Performance obligation
A performance obligation is a promise in a contract to transfer to the customer either a distinct good or service (or bundle), or a series of distinct goods or services that are substantially the same and transfer in the same pattern. It is the unit of account to which the transaction price is allocated and revenue recognised.
Standard references
- ASC 606606-10-25-14 to 25-15
- IFRS 15paragraphs 22–23
- Ind AS 115paragraphs 22–23
Worked example
Illustrative: a $120,000 three-year order form lists platform subscription, implementation and premium support.
- Subscription: the customer can use the platform on its own, and access is provided daily over the term. It is a series of distinct days of service, so it is one performance obligation recognised over time.
- Implementation: a standard configuration that third-party partners also perform, and the platform works without it. It is capable of being distinct and separately identifiable, so it is a second performance obligation.
- Premium support: a stand-ready promise to answer tickets over the term. It is a third performance obligation, also a series.
- Internal account provisioning is a set-up activity that transfers nothing to the customer, so it is not a performance obligation.
Result: Three performance obligations. The $120,000 is allocated across them by relative standalone selling price in step 4.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Treating every SKU on the order form as a separate obligation without testing whether each is distinct.
- Missing implied promises created by customary business practice, such as free upgrades always given to customers.
- Treating internal set-up activities, which transfer nothing to the customer, as performance obligations.