purchaser p and supplier s enter in a parts supply agreement for the lifetime of the 612461

Fixed prices per unit

Purchaser P and supplier S enter in a parts supply agreement for the lifetime of the finished product concerned. S uses tooling equipment that is specific to the needs of P. The tooling is explicitly identified in the agreement and S could not use an alternative asset. The estimated capacity of the tooling equipment is 500,000 units which corresponds to the total production of the finished product units over its life cycle. P takes substantially all of the output produced by S using the specific tooling.

Purchaser P and supplier S agree on the following unit price reductions in the parts supply agreement to reflect S’s increasing efficiencies and economies of scale:

• from 0 to 100,000 units, price per each unit €150;
• from 100,001 to 200,000, price per each unit €140;
• from 200,001 to 300,000, price per each unit €135;
• from 300,001 to 400,000, price per each unit €132;
• above 400,000 price per each unit €130.

The fulfilment of the arrangement depends on the use of a specific asset, the tooling. P has obtained the right to use the tooling because, on the facts presented, the likelihood is remote that one or more parties other than the P will take more than an insignificant amount of the tooling’s output. As the estimated capacity of the tooling equipment corresponds to the total production of the finished product units produced by P, P takes substantially all of the output produced using that tooling.

However, stepped pricing does not mean price ‘fixed per unit of output’ and, particularly as the stepped pricing is agreed in advance, it is not equal to the current market price per unit as of the time of delivery of the output. The arrangement contains a lease within the scope of IAS 17. The purchaser will have to determine whether it is a finance or operating lease.