Explain the “unit of accounting guidance as it applies to the following two examples:

(1) Automobiles Sold with Lifetime Maintenance Services

-    Entity A is an established auto dealer. Entity A's service center provides all scheduled maintenance services (including oil changes) at no additional charge (other than for parts) for any customer who purchases an automobile from Entity A for the period that the customer owns the automobile. The customer also may choose to have the maintenance services performed by others without affecting the vehicle warranty, but most customers utilize Entity A's maintenance services unless they move to a distant location. Neither Entity A nor any other dealer sells the automobile without the lifetime maintenance services. However, Entity A sells maintenance services separately to customers who did not purchase their vehicles from Entity A. The automobiles are sold subject to a limited warranty and there are no refund rights in the arrangement. Customers are obligated to Entity A for all arrangement consideration upon taking delivery of the automobile. Since lifetime maintenance services are not separately priced when a customer purchases an automobile from Entity A, they are not within the scope of Subtopic 605-20.

-    Based on an evaluation of the circumstances, the first condition for separation is met for the automobile because, even though the automobile is not sold separately by any vendor, it is considered to have standalone value because the customer could resell the automobile on a standalone basis. The second condition for separation also is met because there are no refund rights (general or otherwise) in the arrangement. Therefore, the automobile and the maintenance services should be considered separate units of accounting in the arrangement.

-  Because no entity sells the automobile separately, neither vendor-specific objective evidence nor third-party evidence of selling price exists for the automobile. However, there is vendor-specific objective evidence of selling price of the maintenance services (as evidenced by the amount charged on a standalone basis by Entity A for maintenance services and data available from which to estimate the volume and types of maintenance services provided during a typical customer’s ownership of the vehicle). As a result, when applying the relative selling price method, Entity A should use its best estimate of selling price for the automobile and vendor-specific objective evidence of selling price for the maintenance. Additionally, none of the amount allocable to the automobile is contingent upon providing the maintenance services.

(2) Sale of Home Appliances with Installation and Maintenance Services

- Entity S is an experienced home appliance dealer. Entity S also offers a number of services together with the home appliances that it sells. Assume that Entity S regularly sells Appliance W on a standalone basis. Entity S also sells installation services and maintenance services for Appliance W. However, Entity S does not offer installation or maintenance services to customers that buy Appliance W from other vendors. Pricing for Appliance W is as follows:

• a.  Appliance W only: $ 800
• b.  Appliance W with installation service: $ 850
• c.  Appliance W with maintenance services: $ 975
• d.  Appliance W with installation and maintenance services: $1,000.

- In each instance in which maintenance services are provided, the maintenance service is separately priced within the arrangement at $175. Additionally, the incremental amount charged by Entity S for installation of $50 approximates the amount charged by independent third parties.

- Appliance W is sold subject to a general right of return. If a customer purchases Appliance W with installation and/or maintenance services, and Entity S does not complete the services satisfactorily, the customer is entitled to a refund only of the portion of the fee that exceeds $800.

- Assume that a customer purchases Appliance W with both installation and maintenance services for $1,000. Based on its experience, Entity S believes that it is probable that installation of the equipment will be performed satisfactorily to the customer. The maintenance services are priced separately and should be accounted for based on the guidance in Subtopic 605-20. Entity S is evaluating whether Appliance W and the installation service represent separate units of accounting.

-  Based on an evaluation of the circumstances, the first condition for separation is met for Appliance W because it sometimes is sold separately by Entity S. The second condition for separation is also met because, even though a general right of return exists, performance of the appliance installation is probable and within the control of Entity S. Therefore, Appliance W and installation should be accounted for as separate units of accounting.

- Entity S would allocate $175 of the arrangement consideration to the maintenance services based on the guidance in Subtopic 605-20. Without considering whether any of the amount otherwise allocable to Appliance W is contingent upon the performance of the installation, Entity S would allocate the remainder of the arrangement consideration ($825) to Appliance W and the installation service using the relative selling price method. The vendor-specific objective evidence of selling price of Appliance W is its price when sold separately ($800), and the third-party evidence of selling price of the installation service is the amount charged by independent third parties, which approximates $50. Therefore, the amounts allocable to Appliance W and to the installation services are $776 [$825 × ($800 ÷ [$800 + $50])] and $49 [$825 × ($50 ÷ [$800 + $50])], respectively. Since the customer is entitled to a refund only of the portion of the fee that exceeds $800 if the installation is not performed, no portion of the amount allocable to Appliance W is contingent upon that installation.