What is step 2 identify the performance obligations in the contract?

Asked by: Miss Sarai Reilly IV  |  Last update: July 18, 2026
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Step 2 of the revenue recognition model (IFRS 15/ASC 606) requires identifying all distinct promises—goods or services—within a customer contract, known as performance obligations. A promise is distinct if the customer can benefit from it on its own and it is separately identifiable from other promises.

How do you identify performance obligations in a contract?

To be a performance obligation, a promised good or service must be both (1) capable of being distinct and (2) distinct within the context of the contract. Early in the development of the revenue standard, the FASB and IASB thought that goods and services should have a distinct function.

What is an example of a performance obligation?

A performance obligation is satisfied over time when the customer receives benefits as the service is performed. Common examples include long-term construction projects or ongoing services like a subscription to cloud-based software. In these cases, revenue is recognized progressively as the service is provided.

What are performance obligations?

A performance obligation is a distinct, legally enforceable promise in a contract to transfer a good or service to a customer. It acts as the building block for recognizing revenue, dictating exactly what you must deliver and when you can officially claim the payment as earned.

When identifying performance obligations in a contract, what is the first step a company should take according to ASC 606?

Your first step is to meticulously review your contracts to identify every promise made to your customer. Then, for each promise, ask if it's "distinct"—meaning the customer can benefit from it on its own or with other readily available resources, and it's separately identifiable from other promises in the contract.

PwC's IFRS 15 the basics – Step 2 – Identify the performance obligation in the contract

34 related questions found

What are performance obligations in ASC 606?

A performance obligation is a promise in a contract to deliver goods or services. Understand this key concept of ASC 606 for accurate accounting.

What is the performance obligation identification rule?

A performance obligation is a distinct promise in the contract to transfer goods or services to the customer. Revenue recognition is based on the satisfaction of a contract's performance obligations rather than billing.

How do I know if something is a performance obligation?

Identifying performance obligations is the second step in the ASC 606/IFRS 15 revenue recognition model. It requires identifying distinct promises in a contract to transfer goods or services. A promise is distinct if the customer can benefit from it on its own and it is separately identifiable from other promises in the contract.

What are the 4 types of obligation?

The main forms of Obligation include; contractual, absolute, penal, moral, and express.

What is the performance of the contract obligations?

Performance of the Contract

In its legal sense “performance” means the fulfilment or the completion of the obligations which they have towards the other party by virtue of the contract entered by them.

What are five examples of obligations?

Obligation Examples

  • Respect for Others. Respect for others is one of our core duties to one another, taught to us by our parents in childhood. ...
  • Keeping your Word. ...
  • Caring for Family. ...
  • Care for the Elderly. ...
  • Voting. ...
  • Volunteerism. ...
  • Altruism. ...
  • Philanthropy.

What is an example of performance of a contract?

Example: A supplier delivers goods to a buyer as per the agreement, but the buyer refuses to accept them. Here, the supplier's obligations are considered fulfilled under attempted performance.

What is a specific performance obligation?

Specific performance is a contractual remedy in which a court orders a party to fulfill their obligations as closely as possible to what was promised in the contract, rather than simply paying damages for failing to do so.

What are the three types of performance of contracts?

These three types of contract performance are:

  • Complete performance.
  • Substantial performance.
  • Breach of contract (aka non-performance)

What is an example of a distinct performance obligation?

Examples of Distinct Performance Obligations

For example, a technology company selling enterprise software may provide several services within a single agreement. Each of these components may represent a separate performance obligation depending on whether they are capable of being delivered independently.

Who is responsible for performing the contractual obligations?

Generally, the person who made the promise (the promisor) must perform it. Especially in cases where the contract is based on personal skills, taste, or trust like painting a portrait, working as a servant, or performing in an agency the promisor cannot delegate the duty. It must be done personally.

What are the 10 obligations?

The ten obligations are:

  • Be Informed.
  • Get Involved.
  • Stay Open to Compromise.
  • Remain Civil.
  • Reject Violence.
  • Value Norms.
  • Promote the Common Good.
  • Respect Government Service.

What are the three types of obligation?

There are different kinds of obligations, depending on the classification used:

  • If based on the presence or absence of a condition or term (period): Pure Obligation; Conditional Obligation; Obligation with a term or period.
  • If based on number of prestations or objects: Simple Obligation. Compound Obligation.

What are the 5 sources of obligation?

It identifies the five main sources of obligations as law, contracts, quasi-contracts, acts or omissions punished by law, and quasi-delicts. It provides examples of legal obligations, contractual obligations, and quasi-contractual obligations.

What is the difference between a contract and a performance obligation?

A revenue contract represents a single revenue contract between a vendor and a customer. A revenue contract can contain one or more performance obligations. Performance obligations represent the delivery of independent goods and/or services to the customer.

What is not a performance obligation?

For example, administrative tasks to set up a contract or mobilization efforts are not performance obligations if those activities do not transfer a good or service to the customer. Judgment may be required to determine whether an activity transfers a good or service to the customer.

What is the performance of obligations?

A performance obligation is a contractual promise to transfer distinct goods or services to a customer, forming the basis for revenue recognition under ASC 606 and IFRS 15. It represents what a business is required to do for a customer in exchange for payment, which can be explicit, implicit, or implied by business practices.

How to identify performance obligations?

Identifying performance obligations is the second step in the ASC 606/IFRS 15 revenue recognition model. It requires identifying distinct promises in a contract to transfer goods or services. A promise is distinct if the customer can benefit from it on its own and it is separately identifiable from other promises in the contract.

What are the requirements for performance obligations to be considered distinct?

A promised good or service is distinct (and therefore a performance obligation) if both of the following criteria in ASC 606-10-25-19 are met: Capable of being distinct — “The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.”

What is the performance obligation clause?

A Performance Obligation clause defines the specific duties and responsibilities that each party must fulfill under a contract. It typically outlines the standards, timelines, and quality requirements for the goods or services to be delivered, ensuring both parties understand what is expected.