When Multiple Performance Obligations Exist in a Contract
Under the International Financial Reporting Standard (IFRS) 15, a contract can contain multiple performance obligations if it includes separate promises to transfer distinct goods or services to a customer. Each performance obligation is accounted for separately as a distinct unit of account.
Identifying Multiple Performance Obligations
To determine whether a contract contains multiple performance obligations, consider the following factors:
- Distinct goods or services: Each performance obligation must represent a separate and distinct good or service that the customer can benefit from independently.
- Separate pricing: The goods or services must be priced separately or have a different fair value.
- Control by the customer: The customer must have the right to direct the performance of each obligation.
- Separate timelines: The obligations may be performed at different times or in different ways.
Examples of Multiple Performance Obligations
- A software company contracts to provide a software license, implementation services, and ongoing maintenance. Each of these represents a separate performance obligation.
- A construction company contracts to build a house and a garage. The house and garage are separate performance obligations.
- A consulting firm contracts to provide advisory services, training, and performance management tools. Each of these represents a separate performance obligation.
Accounting for Multiple Performance Obligations
When a contract contains multiple performance obligations, the revenue for each obligation is recognized separately as it is performed. The allocation of the contract price to each obligation is based on the relative standalone selling price (SSP) of each good or service.
Best Practices
- Clearly define each performance obligation: Specify the distinct goods or services included in each obligation and the customer’s rights to each.
- Allocate the contract price appropriately: Use the SSP to allocate the contract price to each performance obligation.
- Monitor performance: Track the progress of each performance obligation to ensure timely revenue recognition.
Conclusion
Recognizing revenue for contracts with multiple performance obligations can be complex. By understanding the criteria for identifying multiple obligations and applying the appropriate accounting principles, businesses can ensure accurate and compliant financial reporting.
Recommend: How Much Is Panda Express
Related Posts: How Do You Remove No Sew Tape
Also Read: How To Write Alphabet
Recommend: How Long Is Call Me By Your Name