Question

When must multiple performance obligations in a revenue arrangement be accounted for separately?

Short answer

To assess whether a firm must account for various performance obligations, the company's promise to sell the consumer an item or service must be distinct from other promises in the contract.

Step-by-step solution

Meaning of Multiple Performance Obligations

Multiple performance obligations may be included in a contract, with revenue recognized separately for those that match the following two criteria:

• The item or service can be separate, which means that a client can profit from it on its own or in combination with other easily available resources.
• Within the framework of the contract, the item or service is distinct, which means it can be distinguished from other promises in the contract.

Multiple performance obligations in a revenue arrangement can be accounted for separately

The organization must deliver a distinct product or service to the consumer to assess whether a performance obligation exists. To evaluate whether a firm must account for various performance obligations, the company's promise to sell the consumer a good or service should be distinct from other promises in the contract (that is, the good or service must be distinct within the contract). The goal is to determine whether a company's commitment is to deliver individual goods and services to customers or to deliver a combined item (or items) for which individual goods and services are inputs.