Step 2 Identify performance obligations in the contract

6.1   (IFRS 15) FRS 115 Revenue from Contracts with Customers recognises that an entity may have promised more than one product or service to the customer, i.e., sale of 2 products as a bundle.

6.2   Step 2 requires that the various performance obligations (POs) in the contract are identify and accounted for separately.

6.3   A performance obligation (PO) is a promise (explicit or implicit) to transfer a good or service (or a bundle of goods and services) to the customer that is distinct.

6.4   A performance obligation could also be a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. For example, a routine or recurring cleaning services.

6.5   The promised goods or services may include (but not limited) to the following:

(a)     sale of products

(b)     resale of goods purchased

(c)     provision of warranties

(d)     performing an agreed-upon task

(e)     providing a service to arrange for another party to transfer goods or services

(f)     granting licences

(g)     granting options to purchase for additional goods or services etc.

6.6   The following summarises the standard’s requirements to identify whether a good or services, or a bundle, is distinct.

(a)   Step 1 is to focus on whether the goods or services is capable of being distinct.

Can the customer benefit from the good or services on its own or together with other readily available resources?

(b)   Step 2 is to focus on whether the promised to transfer the good or service is distinct in the context of the contract.

Is the good or service separately identifiable from other promises in the contract?

(c)   For step 1 and 2, if the answer is:

(i)      Yes – account for as a performance obligation (PO)

(ii)     No – combine 2 or more promised goods or services and re-evaluate.

6.7   The following are factors that indicate that the goods or services are not distinct.

(a)     the entity is using the good or service as an input to produce or deliver the combine output specified by the customer

(b)     the good and service significantly modifies / customises another good or service promised in the contract

(c)     the good or service is highly dependent on, or highly interrelated with, other goods or services promised in the contract.

6.8   Performance obligations could be explicit or implicit.

6.9   Summary of Step 2 Identify performance obligations in the contract

(a)     (i)      Performance obligations are promises (explicit or implicit) to transfer distinct goods or services or a series of distinct goods or services to the customer.

          (ii)     Identified at contract inception based on contractual terms and customary business practice

          (iii)   If distinct (both individually and in the context of the contract), promised goods or services are accounted for separately

(b)     Key changes in FRS 115

          (i)      Current standard has limited requirements for transactions with multiple deliverables

          (ii)       Entities may identify different performance obligations (i.e., more or less performance obligations) compared to deliverables identified under current.

Last review: 30 September 2017