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3.3 Identifying performance obligations
Publication date: 31 Mar 2024
us Revenue guide
A performance obligation is a promise to provide a distinct good or service or a series of distinct goods or services as defined by the revenue standard.
Excerpt from ASC 606-10-25-14
At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:
a. A good or service (or a bundle of goods or services) that is distinct
b. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer
3.3.1 Promise to transfer a distinct good or service
Each distinct good or service that a reporting entity promises to transfer is a performance obligation (refer to RR 3.4 for guidance on assessing whether a good or service is distinct). Goods and services that are not distinct are bundled with other goods or services in the contract until a bundle of goods or services that is distinct is created. The bundle of goods or services in that case is a single performance obligation. Refer to RR 3.6.4 for discussion of an accounting policy election to account for certain shipping and handling activities. Refer to RR 8.4.4 for discussion of a practical expedient available to non-public franchisors related to certain pre-opening services.
3.3.2 Promise to transfer a series of distinct goods or services
A series of distinct goods or services provided over a period of time is a single performance obligation if the distinct goods or services are substantially the same and have the same pattern of transfer to the customer. The guidance sets out criteria for determining whether a series of distinct goods or services has the “same pattern of transfer.”
Excerpt from ASC 606-10-25-15
A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are met:
a. Each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria…to be a performance obligation satisfied over time.
b. …the same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation to transfer each distinct good or service in the series to the customer.
A series can consist of distinct time increments of service (for example, a series of daily or monthly services). Examples of promises to transfer a series of distinct services could include certain maintenance services, software-as-a-service (SaaS), transaction processing, IT outsourcing, licenses that provide a right to access IP (refer to RR 9), and asset management services if the service being provided each time period is substantially the same.
In contrast, a service for which each day incorporates the previous day’s effort toward achieving an end result would generally not be a series of distinct services because the service being performed each time period is not substantially the same. Examples of this type of service could include certain consulting services, engineering services, and research and development (R&D) efforts.
While the aforementioned examples relate to services, the series guidance also applies to goods as long as the criteria to be a performance obligation satisfied over time are met for the individual distinct goods within the series.
A reporting entity is required to account for a series of distinct goods or services as one performance obligation if the criteria are met (the “series guidance”), even though the underlying goods or services are distinct. Judgment will often be needed to determine whether the criteria for applying the series guidance are met.
Management will apply the principles in the revenue standard to the single performance obligation when the series criteria are met, rather than the individual goods or services that make up the single performance obligation. The exception is that management should consider each distinct good or service in the series, rather than the single performance obligation, when accounting for contract modifications and allocating variable consideration. Refer to further discussion on contract modifications in RR 2.9 and allocating variable consideration to a series of distinct goods or services in RR 5.5.1.1.
The series guidance is intended to simplify the application of the revenue model to arrangements that meet the criteria; however, application of the series guidance is not optional. The assessment of whether a contract includes a series could impact both the allocation of revenue and timing of recognition. This is because the series guidance requires that goods and services in the series be accounted for as a single performance obligation. As a result, revenue is not allocated to each distinct good or service based on relative standalone selling price. Management will instead determine a measure of progress for the single performance obligation that best depicts the transfer of goods or services to the customer. Refer to further discussion of measures of progress in RR 6.4. Additionally, refer to Revenue TRG Memo No. 27 and the related meeting minutes in Revenue TRG Memo No. 34 for further discussion of this topic.
Question RR 3-1
Could a continuous service (for example, hotel management services) qualify as a series of distinct services if the underlying activities performed by the reporting entity vary from day to day (for example, employee management, accounting, procurement, etc.)?
Could a continuous service (for example, hotel management services) qualify as a series of distinct services if the underlying activities performed by the reporting entity vary from day to day (for example, employee management, accounting, procurement, etc.)?
PwC response
Possibly. The series guidance requires each distinct good or service to be “substantially the same.” Management should evaluate this requirement based on the nature of its promise to the customer. For example, a promise to provide hotel management services for a specified contract term could meet the series criteria. This is because the reporting entity is providing the same service of “hotel management” each period, even though some of the underlying activities may vary each day. The underlying activities (for example, reservation services, property maintenance) are activities to fulfill the hotel management service rather than separate promises. The distinct service within the series is each time increment of performing the service (for example, each day or month of service). Example 12A in ASC 606-10-55-157B through ASC 606-10-55-158 illustrates this concept. Also refer to Revenue TRG Memo No. 39 and the related meeting minutes in Revenue TRG Memo No. 44 for further discussion.
Question RR 3-2
Is a promise to stand ready to provide goods or services (that is, a "stand-ready obligation") a series of distinct goods or services?
Is a promise to stand ready to provide goods or services (that is, a "stand-ready obligation") a series of distinct goods or services?
PwC response
Yes. A stand-ready obligation will typically meet the criteria to be accounted for as a series of distinct goods or services because each time interval during which the reporting entity provides a service of standing ready is distinct from and substantially similar to all of the time intervals during the contract. Management will need to apply judgment to determine whether the nature of a reporting entity’s promise is to stand ready to provide goods or services or a promise to provide specified goods or services. Refer to RR 3.2.3 and RR 6.4.3.
Question RR 3-3
Is it always acceptable to use a time-based measure of progress (that is, straight-line recognition) for a performance obligation that is a series of distinct goods or services?
Is it always acceptable to use a time-based measure of progress (that is, straight-line recognition) for a performance obligation that is a series of distinct goods or services?
PwC response
No. It is not appropriate to default to a time-based measure of progress for a series; however, straight-line recognition over the contract period will be reasonable in many cases. Management should select the method that best depicts the reporting entity’s progress in transferring control of the goods or services. Refer to RR 6.4.
Question RR 3-4
Do goods and services need to be delivered consecutively to qualify as a series of distinct goods or services?
Do goods and services need to be delivered consecutively to qualify as a series of distinct goods or services?
PwC response
No. There is no requirement to deliver goods or services consecutively to qualify as a series of distinct goods or services. The series guidance could apply despite gaps in performance or concurrent transfer of individual distinct goods or services within the series. Refer to Revenue TRG Memo No. 27 and the related meeting minutes in Revenue TRG Memo No. 34 for further discussion of this topic.
Example RR 3-1 illustrates a contract that includes a series of distinct goods. See Examples 7 and 31 in the revenue standard (ASC 606-10-55-125 through ASC 606-10-55-128 and ASC 606-10-55-248 through ASC 606-10-55-250) for additional illustration of a series of distinct goods or services.
EXAMPLE RR 3-1
Series of distinct goods – a single performance obligation
Contract Manufacturer has a contract to provide 50 units of Product A over a 36-month period. Product A is fully developed such that design services are not included in the contract.
Contract Manufacturer has concluded that each unit is a distinct good. An individual unit meets the criteria to be recognized over time because it has no alternative use and Contract Manufacturer has the right to payment for its performance as the goods are manufactured (refer to RR 6.3).
How many performance obligations are in the contract?
Analysis
The promise to provide 50 units of Product A is a single performance obligation. The contract is a series of distinct goods because (a) each unit is substantially the same, (b) each unit would meet the criteria to be a performance obligation satisfied over time, and (c) the same method would be used to measure the reporting entity’s progress to depict the transfer of each unit. If any of these criteria were not met, each unit would be a separate performance obligation.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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