Under Singapore Financial Reporting Standards (SFRS), specifically SFRS 15 “Revenue from Contracts with Customers,” customisation or installation services can be considered separately from the related product sale under the following conditions:
Distinct in the Context of the Contract:
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- The goods or services are capable of being distinct. This means that the customer can benefit from the good or service on its own or with other readily available resources.
- The goods or services are distinct within the context of the contract. This means that the good or service is separately identifiable from other promises in the contract.
Capable of Being Distinct:
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- The product and the service are not highly interrelated or interdependent. For example, if the installation service is highly customised and significantly modifies the product, making it an integral part, it may not be distinct.
Separate Performance Obligations:
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- Each distinct good or service the contract promises must be accounted for as a separate performance obligation. This involves allocating the transaction price to each performance obligation based on the relative standalone selling prices.
Customer’s Ability to Benefit:
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- The customer can benefit from the product independently of the service or with resources that are readily available to them. For instance, if a customer can use the product without the customisation or installation service, or if these services can be provided by another vendor, they may be considered distinct.
Separately Identifiable Promises:
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- The promise to transfer the product and the promise to provide the customisation or installation service is separately identifiable. This requires evaluating if the nature of the promise is to transfer individual goods or services to the customer, rather than transferring a combined item that includes both the product and the service.
If these conditions are met, the customisation or installation services can be considered distinct and accounted for separately from the related product sale. This involves recognising revenue for each performance obligation when (or as) the entity satisfies the obligation.
For example, if a company sells a machine and offers installation services, and the customer can benefit from the machine on its own without the installation service, and the installation service can be performed by other vendors, these can be treated as separate performance obligations.
If the customisation or installation services are not distinct, they must be combined with the related product sale and treated as a single performance obligation, recognising revenue when the combined obligation is satisfied.