Ind AS 115: Revenue from Contracts with Customers||Step 2 Model: Identifying the Performance Obligation

Introduction

Ind AS 115 Revenue from contracts with Customers talks about revenue recognized in financial statements. There is a 5-step model to recognize the revenue. Here we will talk about Step 2 of such a model, i.e., identifying the Performance Obligation. For Step 1 of 5 Step Model in Ind AS 115 click here to know more.

At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

 

• • a good or service (or a bundle of goods or services) that is distinct; or

• • a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Promises in contracts with customers

The goods or services that an entity promises to transfer to a customer are typically expressly stated in a contract with that customer. However, the goods or services that are specifically listed in a contract with a customer may not be the only things that are covered by that contract’s performance obligations. In a contract with a customer may also include promises that are implied by an entity’s customary business practices, published policies or specific statements if, at the time of entering into the contract, those promises create a valid expectation of the customer that the entity will transfer a good or service to the customer. It does not include activities that an entity must undertake to fulfill a contract unless those activities transfer a good or service to a customer.

Example: An entity needs to perform various tasks to set up a contract. The performance of those tasks does not transfer a service to the customer as the tasks are performed. Therefore, those setup activities are not a performance obligation. Performance obligation can be the Supply of Goods or Consultancy services by a CA Firm.

Distinct goods or services

A good or service that is promised to a customer is distinct if both of the following criteria are met:

Step 1 i.e. the good or service is capable of being distinct

The customer can benefit from the good or service either on its own or with other resources readily available to them. A readily available resource is a good or service that is sold separately (by the entity or by another entity) or that the customer has already obtained from the entity or from other transactions or events. A good or service can be beneficial to a customer if it can be used, consumed, sold for more than its scrap value, or otherwise held in a way that yields financial gains.

Step 2 i.e. the good or service is distinct within the context of the contract