What are Revenue Contracts and Performance Obligations?

Revenue contracts and performance obligations have been introduced to support multiple-element arrangements. You might need to use multiple-element arrangements to comply with ASC 606 or IFRS 15. The legislation is not explained here but the key points for Revenue Management are:

  • 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. Performance obligations are linked to source records (via performance obligation line items) which contain the details of the goods or services being delivered.
  • The total revenue for a revenue contract is apportioned to its performance obligations in line with the legislation. Revenue recognition can then be performed on the performance obligations.

You must decide what constitutes a revenue contract and a performance obligation for your business. How you separate out performance obligations depends on your business model. Some examples of revenue contracts and what their performance obligations might be are given in the table below.

Example Revenue Contract Performance Obligations
1 A contract for a mobile phone where you get the handset for free.
  • Handset
  • Line rental
  • Call charges
2 A contract to license a software application that includes installation, training and on-going support.
  • Software license
  • Installation
  • Training
  • Support
3 A contract to send two delegates on a training course and you get a discount for booking early.
  • Training course for Delegate 1
  • Training course for Delegate 2
4 A contract for an annual magazine subscription where you pay for two titles and get a third one free.
  • Title 1
  • Title 2
  • Title 3

Source records can have both revenue and cost values. Cost values can be held on performance obligation line items, then rolled up onto performance obligations and revenue contracts for the purpose of recognizing cost.