Revenue Recognition. Renee Rampulla

3-1

      An entity enters into a contractor with a customer that is a distributor. The entity promises to provide maintenance services for no additional consideration (that is, “free”) to any party (that is, the end customer) that purchases the product from the distributor. The entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-upon amount for providing those services on the entity’s behalf.

      If the end customer does not use the maintenance services, the entity is not obliged to pay the distributor.

      Is the promise to provide maintenance services for no additional consideration to the end customer a performance obligation?

      

Exercise 3-2

      In a contract with a distributor, an entity does not promise to provide any maintenance services. The entity typically does not provide maintenance services, and, therefore has not established a customary business practices. At the inception of the contract the entity transfers control of the product to the distributor and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration.

      Is the promise to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration a performance obligation?