You are the Manager of Technical Accounting for Parker Co (Parker), an SEC registrant. Parker provides highly specialized electronic chip machinery. Parker provides installation and testing services as part of the sale of the equipment to ensure that the machinery meets the customer's specifications. Due to the complexities involved with its machinery and customer specifications, Parker cannot objectively determine that its machinery will meet customer specifications prior to installation. Parker also provides a five-year maintenance plan whereby it will provide telephone support and repair services at no incremental cost to the cost of the plan. Customer A has purchased the machinery and maintenance plan. Some additional back-ground information is as follows:
* The cost of the total package is $1.3M, with $900,000 upon the date of sale and $80,000 payable each year for the maintenance services. The first payment is due one month after the date of installation and annually thereafter.
* Parker does not sell the machinery on a stand-alone basis separate from the installation services, nor does it offer the maintenance services to any customer other than a purchaser of the machinery.
* Parker estimates that a customer could resell the machinery to a third party.
* Duncan Co. provides installation services for a similar product and charges $100,000 and has sufficient skills that it could install Parker's machinery at the same price.
* No competitor provides a product similar enough for Parker to make an estimate of the based on true third-party evidence of stand-alone value of its product. However, those competitors who do provide a machinery in the same market earn a margin of 25%, e.g. if sale price is $1M, then cost is $750,000. Parker's cost to produce the machinery is $675,000.
* If Parker fails to provide the maintenance services, Customer has no obligation to pay additional amounts and may seek a pro rata refund for the maintenance fee paid.
*Typical maintenance plans in Parker's industry earn a margin 40%. Parker's cost for the maintenance services is $240,000.
* Parker believes that it is fully capable and will perform its obligations under the contract. Customer A is in a strong financial position and Parker has no concerns that it will collect all amounts due under the contract.
Required: Discuss the issues and conclusions for Parker's revenue recognition for this contract under the existing GAAP guidance ASC 605.
Discussion should include identification of the deliverables and units of accounting; allocation of revenue to the units of accounting; and appropriate revenue recognition of the deliverables.
Next, discuss the impact of the new GAAP guidance in ASC 606. Please focus the discussion on identification of performance obligations, allocation of revenue to those obligations and timing of revenue recognition.