Performance Obligation
A promise in a contract to transfer a distinct good or service to a customer.
What is Performance Obligation?
A performance obligation is a promise in a contract with a customer to transfer either a distinct good or service, or a series of distinct goods or services that are substantially the same, to the customer. Under ASC 606 (Revenue from Contracts with Customers), a company must identify all performance obligations in a contract, allocate the transaction price across them based on their relative standalone selling prices, and recognize revenue only when — or as — each performance obligation is satisfied. A good or service is considered distinct if the customer can benefit from it on its own or together with readily available resources. Properly identifying performance obligations determines the timing and allocation of revenue recognition.
Example
A software company sells a one-year subscription that bundles software licenses, technical support, and quarterly updates for $1,200. Under ASC 606, it identifies three performance obligations: (1) the software license, (2) the support service, and (3) the update rights. It allocates the $1,200 among them based on standalone selling prices and recognizes each portion as the respective obligation is satisfied over the contract term.
Source: FASB ASC 606 — Revenue from Contracts with Customers