Performance obligations

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A promise in a contract with a customer to transfer to the customer either:

  • a good or service (or a bundle of goods or services) that is distinct; or
  • a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

In the revenue recognition process (IFRS 15) identifying a performance obligation is a critical requirement because revenue is recognised when (or in some instances as) a performance obligation is satisfied. Here are some questions and answers.

What is a performance obligation?

A contract with a customer includes promises to transfer goods or services to the customer. If those goods or services are distinct, the promises are performance obligations and must be accounted for separately.

Examples of goods or services that may be promised in a contract with a customer include:

  • The sale of goods produced by an entity (for example, a manufacturer selling its inventory)
  • The resale of goods purchased by an entity (for example, a retailer selling its inventory)
  • Performing a contractually agreed-upon task for a customer
  • Providing a service of standing ready to provide goods or services to a customer (such as software updates that are provided on a when-and-if-available basis)
  • Providing a service of arranging for another party to transfer goods or services to a customer (i.e. acting as an agent of another party)
  • Constructing, manufacturing or developing an asset on behalf of a customer
  • Granting licences.

What are ‘distinct’ goods and services?

A good or service that is promised to a customer is ‘distinct’ if both of the following criteria are met:

  1. The customer can benefit from the good or service either on its own, or together with other resources that are readily available to the customer, and
  2. The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

When is the entity’s promise to transfer goods and services ‘separately identifiable’?

In assessing whether an entity’s promises to transfer goods or services to the customer are separately identifiable, the objective is to determine whether the nature of the promise in the contract is to transfer each of those goods or services individually or, instead, to transfer a combined item or items to which the promised goods or services are inputs. This assessment is done from the perspective of the customer.

If a promised good or service is not distinct, the entity must combine that good or service with other promised goods or services until it identifies a bundle of goods and/or services that is distinct. Promises are not separately identifiable (i.e. they must be bundled) if any of the following circumstances exist:

  • The seller performs a significant amount of work to integrate the good or service with other goods or services promised in the contract
  • Goods or services provided are highly interdependent or interrelated, or
  • One or more of the goods or services provided by the seller significantly modifies or customises, or is significantly modified or customised by, other goods or services promised in the contract.

The following decision tree summarises the process discussed above and will assist in determining whether goods and services promised in a contract are ‘distinct’:

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