Performance Obligation
A performance obligation is a promise in a contract to transfer to the customer either a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer.
Revenue Recognition
Explanation
Identifying performance obligations is step two of the five-step model. A good or service is distinct if:
• the customer can benefit from it on its own or together with readily available resources, and
• the promise is separately identifiable from other promises in the contract.
Typical performance obligations include equipment, installation, maintenance, software licenses, subscriptions, and service-type (extended) warranties. A standard assurance-type warranty is not a separate performance obligation. Some obligations are not invoiced separately, such as free service periods or material rights, but still receive a share of the transaction price.
Revenue is recognized separately for each performance obligation – either at a point in time or over time.
Why It Matters
Performance obligations determine how the transaction price is allocated and when revenue is recognized. Missing or incorrectly defined obligations are a frequent source of audit findings. In SAP Revenue Accounting and Reporting (RAR), performance obligations are derived from source items and controlled by performance obligation types that define deferral, fulfillment, and posting behavior.
Related Terms
Five-Step Model · Transaction Price · Allocation · Material Right · Remaining Performance Obligation (RPO) · Contract Combination
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