This is an example in a small series for illustrating the concepts in What is a good or service that is distinct?
A building company contracts with a customer to build a wall. It identifies two activities that are necessary to complete the wall:
- Arrange for raw materials (such as bricks) for the purposes of building a wall to be available at the customer’s premises; and
- Provide construction services to build a wall with the raw materials.
The sale of raw materials and the provision of services for the construction of a wall are capable of being distinct. Although the failure to purchase construction services would not significantly affect the delivery of bricks (which, by itself, might result in a vendor identifying two distinct performance obligations), the nature of the overall promise is to build the customer a wall.
Consequently, the risks associated with each activity are not separable, and hence they are not distinct within the context of the overall contract. This is for the following reasons:
- The raw materials and construction services are both inputs that result in the creation of an output (the wall) that is very different to the two inputs;
- The provision of construction services significantly modifies the nature of the raw materials (i.e. it transforms the raw materials into something that performs a very different function to the raw materials on their own).
The analysis would be the same even if the arrangement was structured as two contracts negotiated at or around the same time (i.e. a legal contract for the sale of bricks and a separate legal contract for construction services) because for accounting purposes there would be a single contract.
Although there are two activities that are capable of being distinct, in the context of the single accounting contract, the assessment of whether they would be distinct within the context of that accounting contract remains the same.