Financial Reporting · Revenue

Identifying Contracts and Performance Obligations under IFRS 15

Updated 11 October 2026 · Fact-checked

Under IFRS 15, a contract exists when it is approved, rights and payment terms are identifiable, it has commercial substance and collection is probable. A performance obligation is a distinct promise to transfer goods or services. A promise is distinct if the customer can benefit from it alone and it is separately identifiable in the contract.

Understand Identifying Contracts and Performance Obligations

IFRS 15 is built on the five-step revenue model. This topic covers the first two steps: identify the contract and identify the performance obligations in it. You get these right before you think about price or timing.

A contract is an agreement that creates enforceable rights and obligations. It can be written, oral or implied by customary business practice. IFRS 15 applies only when all five criteria are met: the parties have approved the contract and are committed to it; each party's rights can be identified; payment terms can be identified; the contract has commercial substance; and it is probable the entity will collect the consideration it is entitled to. If any criterion fails, you do not recognise revenue under the model. Cash received is normally treated as a liability until the criteria are met or other conditions in IFRS 15 are satisfied.

A performance obligation is a promise to transfer a good or service (or a bundle of them, or a series of substantially the same ones) to the customer. Revenue is recognised as each performance obligation is satisfied, so you must split the contract into the right units. Too few units and you recognise revenue at the wrong time. Too many and you do the same the other way.

A good or service is distinct only if both tests are met. First, the customer can benefit from it on its own or together with resources it can easily get elsewhere. Second, the promise is separately identifiable from other promises in the contract. The second test fails if, for example, the items are highly interdependent, or the entity provides a significant service of integrating them into a combined output, or one item significantly modifies or customises another.

If goods or services are not distinct, you combine them with others until you have a bundle that is distinct. Installation is the classic case. If the customer could use the equipment without your installation (another firm could install it), installation is usually distinct. If installation significantly customises the software or equipment, it is usually not distinct.

Key rules to remember

Contract existence criteria (IFRS 15): Approved and committed + rights identifiable + payment terms identifiable + commercial substance + collection probable; All five must be met. If one fails, the contract is not accounted for under the five-step model.
Distinct goods or services: Capable of being distinct AND distinct within the context of the contract; Both tests are needed. Capable means the customer can benefit from it alone or with readily available resources.
Indicators that a promise is not separately identifiable: Significant integration service, significant modification or customisation, or high interdependence; Any of these points to combining the items into a single performance obligation.
Series of distinct goods or services: Substantially the same + same pattern of transfer to the customer = one performance obligation; For example, a year of daily cleaning or monthly payroll processing.
Contract modification as a separate contract: Added distinct goods or services + price rises by their stand-alone selling prices (adjusted for the circumstances); If both conditions hold, treat the modification as a new separate contract.

How to solve Identifying Contracts and Performance Obligations questions

Use this order for any scenario question on contracts and performance obligations. Write each step in your answer in Section C, and use it to eliminate options in objective questions.

1Check the contract exists: approval, identifiable rights and payment terms, commercial substance and probable collection. If one fails, say revenue is not recognised under the model yet.
2List every promise in the contract, including those stated only implicitly, such as customary installation or support.
3For each promise, test whether the customer can benefit from it alone or with readily available resources.
4Test whether the promise is separately identifiable. Look for integration, significant customisation and interdependence.
5Combine non-distinct items into one bundle. Treat a series of substantially the same services with the same pattern of transfer as one performance obligation.
6State the number of performance obligations you conclude and give a one-line reason for each.
7Link to the next steps if asked: allocate the price using stand-alone selling prices and recognise revenue when or as each obligation is satisfied.

Quickest way: Two-question distinct test

When to use it: Use this in Section A and OT case questions where you have about a minute per question.

Ask: could the customer use this item without the other items, or with things it could easily buy elsewhere? If no, it is not distinct.
Ask: does the seller transform, customise or integrate the items into one combined result? If yes, it is one bundle.
If both answers favour separation, count it as a separate performance obligation.
Check the contract criteria only if the question hints at doubt, such as the customer's ability to pay.

Common mistakes in Identifying Contracts and Performance Obligations

Treating every item listed in the contract as a separate performance obligation.
Students count line items instead of applying the distinct test.
Fix: Apply both tests to each promise. Combine items that are not separately identifiable, such as a service that customises the product.
Concluding that installation is always a separate performance obligation.
Installation is often separate in textbook examples, so students assume it always is.
Fix: Ask whether the customer or another supplier could do the installation, and whether it significantly modifies the product. Customisation means one bundle.
Ignoring promises that are not written down.
Students read only the explicit terms.
Fix: Include promises implied by customary practice or published policies that create a valid expectation in the customer.
Recognising revenue when a contract fails the collectability criterion.
Students focus on delivery and forget the contract test.
Fix: If collection is not probable, do not apply the model. Treat consideration received as a liability until the position changes.
Treating a series of identical services as many obligations or ignoring the series rule.
Students think each day or month is a separate promise and overcomplicate.
Fix: If the services are substantially the same with the same pattern of transfer, treat the series as one performance obligation.
Confusing a performance obligation with an activity that does not transfer a good or service.
Setup work or administrative tasks look like deliverables.
Fix: Ask whether the activity transfers something to the customer. If not, it is not a performance obligation.

Worked examples

Example 1

Alpha sells a specialised machine to a customer for $500,000 and agrees to install it. The machine is standard and installation does not modify it. Other firms regularly install this type of machine. Identify the performance obligations.

Show the solution

Contract: assume it is approved, with identifiable rights and terms, commercial substance and probable collection.
Promises: the machine and the installation.
Machine: the customer can benefit from it with installation by another supplier, so it is capable of being distinct. It is separately identifiable because installation does not modify or integrate it.
Installation: other firms can provide it, so the customer can benefit from it with the machine, which it has obtained. It is not interdependent with the machine in a way that changes it.
Both promises are distinct.

Answer: There are two performance obligations: the supply of the machine and the installation service. The $500,000 would be allocated between them using stand-alone selling prices.

Example 2

Beta licenses accounting software to a client and agrees to modify the software significantly so that it works with the client's systems. The modification is complex, and the licence cannot be used without it. Beta also provides one year of helpdesk support, which other suppliers can also provide for the software. How many performance obligations are there?

Show the solution

Promises: software licence, modification service and helpdesk support.
The licence and the modification: the modification significantly customises the software and the licence cannot be used without it. They are not separately identifiable.
Combine the licence and modification into one performance obligation.
Helpdesk support: it does not change the software and the client could obtain it from others. It is distinct.
Count the obligations: the combined licence and modification, plus support.

Answer: There are two performance obligations: the customised software (licence plus modification) and the helpdesk support.

Exam tips

In OT cases, read the scenario for words such as customise, integrate, significantly modify and can be bought separately. They decide the answer.
Always give a reason for your conclusion in Section C. State both tests, not just the result.
Check the contract criteria first when a scenario mentions a customer in financial difficulty or an unapproved agreement.
Remember that OT questions are all or nothing. Eliminate options that treat every listed item as separate without justification.
Count the performance obligations before you start any allocation calculation. A wrong count spoils every number after it.

Practice questions from Revenue

Identifying Contracts and Performance Obligations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Identifying Contracts and Performance Obligations: frequently asked questions

What is a distinct performance obligation in IFRS 15?

It is a promise to transfer a good or service that passes two tests. The customer can benefit from it on its own or with readily available resources, and it is separately identifiable from other promises in the contract. If either test fails, you combine it with other items.

When does a contract exist under IFRS 15?

A contract exists when it is approved and the parties are committed, rights and payment terms are identifiable, it has commercial substance and collection is probable. It can be written, oral or implied by customary business practice. If any criterion fails, the five-step model is not applied.

What is the difference between distinct and bundled goods?

Distinct goods or services are accounted for separately, so revenue is recognised as each is transferred. Bundled items are not separately identifiable, for example because one is customised or integrated with another. They are treated as one performance obligation.

Is a series of similar services one or many performance obligations?

If the services are substantially the same and have the same pattern of transfer to the customer, IFRS 15 treats the series as a single performance obligation. A year of monthly payroll processing is an example.