Question

What is a performance obligation? Describe in your own words. Provide citation from ASC 606.

Answer 1

Once an entity has determined that it has a contract with a customer as defined in Accounting Standards Codification (ASC) 606, the entity must determine what the performance obligations are. A performance obligation is defined in the ASC Master Glossary as:

A promise in a contract with a customer 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.

Examples (not intended to be limiting) of promised goods or services are provided in ASC 606 as follows:

1. Sale of goods produced by an entity (for example, inventory of a manufacturer)
2. Resale of goods purchased by an entity (for example, merchandise of a retailer)
3. Resale of rights to goods or services purchased by an entity (for example, a ticket resold by an entity acting as a principal, as described in paragraphs (606-10-55-36 through 55-40)
4. Performing a contractually agreed-upon task (or tasks) for a customer
5. Providing a service of standing ready to provide goods or services (for example, unspecified updates to software that are provided on a when-and-if-available basis) or of making goods or services available for a customer to use as and when the customer decides
6. Providing a service of arranging for another party to transfer goods or services to a customer (for example, acting as an agent of another party, as described in paragraphs (606-10-55-36 through 55-40)
7. Granting rights to goods or services to be provided in the future that a customer can resell or provide to its customer (for example, an entity selling a product to a retailer promises to transfer an additional good or service to an individual who purchases the product from the retailer)
8. Constructing, manufacturing, or developing an asset on behalf of a customer
9. Granting licenses (606-10-55-54 through 55-65)
10. Granting options to purchase additional goods or services (when those options provide a customer with a material right, as described in paragraphs 606-10-55-41 through 55-45)