An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a machine and spare parts. The manufacturing lead time for the…

CA Final · Financial Reporting · MTP · January 2026
An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years. Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On 31st March, 20X3, the customer pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity's warehouse because of its close proximity to the customer's factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer's request. The entity expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts or direct them to another customer. How will the Company recognize revenue for sale of machine and spare parts? Is there any other performance obligation attached to this sale of goods?

Suggested Answer and Working Notes:

In the facts provided above, the entity has made sale of two goods – machine and space parts, whose control is transferred at a point in time. Additionally, company agrees to hold the spare parts for the customer for a period of 2-4 years, which is a separate performance obligation. Therefore, total transaction price shall be divided amongst 3 performance obligations – (i) Sale of machinery (ii) Sale of spare parts (iii) Custodial services for storing spare parts. Recognition of revenue for each of the three performance obligations shall occur as follows: Sale of machinery: Machine has been sold to the customer and physical possession as well as legal title passed to the customer on 31st March, 20X3. Accordingly, revenue for sale of machinery shall be recognized on 31st March, 20X3. Sale of spare parts: The customer has made payment for the spare parts and legal title has been passed to specifically identified goods, but such spares continue to be physically held by the entity. In this regard, the company shall evaluate if revenue can be recognized on bill-and-hold basis if all below criteria are met: (a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement); The customer has specifically requested for entity to store goods in their warehouse, owing to close proximity to customer's factory. (b) the product must be identified separately as belonging to the customer; The spare parts have been specifically identified and inspected by the customer. (c) the product currently must be ready for physical transfer to the customer; and The spares are identified and segregated, therefore, ready for delivery. (d) the entity cannot have the ability to use the product or to direct it to another customer Spares have been segregated and cannot be redirected to any other customer. Therefore, all conditions of bill-and-hold are met and hence, company can recognize revenue for sale of spare parts on 31st March, 20X3. Custodial services: Such services shall be given for a period of 2 to 4 years from 31st March, 20X3. Where services are given uniformly and customer receives & consumes benefits simultaneously, revenue for such service shall be recognized on a straight-line basis over a period of time.

Topics: Ind AS 115

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