HEMO-Tech Inc.
Part 1.
Solution
Hemo has not identified all the potential deliverables in the arrangement. Although the
accounting literature does not define what a deliverable is, entities may consider the following in
identifying potential deliverables, which is not an all-inclusive list of factors that could be
considered:
• Whether an item is explicitly referred to as an obligation of the vendor in a contractual
arrangement.
• Whether an item in an arrangement requires a distinct action from the vendor.
• Whether the item would cause the arrangement fee to vary by more than an insignificant
amount if it is excluded or included in the arrangement.
• Whether the vendor’s failure to deliver an item results in (1) the customer receiving a full or
partial refund, (2) the vendor incurring a contractual penalty, or (3) both.
• The degree to which an item is essential to the functionality of other products, services, or
rights being sold.
• Whether each performance obligation (e.g., an obligation to provide a product, service, or right,
either at a point in time or over the term of the arrangement) has been identified — particularly
performance obligations that (1) may be considered ancillary to the “primary” product(s),
service(s), or right(s) being sold or (2) do not have explicit monetary values assigned to them
under the terms of the arrangement.
The above assessment should be performed from the perspective of the customer (that is, the
other party to the arrangement). Significant judgment is involved, and no single factor is
necessarily determinative.
A remaining performance obligation is not inconsequential or perfunctory if it is essential to the
functionality of the delivered products or services. In addition, remaining activities are not
inconsequential or perfunctory if failure to complete the activities would result in the customer
receiving a full or partial refund or rejecting (or a right to a refund or to reject) the products
delivered or services performed to date. The terms of the sales contract regarding both the right
to a full or partial refund and the right of return or rejection should be considered when
evaluating whether a portion of the purchase price would be refundable. If the company has a
historical pattern of granting such rights, that historical pattern should also be considered even if
the current contract expressly precludes such rights. Further, other factors should be considered
in assessing whether remaining obligations are inconsequential or perfunctory. For example, the
staff also considers the following factors, which are not all-inclusive, to be indicators that a
remaining performance obligation is substantive rather than inconsequential or perfunctory:
• The seller does not have a demonstrated history of completing the remaining tasks in a timely
manner and reliably estimating their costs.
• The cost or time to perform the remaining obligations for similar contracts historically has
varied significantly from one instance to another.
• The skills or equipment required to complete the remaining activity are specialized or are not
readily available in the marketplace.
• The cost of completing the obligation, or the fair value of that obligation, is more than
insignificant in relation to such items as the contract fee, gross profit, and operating income
allocable to the unit of accounting.
• The period before the remaining obligation will be extinguished is lengthy. Registrants should
consider whether reasonably possible variations in the period to complete performance affect the
certainty that the remaining obligations will be completed successfully and on budget.
• The timing of payment of a portion of the sales price is coincident with completing
performance of the remaining activity.
Registrants’ determinations of whether remaining obligations are inconsequential or perfunctory
should be consistently applied.
