Question

Engelhart Implements Inc. sells tractors to area farmers. The price for each tractor includes a GPS positioning service for nine months (which facilitates field settings for planting and harvesting equipment). The GPS service is regularly sold on a standalone basis by Engelhart for a monthly fee. After nine months, the consumer can renew the service on a fee basis. Does Engelhart have one or multiple performance obligations? Explain.

Short answer

Both the obligations are unique (and maybe sold individually) and unrelated.

Step-by-step solution

Meaning of Multiple Performance Obligation

A contract may have several performance obligations, with revenue recorded separately for those that meet the following two criteria:

• The item or service may be purchased separately, allowing a client to benefit from it on its own or in conjunction with other readily available resources.

• The item or service is distinct within the context of the contract, which means it can be identified from other promises in the contract.

Explanation for the multiple performance obligations

The organization must deliver a distinct product or service to the consumer to assess whether a performance obligation exists. To determine if a firm must account for various performance obligations, the company's promise to sell the consumer a good or service should be distinctfrom other promises in the contract (that is, the good or service must be distinct within the contract).

Therefore, Engelhart has two performance responsibilities in this situation, one to deliver the tractor and one to provide GPS services. Both are unique and unrelated.