Question

Under FASB ASC 606, revenue is recognized when there is a performance obligation. Required:

a. What is a performance obligation?

b. Under what conditions does a performance obligation exist?

c. When must multiple performance obligations in a revenue arrangement be accounted for separately

Answer 1

Performance Obligation, as defined by FASB, is the distinct promise of performance of the contract which is defined terms of certain performance checkpoints. These are the promises of goods or services in contract with a customer.

Performance Obligation does exist in the following scenarios:

• when such promises are distinct on their own i.e. not dependent on any other promise; and
• in the case of a series of goods or services - they must be the same and broadly, have the same pattern of transfer to the customer.

When the transfer of goods or services are made over a period of time and are divided into distinct promise or performance obligations with different time spans, in such case the revenue shall be accounted for separately on the performance of each performance obligation.