Customer-owned tooling held at the manufacturer's plant

Wrongly capitalizing customer-owned tooling overstates the manufacturer's PP&E and understates margins through unnecessary depreciation charges, while failing to separate a distinct tooling performance obligation misstates the timing and pattern of revenue recognition (deferring tooling revenue into unit prices over years instead of recognizing it on transfer of control); both errors distort gross margin trends, unit economics used in pricing decisions, and covenant/asset-based lending calculations tied to reported PP&E.

Does the customer hold title and substantively control the tooling's use and fate, such that it should not be recognized as the manufacturer's PP&E despite being physically located at the plant? Does the manufacturer provide a distinct tooling design/build service separate from the ongoing parts supply, requiring its own allocated transaction price? If title clauses are ambiguous (security interest or removal right rather than outright title), has the substance been analyzed rather than relying on the label?

1. Review the supply/tooling agreement to determine who holds legal title to the tooling and who bears the risks and rewards of ownership (obsolescence risk, insurance obligation, right to relocate or dispose of the tooling).
2. If the customer holds title and substantively controls the tooling's use and fate, do not recognize the tooling as the manufacturer's PP&E, even though it is physically located at and maintained by the manufacturer's plant.
3. Determine whether the manufacturer provides a distinct good or service in designing and building the tooling, separate from the ongoing supply of parts, by assessing whether the customer can benefit from the tooling on its own or with readily available resources.
4. If tooling design/build is a separate performance obligation under IFRS 15, allocate a portion of transaction price to it based on relative standalone selling price and recognize that revenue as control of the tooling transfers to the customer (which may be over time or at a point in time).
5. If tooling costs are instead recovered silently through the unit price of parts (no separate performance obligation), recognize that amount as part of the transaction price for parts over the production period, not as a separate tooling sale.
6. Continually monitor the arrangement for indicators of a financing component (e.g., upfront customer funding significantly ahead of tooling delivery) requiring separate accounting.

Measurement basis: tooling that remains customer property is not measured or recognized on the manufacturer's balance sheet at all (memo/custodial tracking only, e.g., for insurance purposes). Where tooling design/build is a distinct performance obligation, the transaction price is allocated between tooling and parts based on relative standalone selling prices (estimated if not sold separately, using approaches such as cost-plus-margin); revenue is recognized as control of the tooling transfers, either over time (if the customer controls the asset as it is created) or at a point in time (on completion/acceptance). Included in tooling transaction price: design, engineering, and fabrication costs attributable to that performance obligation. Excluded: ongoing per-unit parts production costs, which are recognized as parts are produced/shipped. Remeasurement trigger: reassess the arrangement if contract terms change (e.g., title transfers, tooling later sold standalone) or if a financing component emerges from a timing mismatch between funding and delivery.

Disclose: (1) that customer-owned tooling held at the manufacturer's site is excluded from PP&E, with its nature and approximate value if material (off-balance-sheet custodial disclosure); (2) the policy for identifying and allocating transaction price to a tooling performance obligation versus parts revenue; (3) the timing/method of revenue recognition for tooling (point in time or over time) and the judgment basis; (4) any contract asset/liability arising from timing differences between tooling billing and revenue recognition; (5) insurance/custodial responsibilities assumed for customer-owned tooling, if material to risk disclosures.

• Capitalizing customer-funded tooling as the manufacturer'
• s own PP&
• E and depreciating it, simply because it is physically located at and maintained by the manufacturer
• failing to identify a separate performance obligation for tooling design and fabrication, instead spreading its price silently over unit parts sales without assessing distinctiveness
• recognizing tooling revenue on receipt of customer funding rather than on transfer of control of the completed tooling
• not reassessing the arrangement when a previously non-distinct tooling arrangement changes (e.g., the manufacturer starts selling similar tooling standalone), which may indicate it has become distinct
• overlooking a financing component when customer funding is received well in advance of tooling completion, which can require adjusting the transaction price for the time value of money.