Question

BARTCO is required to stand ready to produce a part for a customer under a standby supply agreement. The customer is not obligated to purchase any parts (i.e., there is no minimum guaranteed volume); however, it is highly likely the customer will purchase parts because the part is required to manufacture the customer’s product, and it is not practical for the customer to buy parts from multiple suppliers because of product specificity issues. In addition, the customer’s current product design is relatively new.
Question: What is the performance obligation here? Is it (a) the standby supply agreement, (2) the issuance of a purchase order, (3) the production of the part or (4) delivery of the part? Why and why not?   

Answer 1

	Performance obligation	Reason
Standby supply agreement	Performance obligation	As per IFRS 15 or ASC 606, a promises or set of promises can be categorised as separate performance obligation if the customer can use the good or services with readily available resources. In the present case, the customer can not purchase parts separately due to product specifications and new product design. Hence the promises like production of part and delivery of the part are part of same performance obligation.
Issuance of a purchase order	Process	Issuance of a purchase order is a process in satisfaction of the performance obligation
Production of the part	Part of the entire performance obligation	Production of the part is one of the promises to be satisfied in the contract with the customer. However , it is not a separate performance obligation since the customer will not purchase parts separately due to product specifications and new product design.
Delivery of the part	Part of the entire performance obligation	Delivery of the part is one of the promises to be satisfied in the contract with the customer. However , it is not a separate performance obligation since the customer will not purchase parts separately due to product specifications and new product design.