Accounting technology / Glossary / Performance obligations

What are performance obligations?

Definition

Performance obligations are the distinct promises in a contract to transfer goods or services to a customer. Under IFRS 15 and ASC 606, a contract's price is split between its performance obligations, and revenue for each one is recognised when, or as, that promise is fulfilled, either at a point in time or over time.

Also calledPOBsdistinct goods or services

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Model step: Step 2 of 5
Test: Distinct and separately identifiable
Price split by: Standalone selling price

How performance obligations work

Identifying performance obligations is step two of the five-step model. A promised good or service is distinct if the customer can benefit from it on its own or with readily available resources, and if it is separately identifiable from the other promises in the contract. A software contract may contain a licence, implementation services, support and training: if the implementation heavily customises the software, licence and implementation may form one obligation; if not, they are separate. A series of similar services delivered over time, such as monthly hosting, is treated as one obligation. The transaction price is allocated to each obligation in proportion to its standalone selling price. Companies disclose the remaining performance obligations, the revenue still to be recognised on signed contracts, which SaaS investors watch alongside bookings.

Common questions

How do you identify a performance obligation?+

List every promise in the contract, then ask whether each one is distinct: whether the customer could benefit from it alone, and whether it is separate from the other promises rather than an input to a combined output.

What are remaining performance obligations?+

The contracted revenue not yet recognised, including amounts not yet billed. Companies disclose it, with the timing, under IFRS 15 and ASC 606.

Is a warranty a performance obligation?+

A standard assurance warranty is not; it is accounted for as a cost provision. A warranty that the customer can buy separately or that provides an extra service is a separate performance obligation.