On September 1, 2019, Foster Construction signed a contract with Costa Enterprises to construct a new corporate headquarters and parking garage on land that Costa owns.

Foster determines that control of the building is passed to Costa as it is constructed, but control of the parking garage will transfer when the garage is completed. Costa will use the garage for its employees and open it for public parking. The contract price is $50 million for both the building and the garage, but Costa includes a price adjustment for early or late completion of the building. For each day before September 1, 2021, that the building is completed, the promised consideration will increase by $15,000. For each day after September 1, 2021, that the building is incomplete, the promised consideration will be reduced by $15,000. Foster considers it 70% likely that it will complete the building seven days early, 10% likely that it will complete the project on time, and 20% likely that the project will be delayed five days. The building is constructed based on Costa's specifications and would require extensive alterations if used by another entity. The transaction has commercial substance, and Costa is in good financial health. The parties have also agreed that the building will be inspected and assigned a green building certification level. If the building achieves the certification level specified in the contract, Foster will be entitled to a bonus of $350,000. Foster has been highly successful in achieving the certification on prior building projects. The terms of the contract stipulate that Costa will make a $50,000,000 payment to Foster at the completion of the project. Foster will have two years or 24 months (until September 1, 2021) to complete the project.Furthermore, Foster has an enforceable right to demand payment related to performance to date based on time elapsed.

Foster has constructed similar buildings and sold them for $26 million but does not have experience in garage construction. Foster is aware of similar garages constructed by their competitors that were sold for $14 million. Due to good weather, Foster is able to complete the building early. Foster completes the building and garage on August 21, 2021. Costa receives control and legal title on these dates. The building also receives the required green building certification on August 21, 2021. Costa pays Foster any amounts owed on September 1, 2021. Foster has a normal profit margin of 20% and an interest rate of 10%. It allocates interest revenue on a straight-line basis. It is a calendar-year company that prepares financial statements annually. It uses time elapsed as its measure of progress for performance obligations that are satisfied over time.

Step 1: Identify the contract.

Indicate whether each criterion has been met and select an explanation for each.

a.	The provisions of the contract in terms of the transfer of goods and services and the right to payment are all clearly specified.
b.	Foster expects its future cash flows to change as a result of the contract.
c.	Costa is in good financial health - there are no foreseen problems.
d.	Both parties have agreed and signed the contract.
e.	The provisions of the contract in terms of the transfer of goods and services and the right to payment are not clearly specified.
f.	A contract involving two separate products (e.g., a building and a garage) does not have commercial substance.
g.	The payment and bonus/penalty scheme are clearly identified.

Criterion

Met?

Explanation

1.

All parties to the contract have agreed to the contract and are committed to performing under the contract.

Yes/No

(Pick letter from above)

2.

Each party's rights with respect to the goods or services that are being transferred are identifiable.

Yes/No

(Pick letter from above)

3.

The payment terms for the goods or services that are being transferred are identifiable.

Yes/No

(Pick letter from above)

4.

The contract has commercial substance.

Yes/No

(Pick letter from above)

5.

It is probable that the seller will collect the consideration to which it is entitled in exchange for the goods or services.

Yes/No

(Pick letter from above)

Step 2: Identify the performance obligations.

A.There are possibly two performance obligations - to complete the building before September 1, 2021 and to pass the green building certification. These two items appear to be distinct as the completion of the building and the inspection for certification are on two different dates.

B.There are possibly two performance obligations - the building and the garage. These two items appear to be distinct as Costa can benefit from the building on its own as indicated by Costa having control of the building prior to completion. However, Costa does not have control of the garage prior to completion. Thus, the promise of the seller to deliver the building is separately identifiable from other promises in the contract to deliver the garage.

C.There are possibly two performance obligations - the building and the garage. These two items do not appear to be distinct as Costa cannot benefit from the building on its own as indicated by Costa not having control of the building prior to completion.However, Costa does have control of the garage prior to completion. Thus, the promise of the seller to deliver the garage is separately identifiable from other promises in the contract to deliver the building.

D.There is only one performance obligation - the combined product of the building and the garage. Since the contract is to construct a new corporate headquarters and a parking garage, these components cannot be segregated. Thus, Foster is obligated to perform the contract in its entirety.