Question

When is a performance obligation distinct? Describe in your own words and provide citation from ASC 606. What difference does it make if a performance obligation is distinct or not?

Answer 1

A performance obligation is distinct if both the below conditions are met:

1) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (that is, the good or service is capable of being distinct.

2) The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. (that is, the good or service is distinct within the context of the contract)

If the promises do not meet the requirements for separating, the performance obligations shall be combined into one performance obligation. A contract could have several performance obligations which in themselves include sets of promises that are not distinct and cannot be separated.