In short
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service (or a series of substantially the same distinct goods or services). Revenue is recognized when, or as, each one is satisfied.
Key takeaways
- A good or service is distinct if the customer can benefit from it on its own or with readily available resources, and it is separately identifiable in the contract.
- Identifying performance obligations is step 2 of the five-step revenue model.
- The transaction price is allocated to performance obligations by relative standalone selling price.
Example
A software license, installation and two years of support sold together may be three performance obligations, each recognized when its own control transfers.
Where it's tested
FAR: Revenue Recognition — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Under ASC 606, revenue from a performance obligation should be recognized over time if which of the following is true?