together with the other goods and services that are readily available.
The software and the services do not significantly affect each other and, therefore, are not highly interdependent or highly interrelated because Ace Partners would be able to fulfill its promise to transfer the initial software license independent from its promise to subsequently provide the installation service, software updates, or technical support.
When goods and services are not distinct
When identifying performance obligations, FASB ASC 606-10-25-21 states that the objective is to determine whether an entity’s promises to transfer goods or services to the customer are separately identifiable within the context of the contract or are instead a combined item or items to which the promised goods or services are inputs. Some factors that would indicate that two or more promises to transfer goods or services to a customer would not be considered as separately identifiable include the following:
When an entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. A combined output or outputs might include more than one phase, element, or unit.
When one or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract.
When each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases an entity would not be able to fulfill their promise by transferring each of the goods or services independently.
When a good or service is not distinct, they should be combined with other promised goods or services until an entity identifies a bundle of goods or services that are distinct. In some cases, this would result in accounting for all the goods or services promised in a contract as a single performance obligation.
The contract with the customer
A contractor enters into a contract to build a hospital for a customer. The contractor is responsible for the overall management of the project and identifies various promised goods and services, including engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing.
Considerations in determining whether the goods and services are distinct:
The promised goods and services are capable of being distinct because the customer can benefit from the goods and services either on their own or together with other readily available resources. This is evidenced by the fact that the contractor’s competitors will regularly sell many of these goods and services separately to other customers. In addition, the customer could generate economic benefit from the individual goods and services by using, consuming, selling, or holding those goods or services.
The promises to transfer the goods and services are not separately identifiable as evidenced by the fact that the contractor provides a significant service of integrating the goods and services (the inputs) into the hospital (the combined output) for which the customer has contracted.
Conclusion
The criterion has not been met for the goods and services to be considered distinct, and therefore the contractor will account for all of the goods and services in the contract as a single performance obligation. To put another way, the customer entered into a contract with the contractor to a hospital and without the engineering, site clearance, foundation, procurement, construction of the structure, piping and wiring, installation of equipment, and finishing, the hospital could not have been built.
The contract
Merrill Corporation (Merrill) grants its customer Darren Partners (Darren) a three-year term license to anti-virus software and promises to provide Darren with when-and-if available updates to that software during the license period. Merrill frequently provides updates that are critical to the continued utility of the software. Without the updates, Darren’s ability to benefit from the software would decline significantly during the three-year arrangement.
Assessment considerations
Merrill considered whether the software and the updates are each promised goods or services in the contract and are each capable of being distinct because Darren can derive economic benefit from the software on its own throughout the license period (that is, without the updates the software would still provide its original functionality to Darren), while Darren can benefit from the updates together with the software license transferred at the outset of the contract.
Conclusion
Merrill concludes that its promise to transfer the software license and to provide the updates, when-and-if available, are not separately identifiable because the license and the updates are, in effect, inputs to a combined item (anti-virus protection) in the contract.
The updates significantly modify the functionality of the software (that is, they permit the software to protect Darren from a significant number of additional viruses that the software did not protect against previously) and are integral to maintaining the utility of the software license with Darren.
The
