Supplier tooling

Before a new car goes into production, its suppliers spend heavily on tools to make its parts, and the contracts that cover those tools vary widely. Some carmakers buy the tools outright; others pay for them through the price of each part; some pay part upfront and leave title with the supplier. The accounting follows control, and getting it wrong moves revenue and margins between years. This guide sets out the control indicators, compares the two outcomes over a five-year programme, and covers pre-production engineering, impairment and US GAAP.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. 4 minute read.

Short answer

Supplier tooling is the moulds, dies and fixtures a parts supplier builds to make components for a carmaker. Under IFRS 15, the first question is who controls the tooling. If the carmaker obtains control, typically because it pays for the tools, takes legal title and can take them away, the tooling is a separate performance obligation: the supplier recognises tooling revenue when control passes, often at the carmaker's approval of the tools, or over time if the conditions are met. If the supplier keeps control, the tools are its own property, plant and equipment under IAS 16, and any separate payment from the carmaker is part of the price of the parts, recognised as parts are delivered. In this guide's example, a US$ 2,000 thousand tool paid for with a 2,200 thousand lump sum is either revenue at approval or spread over 5 years of parts deliveries.

At a glance

Key question
Who controls the tooling?
Carmaker controls
Separate sale, tooling revenue
Supplier controls
Supplier's PPE under IAS 16
Tooling payment, supplier controls
Part of the parts price
Engineering and design
Separate only if distinct
US GAAP
ASC 340-10 pre-production costs
Supplier toolingKey question: Who controls the tooling?; Carmaker controls: Separate sale, tooling revenue; Supplier controls: Supplier's PPE under IAS 16; Tooling payment, supplier controls: Part of the parts price; Engineering and design: Separate only if distinct; US GAAP: ASC 340-10 pre-production costs.KEY FACTS AT A GLANCESupplier toolingKey questionWho controls the tooling?Carmaker controlsSeparate sale, toolingrevenueSupplier controlsSupplier's PPE under IAS16Tooling payment, supplier controlsPart of the parts priceEngineering and designSeparate only if distinctUS GAAPASC 340-10 pre-productioncostsTax BakersSupplier toolingKey question: Who controls the tooling?; Carmaker controls: Separate sale, tooling revenue; Supplier controls: Supplier's PPE under IAS 16; Tooling payment, supplier controls: Part of the parts price; Engineering and design: Separate only if distinct; US GAAP: ASC 340-10 pre-production costs.KEY FACTS AT A GLANCESupplier toolingKey questionWho controls the tooling?Carmaker controlsSeparate sale, tooling revenueSupplier controlsSupplier's PPE under IAS 16Tooling payment, supplier controlsPart of the parts priceEngineering and designSeparate only if distinctUS GAAPASC 340-10 pre-production costsTax Bakers
Key facts at a glance, as set out in this guide.

Who controls supplier tooling?

IFRS 15 asks whether the carmaker obtains control of the tooling: the ability to direct its use and obtain substantially all of its remaining benefits. Indicators that it does include legal title passing to the carmaker, the carmaker's right to take the tools to another supplier at any time, tools tagged as the carmaker's property, the carmaker bearing the risk of loss, and an unconditional obligation to pay for the tools whatever happens to the parts contract. Indicators that the supplier keeps control include title staying with the supplier, payment only through the price of parts delivered, and the supplier being free to use the tools for other customers. Tools that sit in the supplier's plant can still be controlled by the carmaker; physical possession is not decisive.

Supplier tooling: the same tool, two answers

A supplier spends US$ 2,000 thousand building a die for a door panel. The carmaker pays a lump sum of 2,200 thousand when it approves the tool, and then buys panels for 5 years.

Revenue from the tooling payment (US$ thousand)Revenue from the tooling payment (US$ thousand)2,200Approval440Year 1440Year 2440Year 3440Year 4440Year 5Carmaker controls the toolSupplier controls the tool
Control decides whether tooling is revenue at approval or over the programme.
US$ thousandCarmaker controls the toolSupplier controls the tool
At approvalTooling revenue 2,200, cost of sales 2,000Tool in property, plant and equipment 2,000; payment is a contract liability of 2,200
Each year of productionRevenue for parts onlyExtra revenue 440, depreciation 400
Total profit on the tool200 at approval200 spread over 5 years

The total profit is the same, but the timing and the revenue line are not. If the carmaker controls the tool, the supplier may recognise tooling revenue over time while it builds the tool, if the tool has no alternative use and the supplier has an enforceable right to payment for work done; otherwise at the point control passes, usually approval. If the supplier controls the tool, it depreciates it over the expected production, often on a units of production basis, and the payment is spread over the parts, because it is consideration for the parts the supplier promises to deliver.

What if the tooling is paid through the piece price?

Many contracts recover tooling through an amount added to the price of each part, with no lump sum. If the carmaker nevertheless obtains control of the tool, for example by taking title at approval, the supplier has sold the tool on deferred terms: tooling revenue is recognised when control passes, with a receivable or contract asset recovered through the parts, and a financing component considered if the recovery period is long. If the supplier keeps control, the tool is its equipment and the uplift is simply part of the part price. Volume shortfalls matter: where the carmaker guarantees to pay any unrecovered tooling cost if volumes fall short, the supplier's right to payment is more secure.

How are engineering and design costs treated?

Suppliers also design the parts and tools before production. Engineering work is a separate performance obligation only if the carmaker obtains a distinct benefit, such as design rights it can use with other suppliers. Otherwise it is an activity to fulfil the parts contract: the costs are capitalised as costs to fulfil a contract if they relate directly to the contract, create resources used to satisfy it and are expected to be recovered, and are amortised as parts are delivered; costs that do not meet those tests, including research, are expensed. See contract costs and performance obligations.

When is tooling impaired?

When a programme's volumes fall well below plan, or the carmaker cancels or shortens it, tools the supplier controls are tested for impairment under IAS 36, and capitalised costs to fulfil are written down if the remaining consideration no longer covers them. Contracts where the supplier must deliver parts at a loss may also be onerous under IAS 37. Cuts to electric vehicle programmes have caused write-downs of this kind at a number of suppliers. See manufacturing plant impairment.

How does US GAAP differ?

US GAAP has specific guidance for pre-production costs under long-term supply arrangements in ASC 340-10. Design and development costs for moulds, dies and tools the supplier will own are capitalised as part of the tools; costs for tools the supplier will not own are capitalised only if the supplier has a non-cancellable right to use them during the supply arrangement, and otherwise expensed unless reimbursement is contractually guaranteed. Customer-owned tooling sold to the carmaker is accounted for under ASC 606, much as under IFRS 15. See automotive accounting.

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Questions people ask

Is supplier tooling revenue under IFRS 15?

Only if the carmaker obtains control of the tooling, for example through legal title and the right to remove it; then it is a separate performance obligation.

How are tools the supplier controls accounted for?

As the supplier's property, plant and equipment, depreciated over the production, with any payment from the carmaker spread over the parts.

Are engineering and design costs capitalised by suppliers?

As costs to fulfil the parts contract if they meet IFRS 15's criteria; otherwise expensed, unless the design is a distinct service sold to the carmaker.

How does US GAAP treat supplier pre-production costs?

Under ASC 340-10, costs of tools the supplier will own are capitalised; costs of tools it will not own are capitalised only in specific circumstances.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers
  2. IFRS Foundation: IAS 16 Property, Plant and Equipment
  3. FASB Accounting Standards Codification: Topic 340, Other Assets and Deferred Costs

Rules and fees change. If you are reading this long after October 9, 2026, confirm the figures with the source before you rely on them.

AutomotiveAutomotive accounting: the key IFRS issuesIFRS 15Identifying performance obligations under IFRS 15IFRS 15Contract costs: costs to obtain and fulfil a contract under IFRS 15

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