Distinct good or service
A good or service is distinct if the customer can benefit from it on its own or with readily available resources (capable of being distinct) and the promise to transfer it is separately identifiable from the other promises in the contract (distinct within the context of the contract). Both criteria must be met.
Standard references
- ASC 606606-10-25-19 to 25-22
- IFRS 15paragraphs 27–30
- Ind AS 115paragraphs 27–30
Worked example
Illustrative: a $90,000 annual subscription sold with a $30,000 set-up service.
- Case A: the set-up is standard configuration that partners also sell, and the platform works without it. Both criteria are met, so there are two obligations; the $120,000 is allocated by relative SSP and the set-up share is recognised as the work is done.
- Case B: the set-up significantly customises the platform, and the customer cannot use the platform for its purpose without it. The promises are inputs to one combined output, so there is one obligation.
- In Case B the full $120,000 is recognised over the period the customer has access to the customised platform.
Result: The same price list produces two obligations in Case A and one in Case B.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Stopping at 'capable of being distinct' and skipping the separately identifiable test.
- Ignoring the significant integration, modification and interdependence indicators.
- Splitting promises that are really inputs to a single combined output.