updates as a single performance obligation because it has concluded that the nature of the combined good or service it promised to transfer to its customer Darren is computer virus protection for three years.
The following are some thoughts for management to consider when identifying performance obligations:
Performance obligations may be explicitly stated in the contract and/or may be implied based on customary business practices.
Do any of the contracts contain material rights to customers that need to be accounted for as separate performance obligation?
When identifying performance obligations have immaterial items been omitted? If there are immaterial items, how did management determine those items to be immaterial?
If transactions with customers involve shipping and handling activities, is management going to assess whether the shipping and handling activities represent a separate performance obligation to the customer?
Should management elect to not account for shipping and handling activities as separate performance obligations and, if so, has that election been properly disclosed in the notes to the financial statements?
How does management determine whether a promised good or service is distinct, particularly within the context of the contract?
If a series of goods or services is provided to a customer, should management treat that series of goods or services as separate performance obligations or should they be treated as a single performance obligation?
Has management established proper controls over the process used to identify performance obligations?
Unlike larger companies, many private companies do not have written contracts with their customers and therefore it may be a bit more difficult for these private companies to identify performance obligations because some promises to customers may be based on customary business practices established over the years. Although not all inclusive, these companies might want to consider the following:
As private companies identify the customary business practices they have established, they should consider documenting them in writing to assist in the assessment of separate performance obligations as well as establish an overall consistent policy.
When searching for customary business practices, consider reviewing notices posted at the business establishment such as, “We value our customers and provide training on all of our products free of charge.”
If a private company has a website, they should review its contents making sure they have not stated something on the website that might be considered a customary business practice.
Knowledge check
1 Which item below would not result in a separately identifiable promise by an entity to transfer goods to a customer?Assessing whether the customer can benefit from each good on its own.Determining whether the customer is able to benefit from the good in conjunction with other readily available resources.Determining whether the goods are interdependent and significantly impact each other.Determining whether the goods are can be fulfilled independently of each other.
An entity enters into a contractor with a customer that is a distributor. The entity promises to provide maintenance services for no additional consideration (that is, “free”) to any party (that is, the end customer) that purchases the product from the distributor. The entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreed-upon amount for providing those services on the entity’s behalf.
If the end customer does not use the maintenance services, the entity is not obliged to pay the distributor.
Is the promise to provide maintenance services for no additional consideration to the end customer a performance obligation?
In a contract with a distributor, an entity does not promise to provide any maintenance services. The entity typically does not provide maintenance services, and, therefore has not established a customary business practices. At the inception of the contract the entity transfers control of the product to the distributor and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration.
Is the promise to provide maintenance services to any party that purchases the product from the distributor for no additional promised consideration a performance obligation?
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