Tooling and moulds paid for by customers

Who controls customer-funded tooling?

Indicators that the customer controls the tooling include legal title passing to the customer, the customer's right to remove the tooling at any time, the supplier being barred from using it for other customers, the customer bearing the risk of loss, and a separately negotiated price paid on approval. Indicators that the supplier keeps control include the supplier holding title, recovering the cost through the price of each part, and being free to use or modify the tooling as it chooses. No single indicator decides; the contract and the way it works in practice do.

A customer-funded tooling example

A supplier designs and builds an injection mould for a car maker at a cost of 450,000 and a price of 500,000, then uses it to make 2,000,000 of parts a year for 5 years.

When the customer controls the mould but it stays in the supplier's factory, the supplier is effectively holding the customer's asset. Revenue at approval needs the bill-and-hold conditions of IFRS 15 to be met: there must be a substantive reason for the arrangement, the mould must be identified as the customer's, be ready for transfer, and not be usable by the supplier for anyone else. In practice, automotive suppliers often treat the customer's formal approval of the tooling, the production part approval, as the point control passes.

Why is the payment an advance when the supplier keeps control?

Because the customer is not buying the mould; it is paying in advance for parts it will receive over five years. The payment is part of the transaction price for the parts, recognised as they are delivered. Since the payment comes well ahead of delivery, the supplier assesses whether there is a significant financing component.

How are pre-production costs treated?

Design and engineering costs of tooling the supplier will own are part of the cost of that property, plant and equipment. Costs of tooling the customer will own are costs of the tooling performance obligation. Engineering work that is not a separate obligation and does not create an asset is considered under the IFRS 15 rules for costs to fulfil a contract: capitalised only if it relates directly to the contract, creates resources used to satisfy future obligations, and is expected to be recovered. Otherwise it is expensed.

Could the arrangement contain a lease?

Sometimes. If the supplier owns tooling dedicated to one customer and the customer has the right to direct how and for what purpose it is used, the supply contract may contain a lease of the tooling under IFRS 16. In most supply arrangements the supplier decides how its production equipment is used, so there is no lease, but the assessment should be made. See identifying a lease.

How does US GAAP treat tooling?

Revenue follows the same ASC 606 control analysis. In addition, ASC 340-10 has specific rules for pre-production costs under long-term supply arrangements: design and development costs for moulds and dies the supplier will not own are expensed unless the supplier has a non-cancellable right to reimbursement, while moulds and dies the supplier will own are capitalised as property, plant and equipment.

What should suppliers disclose?

The judgement on control of tooling, tooling revenue if significant, contract liabilities for advances, and capitalised fulfilment costs. See the IFRS 15 five-step model, plant useful lives and manufacturing accounting.

This guide is general information. It is not tax or legal advice for your situation.