Performance obligations

A performance obligation is a promise in a contract to transfer to the customer either a distinct good or service (or bundle), or a series of distinct goods or services that are substantially the same and transferred in the same pattern — such as daily cleaning or monthly payroll processing, which are treated as one obligation (IFRS 15.22–23).

A good or service is distinct only if both conditions are met (IFRS 15.27): - Capable of being distinct — the customer can benefit from it on its own or with resources readily available (things sold separately by anyone, or already obtained from the entity). - Distinct within the context of the contract — the promise to transfer it is separately identifiable from the other promises. IFRS 15.29 lists signs that it isn't: the entity provides a significant integration service combining the items into a combined output (a building, an integrated system); one item significantly modifies or customises another; or the items are highly interdependent, so that each significantly affects the other.

Promises that fail the test are bundled until the bundle is distinct. That changes when revenue is recognised: bricks, labour and design delivered for a building are one obligation satisfied as the building goes up, not three sales.

Watch for promises that hide in the small print: - Warranties — an assurance-type warranty (the product works as specified) is not a performance obligation; it is a cost provision under IAS 37. A warranty the customer can buy separately, or one that provides a service beyond assurance, is a service-type warranty and is a performance obligation (IFRS 15.B28–B33). - Customer options — loyalty points or discount vouchers for future purchases are a separate obligation when they give a material right the customer wouldn't get without the contract (IFRS 15.B40). - Activities that transfer nothing — set-up tasks and internal administration are not performance obligations, even if the contract mentions them.

US GAAP differences: ASC 606 lets an entity elect to treat shipping and handling performed after the customer obtains control as a fulfilment cost rather than a promised service (ASC 606-10-25-18B), and allows promises that are immaterial in the context of the contract to be ignored (ASC 606-10-25-16A). IFRS 15 has neither election.