X Ltd. agrees to produce 2,000 customized engines for use by Customer A in its products. X Ltd. concludes that the engines will transfer to Customer…

CA Final · Financial Reporting · RTP · May 2026
X Ltd. agrees to produce 2,000 customized engines for use by Customer A in its products. X Ltd. concludes that the engines will transfer to Customer A over time because: they have no alternative use to X Ltd.; andCustomer A is contractually obligated to pay X Ltd. for any finished or in-process engines, including a reasonable margin, if Customer A terminates the contract even when no fault of X Ltd. X Ltd. already has the process in place to produce the engines and is given the design by Customer A, such that X Ltd. does not expect to incur any significant learning curve or design and development costs. X Ltd. uses a method of measuring progress toward complete satisfaction of its manufacturing contracts that takes into account work in progress and finished goods controlled by Customer A. Require: (i) State whether the 2000 engines are distinct in nature or not. (ii) State whether 2000 engines is a single performance obligation or each engine is a separate performance obligation.

Suggested Answer and Working Notes:

(i) X Ltd. concludes that each of the 2,000 engines is distinct, because: Customer A can use each engine on its own; andeach engine is separately identifiable from the others because one does not significantly affect, modify or customize another. (ii) Despite the fact that each engine is distinct, X Ltd. concludes that the 2,000 units are a single performance obligation because: each engine will transfer to Customer A over time; andX Ltd. uses the same method to measure progress toward complete satisfaction of the obligation to transfer each engine to Customer A. Consequently, the transaction price for all 2,000 engines is recognized over time using an appropriate measure of progress. This outcome may be different from the outcome of allocating a fixed amount to each engine if each one was a performance obligation.

Topics: Ind AS 115

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