Once a company has determined that it has a contract with a customer as defined in the 606 Accounting Standards (ASC) Code, it must determine the performance obligations. A performance obligation is defined in the CSA`s main glossary as follows: For each performance obligation, a business must determine whether it will meet the performance obligation over time by transferring control of a good or service over time. If a company does not comply with a performance obligation over time, the performance obligation is fulfilled at some point. An entity transfers control of a good or service over time and therefore captures revenue over time when one of the following criteria is met: In order to assign a fair value to each performance obligation, an entity must determine the independent selling price at the beginning of the contract of the various goods or services on which each performance obligation is based and would normally set the transaction price at a relative autonomous selling price base. If a stand-alone selling price is not observable, a company must estimate it. Sometimes the transaction price includes a discount or variable consideration that fully relates to one of the performance obligations in a contract. The requirements specify when an entity is to allocate the discount or variable consideration to one (or more) performance obligation(s) and not to all performance obligations in the contract. Determining a standalone selling price can be simple if the company regularly sells the product or service on a stand-alone basis. However, if a company does not itself sell a particular performance obligation, it must estimate the stand-alone selling price using one of three methods, as shown in the graph below. These methods are described in detail on page 23 of our Revenue Recognition Guide. The process of allocating the transaction price to the various performance bonds is similar to what is done in many industries today and is based on a relatively autonomous sales approach.
In the case of a contract involving more than one performance obligation, an entity should allocate the transaction price to each performance obligation in an amount that represents the amount of consideration to which the entity expects to be entitled in exchange for the performance of each performance obligation. Video – Performance obligations under the new revenue standard If the commitments do not meet the separation conditions, the performance obligations are combined into a performance obligation. A contract may have several performance obligations, which in themselves include a set of promises that are not different and cannot be separated. If the customer does not have the possibility to purchase a guarantee separately, this is not a separate obligation of performance. The Company shall consider these warranties in accordance with the product warranty guidelines in effect in ASC 460-10. For example, in the examples above, if the retailer agrees to deliver the TV to the customer at the time of sale, this may result in a separate performance obligation. If the workshop still washes the customer`s car after the oil change, this may be a separate obligation to be performed. Although simple in nature, other performance obligations require more judgment to identify them. Especially when the directives are applied to complex contracts. All promised goods and services may differ as they could be provided by other companies, so the customer could benefit by adding resources. However, the goods and services do not differ according to the contract, since the company provides essential services by integrating all the promises of delivery of a finished building for which the hospital has concluded a contract. Since both of the above criteria have not been met, the contract contains a performance obligation.4 These types of contracts are usually based on the actual time spent on a project that is billed at one or more fixed hourly rates.
These can be short-term contracts or span multiple reporting periods. One. If the warranty is required by law: If the company is required by law to provide a warranty, the existence of this law indicates that the promised warranty is not an obligation of performance, as such requirements usually exist to protect customers from the risk of purchasing defective products.b. The length of the warranty period: The longer the coverage period, the more likely it is that the promised warranty will be a performance obligation, as it is more likely to provide a service in addition to the assurance that the product meets the agreed specifications.c. The type of tasks the company promises to perform: When it is necessary for a company to perform certain tasks to provide certainty that a product meets the agreed specifications (e.B. a return service for a defective product), it is therefore unlikely that these tasks will create a performance obligation.10 In this case, the contract with the distributor does not contain an explicit promise of free maintenance, and the company`s usual business practices do not indicate that the end user would expect free maintenance. However, after delivery of the products to the distributor and before sale to the final consumer, the manufacturer unilaterally decides to carry out free maintenance and informs the distributor of his intention. Since the free maintenance in this case was not part of the contract or was not negotiated by any party, it is not considered to be a separate performance obligation.
In this situation, the manufacturer would apply the CSA 450 contingency guidelines.9 Revenues should be divided into categories representing the nature, amount and timing of the transfer of goods or services. All entities must also disclose material valuations made in connection with the application of the CFS 606 guidelines, including assessments of the timing of performance obligations, determination of the transaction price and allocation of amounts to performance obligations. Note that performance obligations do not include administrative tasks that a company may have to perform to perform the contract, as they do not transfer goods or services to a customer. With the reminder that a contract with a customer can be written or oral as long as it has a commercial substance, let`s look at some of the key concepts in identifying performance obligations. .