This second criterion was developed for performance obligations for which it may not be clear whether any asset that is created or enhanced is controlled by the customer or for which the entity’s performance does not result in a recognizable asset.
In developing this criterion, the Boards decided that it would be easier to determine when the entity’s performance results in a transfer of goods or services to the customer by first eliminating the circumstances in which the entity’s performance would not result in a transfer of goods or services to the customer. The Boards decided that an entity’s performance would not result in a transfer of goods or services to the customer if the entity’s performance creates an asset with an alternative use to the entity. If an asset has an alternative use to an entity, the entity could readily direct the asset to another customer. For instance, in many cases an asset will have an alternative use because it is a standard inventory-type item and the entity has discretion to substitute the item across contracts with customers. Because the entity has discretion to substitute the asset being created for a similar item, the customer cannot control the asset.
Conversely, if an entity creates an asset that is highly customized for a particular customer, then the asset would be less likely to have an alternative use because the entity likely would incur significant costs to reconfigure the asset for sale to another customer (or would need to sell the asset for a significantly reduced price). The Boards observed that the level of customization might be a helpful factor to consider when evaluating whether an asset has an alternative use. However, the Boards decided that it should not be a determinative factor because, in some cases (for example, some real estate, software, or some manufacturing contracts), an asset might be standardized but yet still might not have an alternative use to an entity as a result of contractual or practical limitations that preclude the entity from readily directing the asset to another customer. If a contract precludes the entity from transferring an asset to another customer, the entity does not have an alternative use for that asset because it is legally obliged to direct the asset to the customer.
Having decided that a performance obligation can be satisfied over time only if the entity’s performance does not create an asset with alternative use to the entity, the Boards then developed the three additional criteria in paragraph 35(b). The Boards decided that those criteria were necessary to determine that control of the good or service transfers to the customer over time as the entity performs and, hence, the performance obligation is satisfied over time.
In some cases in which an entity’s performance does not create an asset with an alternative use to the entity, the customer simultaneously receives a benefit and consumes that benefit as the entity performs. In those cases, the entity is transferring goods or services as it performs, thereby satisfying its performance obligation over time. For example, consider an entity that promises to process transactions on behalf of a customer. The entity’s processing of each transaction does not create an asset with an alternative use to the entity and the customer simultaneously receives and consumes a benefit as each transaction is processed. Consequently, the entity would satisfy its performance obligation over time as those transactions are processed for the customer.