In our previous issue of this serial we discussed how to identify a contract with a customer. Once it has been determined that a contract with a customer is within the scope of Topic 606, the next step is to identify the performance obligations in the contract.
In Step 2, the goods or services that a customer expects to receive are evaluated at the inception of the contract to determine if they individually or collectively meet the definition of performance obligations. While conceptually this evaluation appears straight forward, there are some considerations which can complicate this analysis, including principal vs. agent determination and implied performance obligations. As we further discuss performance obligations, keep in mind that a performance obligation is simply a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct. As with Step 1, a systematic approach to evaluating the conditions of Step 2 will likely be the best practice.
Learn more in the third part of our Revenue Recognition Serial.