Under IFRS 15, a promise to transfer a good or service is a separate performance obligation when that good or service is distinct — meaning the customer can benefit from it on its own, and the entity's promise to transfer it is separately identifiable from other promises in the contract.
Identifying Performance Obligations at Contract Inception
At contract inception, an entity assesses the promised goods or services and identifies as a performance obligation each promise to transfer to the customer either:
- A good or service (or a bundle of goods or services) that is distinct.
- A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
Two Criteria That Must Both Be Met
A promised good or service is distinct only if both of the following criteria are met:
- The customer can benefit from the good or service either on its own or together with other readily available resources, i.e. the good or service is capable of being distinct.
- The entity's promise to transfer the good or service is separately identifiable from other promises in the contract, i.e. the promise is distinct within the context of the contract.
If a good is capable of being distinct on its own but the entity is in fact using it as an input to produce a combined output that it has promised to transfer to the customer, the promise is not separately identifiable and the good is not accounted for as a distinct performance obligation; instead it is combined with other promised goods or services into a single performance obligation.
Why the Distinction Matters
Whether a contract contains one performance obligation or several separate ones directly affects the timing of revenue recognition and how the transaction price is allocated across the contract; each distinct performance obligation may be satisfied at a different time than the others (at a point in time or over time), and is allocated its share of the transaction price based on its stand-alone selling price.
A Series of Similar Goods or Services
The Standard treats a series of distinct goods or services as a single performance obligation when they are substantially the same and have the same pattern of transfer to the customer, which is typically observed in recurring or continuous service contracts delivered regularly throughout the contract term, such as periodic maintenance contracts or ongoing system-management services.
Illustrative Examples of Distinct and Non-Distinct Goods
A good is typically distinct if it can be sold separately on its own in the market without a substantive need for other items in the contract; selling a standard piece of equipment together with a simple installation service that other market participants could readily perform is generally treated as two separate performance obligations: the equipment and the installation service. By contrast, when an entity combines several goods and services to deliver a single integrated output to the customer, where the components cannot be separated without materially affecting the function of that output — as in an integrated construction contract where the contractor combines materials, design and interrelated building works — those items are usually combined into a single performance obligation rather than several separate ones.
Legal References
- IFRS 15 — Revenue from Contracts with Customers, paragraph 22 (identifying a performance obligation).
- IFRS 15, paragraph 27 (the two distinctness criteria).
For questions about your specific situation, you can ask the Accounting Helper (private sector) on Helpers, or consult a licensed chartered accountant.