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( ASC 606 ) Step2 : Identify the performance obligations in the contract

Posted on May 2nd, 2017 by Sanjit Anand |Print This Post Print This Post |Email This Post Email This Post

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The underlying principle of the new standard is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The standard consists of a five-step approach as follows:

clasical steps 606

Fig : 5 steps Framework

Last post we have seen step 1

  • ( ASC 606 ) Step1 : Identify the contract with a customer

Lets take a quick look on Step 2:

IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT

A performance obligation is the basically promise to transfer goods or services to a customer.

In this step, the business needs to identify all the distinct performance obligations in an arrangement.

A good or service is defined as distinct if

  1. the customer can benefit from it on their own, or with resources they already have, and
  2. can be transferred independent of other performance obligations.

Any goods or services that can't be deemed distinct should be bundled together until they can be.
Performance obligations can also cover an obligations the customer might expect because of their history, which can make this step more complex.

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