In determining when promises are performance obligations the assessment has to be made whether
- the performance obligations consist of a series of distinct goods and/or services that are substantially the same and have the same pattern of transfer, OR Determining when promises are performance obligations
- a series of non-distinct goods and/or services that are not substantially the same and not have the same pattern of transfer.
This is important in the recognition of revenue over time or at a point in time. Determining when promises are performance obligations
Separate performance obligations
After identifying the promised goods or services within a contract, an entity determines which of those goods or services will be treated as separate performance obligations. That is, the entity identifies the individual units of account. Promised goods or services represent separate performance obligations if the goods or services are distinct (by themselves, or as part of a bundle of goods or services) (see below Determination of ‘distinct’) or if the goods or services are part of a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (see below Series of distinct goods or …. that are substantially the same and ….. the same pattern of transfer). Determining when promises are performance obligations
Combine deliveries to one distinct good or service
If a promised good or service is not distinct, an entity is required to combine that good or service with other promised goods or services until it identifies a bundle of goods or services that, together, is distinct. An entity is required to account for all the goods or services promised in a contract as a single performance obligation if the entire bundle of promised goods or services is the only performance obligation identified.
References: Determining when promises are performance obligations
A single performance obligation may include a licence of intellectual property and other promised goods or services. IFRS 15 identifies two examples of licences of intellectual property that are not distinct from other promised goods or services in a contract:
- a licence that is a component of a tangible good and that is integral to the functionality of the tangible good; and
- a licence that the customer can benefit from only in conjunction with a related service (e.g., an online hosting service that enables a customer to access the content provided by the licence of intellectual property).
Specified performance obligations
The standard also specifies that the following items are performance obligations: Determining when promises are performance obligations
- Customer options for additional goods or services that provide material rights to customers (see IFRS 15 B40)
- Service-type warranties (see IFRS 15 B28-B33)
Entities do not apply the general model to determine whether these goods or services are performance obligations because IASB deemed them to be performance obligations if they are identified as promises in a contract. Determining when promises are performance obligations
Determination of ‘distinct’
IFRS 15 outlines a two-step process for determining whether a promised good or service (or a bundle of goods or services) is distinct:
Customer directly benefits
Consideration at the level of the individual good or service of whether the customer can benefit from the good or service on its own or with other readily available resources (i.e., the good or service is capable of being distinct). [IFRS 15 28] Determining whether a good or service is capable of being distinct is straightforward in many situations. For example, if an entity regularly sells a good or service separately, this fact would demonstrate that the good or service provides benefit to a customer on its own or with other readily available resources. The evaluation may require more judgement in other situations, particularly when the good or service can only provide benefit to the customer with readily available resources provided by other entities.
Conditions Customer directly benefits
These are resources that meet either of the following conditions: Determining when promises are performance obligations
- They are sold separately by the entity (or another entity).
- The customer has already obtained them from the entity (including goods or services that the entity has already transferred to the customer under the contract) or from other transactions or events.
Consideration of whether the good or service is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract). [IFRS 15 29] Once an entity has determined whether a promised good or service is capable of being distinct based on the individual characteristics of the promise, the entity considers the second criterion of whether the good or service is separately identifiable from other promises in the contract (i.e., whether the promise to transfer the good or service is distinct within the context of the contract).
Both of these criteria must be met to conclude that the good or service is distinct. If these criteria are met, the individual good or service must be accounted for as a separate unit of account (i.e., a performance obligation).
Series of distinct goods and/or services that are substantially the same and have the same pattern of transfer
IFRS 15 22(b) defines, as a second type of performance obligation, a promise to transfer to the customer a series of distinct goods or services that are substantially the same and that have the same pattern of transfer, if both of the following criteria from IFRS 15 23 are met:
- Each distinct good or service in the series that the entity promises to transfer represents a performance obligation that would be satisfied over time, in accordance with IFRS 15 35, if it were accounted for separately.
- The entity would measure its progress toward satisfaction of the performance obligation using the same measure of progress for each distinct good or service in the series. Determining when promises are performance obligations
Series is a single performance obligation
If a series of distinct goods or services meets the criteria in IFRS 15 22(b) and IFRS 15 23 (i.e., the series requirement), an entity is required to treat that series as a single performance obligation (i.e., it is not optional). So:
Distinct and substantially the same
(1) Satisfied over time
(2) Same measure of progress
One performance obligation
The same method is used to measure progress toward completion for each distinct good or service in the series.
Substantially The Same
A series of distinct goods or services that are substantially the same are those that are separately identifiable (i.e., distinct) within the context of an arrangement, such as one delivery out of a set of 10 monthly deliveries; or each identifiable increment in a long-term service contract.
Example: Three services considered substantially the same:
- The first example presents a hypothetical cleaning services contract. Each increment in the service (i.e., a weekly cleaning) is distinct within the context of the contract, but the same service is being delivered in each increment.
- The second example describes a contract for asset management services that are provided on a daily, ongoing basis. Total services provided will be segregated into distinct services by the time period in which the services are rendered. Determining when promises are performance obligations
- The third example involves a hotel management company providing certain management service to a customer-owned property for a 20-year period. Although day-to-day activities may vary depending on property needs, all activities are considered management services. As such, each day is distinct and the same service is being delivered daily.
In all three cases the services are substantially the same, and would be treated as single performance. In each example, services are delivered consecutively. However, consecutive delivery is not necessarily necessary for distinct goods or services to be a series.
Same pattern of transfer: (1) Satisfied over time and (2) Same measure of progress
The series provision is intended to simplify the application of the revenue model and promote consistency in identifying performance obligations when an entity provides essentially the same service over time. Determining when promises are performance obligations
On January 1, 20X1, Sea-snack IT Company enters into a 3-year contract with Aluster Telecom to provide a monthly system service for $36,000. At the time of contract inception, Sea-snack’s standalone selling price for a year of service is $12,000. The services provided are the same each month and the pattern of transfer to the customer is the passage of time (services provided per month).
As such, Sea-snack determines that it is providing a series of distinct services (1) that are substantially the same and (2) have the same pattern of transfer. Therefore, the services will be treated as a single performance obligation satisfied over time.
The following decision tree illustrates how the determination of the nature of the promise might affect whether the series requirement applies:
Document your decisions in your financial close file to facilitate internal review and approval and external audits.
Take a high level view
It is important to highlight that even if the underlying activities an entity performs to satisfy a promise vary significantly throughout the day and from day to day, that fact, by itself, does not mean the distinct goods or services are not substantially the same. Consider an example where the nature of the promise is to provide a daily hotel management service. The service is comprised of activities that may vary each day (e.g., cleaning services, reservation services or property maintenance). However, the entity determines that the daily hotel management services are substantially the same because the nature of the entity’s promise is the same each day and the entity is providing the same overall management service each day.
See also: The IFRS Foundationbligations