Question

Explain in your own words what difference it makes if performance obligations are distinct.

REQUIREMENT:

1.One paragraph and as much details as possible

Answer 1

Performance Obligation : Means an obligation to transfer of goods & services. Activities undertaken to fulfill a contract are not considered a performance obligation unless those activities transfer a good or service to a customer. Performance Obligation is important because that has significant impact on when and how much revenue will be recognised.

Performance Obligation either covers followings

• The good or service is distinct;
• The good or service is part of a series of distinct goods

A good or service is distinct if both of the following are met

• The customer can benefit from the good or service either on its own or together with other resources readily available to the customer.

Some factors to consider when determining if a good or service is separately identifiable would be:

1. The entity doesn’t provide integration services for that good or service with other goods or services promised in the contract;
2. The good or service doesn’t significantly alter other goods or services promised; and
3. The customer could decide to not purchase the good or service, and it would not significantly affect the other goods or services promised in the contract.

Example : the construction of a building requires the transfer of building supplies and the service of integrating each of the goods to create a building

Performance Oblibagation satisfy,

• The customer simultaneously receives and consumes the benefit as the entity performs.
• The performance creates or enhances an asset that the customer controls.
• The asset created has no alternative use to the entity and the entity has an enforceable right to payment.