Understanding IFRS15: Episode 3 - Step 2 Identify the Performance Obligation

Summary

This video explains the second step of the five-step revenue recognition model: identifying performance obligations under IFRS 15. Once a customer contract is identified, the obligations must be assessed as either distinct goods or services, or a series of similar obligations with a consistent transfer pattern. The video discusses criteria for distinguishing these obligations, such as whether they can be used independently or are separately identifiable. It also outlines the difference between performance obligations fulfilled over time versus at a point in time, using real-life examples for clarity.

Takeaways

• 🔍 The video covers the second step in the five-step revenue recognition model: identifying performance obligations.
• 📃 Step one involves identifying the contract with the customer.
• 🔍 Step two is about identifying the performance obligations, which include assessing the goods or services promised in the contract.
• 📦 Performance obligations must be distinct goods or services or a series of distinct goods or services that are substantially the same with the same pattern of transfer.
• 🏷️ A distinct good or service example: hiring a photographer for an event.
• 📈 A series of distinct goods or services example: hiring an accountant for monthly services.
• ✔️ For a contract to have distinct goods or services, the customer must benefit from the obligation on its own, and it must be separately identifiable from other promises.
• 🚗 Example: Car maintenance contract sold with a car is a distinct service because it benefits the customer individually and is separately identifiable.
• 📅 A series of distinct goods or services must be substantially the same and have the same pattern of transfer, such as a monthly magazine subscription.
• 🔄 Revenue is recognized over time by measuring progress towards the complete satisfaction of the performance obligation, using a consistent method for similar obligations.

Q & A

What is the second step in the five-step revenue recognition model?

The second step in the five-step revenue recognition model is identifying the performance obligations in a contract.

What are performance obligations in a contract?

Performance obligations are the goods or services promised in a contract that a company must deliver to the customer. These can be distinct goods or services or a series of distinct goods or services.

How do you determine if a good or service is distinct?

A good or service is distinct if the customer can benefit from it on its own and if it is separately identifiable from other promises in the contract.

What criteria must be met for a performance obligation to be considered distinct?

To be considered distinct, the customer must be able to benefit from the good or service on its own, and it must be separately identifiable from other promises in the contract. Additionally, the entity must not provide integration services, the good or service must not significantly alter other promised products, and the decision not to purchase it should not affect other products in the contract.

Can you give an example of a distinct good or service?

An example of a distinct good or service is hiring a photographer for an event. The service is provided independently, and the customer can benefit from it on its own.

What is an example of a series of distinct goods or services?

An example of a series of distinct goods or services is hiring an accountant for monthly services or subscribing to a magazine where monthly deliveries are made.

What are the criteria for a series of distinct goods or services?

For goods or services to be considered a series, they must be substantially the same, have the same pattern of transfer to the customer, be performance obligations satisfied over time, and be measured consistently for progress toward completion.

What are the conditions for a performance obligation to be satisfied over time?

A performance obligation is satisfied over time if: 1) the customer receives and consumes benefits as the entity performs, 2) the entity's performance creates or enhances an asset the customer controls, or 3) the entity's performance doesn't create an alternative use for the asset and the entity has an enforceable right to payment.

How is progress measured for performance obligations satisfied over time?

Progress is measured using a single method, such as an input method (e.g., costs incurred), applied consistently for all similar performance obligations in the contract.

What is an example of a performance obligation that is satisfied over time?

An example is a contract to refurbish a building and install new elevators. The work is a single performance obligation that is satisfied over time, with progress measured based on the costs incurred.