What is Performance Obligation?
A performance obligation is a promise in a contract to transfer a distinct good or service (or a series of substantially the same goods or services) to a customer. Under IFRS 15, identifying performance obligations is step two of the five-step revenue model and drives when and how much revenue is recognized.
How It Works
- Identify all explicit and implicit promises in the contract.
- Test each promise for whether it is distinct.
- Combine non-distinct promises into a single performance obligation.
- Recognize revenue when each obligation is satisfied, either over time or at a point in time.
Saudi Context
Saudi software companies splitting license, implementation and support into separate performance obligations apply IFRS 15 to time their revenue correctly.
Example
A SAR 600,000 contract that bundles a software license (SAR 400,000 standalone), training (SAR 100,000) and a year of support (SAR 100,000) has three performance obligations.