Strategic Business Reporting (International) · Revenue

Identifying Performance Obligations and Distinct Goods in IFRS 15

Updated 11 October 2026 · Fact-checked

A performance obligation is a promise in a contract to transfer a distinct good or service. A good or service is distinct if the customer can benefit from it on its own (capable of being distinct) and the promise is separately identifiable from other promises in the contract. Distinct promises are accounted for separately.

Understand Identifying Performance Obligations and Distinct Goods

IFRS 15 asks you to split a contract into its separate promises. Each separate promise is a performance obligation. You do this because revenue is recognised when each obligation is satisfied, not when the whole contract is signed or paid for.

A promise is a performance obligation if the good or service is distinct. There are two tests, and both must be met. First, the customer can benefit from the item on its own or with resources it can easily get (capable of being distinct). Second, the promise to transfer it is separately identifiable from the other promises in the contract (distinct within the context of the contract).

IFRS 15 gives indicators that promises are not separately identifiable. You provide a significant service of integrating the items into a combined output. One item significantly modifies or customises another. The items are highly interdependent or highly interrelated, so you could not fulfil one without the other. If any of these apply, bundle the items into one performance obligation.

A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer (for example, daily cleaning or monthly payroll processing) is treated as a single performance obligation.

Two special cases appear often. A warranty that the customer can buy separately, or that gives a service beyond assuring the product meets its specification, is a separate performance obligation. A warranty that only assures the product works as promised is accounted for under IAS 37. A customer option for free or discounted goods is a separate performance obligation only if it gives a material right the customer would not receive without entering the contract, such as a discount above what is normally offered to that class of customer.

Key rules to remember

Distinct good or service: Distinct = capable of being distinct AND separately identifiable in the contract; Both tests must be met. If either fails, combine the item with others until you have a bundle that is distinct.
Indicators of not separately identifiable: Significant integration service OR significant modification/customisation OR highly interdependent/interrelated; Any one indicator points towards a single combined performance obligation. These are indicators, so use judgement.
Series guidance: Distinct items that are substantially the same + same pattern of transfer = one performance obligation; Typical for services provided continuously, such as cleaning, hosting or payroll.
Warranty treatment: Assurance-type warranty: IAS 37. Service-type warranty (separately priced or extra service): separate performance obligation; If the customer can buy the warranty separately, it is a service-type warranty.
Customer option: Separate performance obligation only if the option gives a material right; A discount that is available to any customer anyway is not a material right.

How to solve Identifying Performance Obligations and Distinct Goods questions

Use this method for any question on whether promises in a contract are separate performance obligations.

1List every promise in the contract, including those that are implied or only in the small print, such as installation, training, support, warranties and options.
2For each item, test whether the customer can benefit from it on its own or with readily available resources. The item may also be sold separately by you or others.
3Test whether the promise is separately identifiable. Look for integration, significant customisation, and high interdependence.
4Combine items that fail either test into one bundle, and repeat the test on the bundle.
5Check for a series of substantially identical services with the same transfer pattern. If so, treat them as one performance obligation.
6Deal with warranties and options. Decide if the warranty is assurance-type or service-type, and whether an option gives a material right.
7State the number of performance obligations and what it means for revenue: allocate the price and recognise each obligation when or as it is satisfied.
8Conclude clearly and refer to the facts in the scenario.

Quickest way: Two-test shortcut for distinct goods

When to use it: Use this when time is short and the scenario lists several goods or services sold together.

Underline each promise in the scenario.
Ask: could the customer use this on its own? If not, merge it with the item it depends on.
Ask: does it change, customise or integrate with another item? If yes, merge.
Mark warranties as service-type if separately priced or beyond a repair promise; otherwise IAS 37.
Mark options as material rights only if the discount exceeds what other customers get.
Write the final count of performance obligations and move on to the price allocation.

Common mistakes in Identifying Performance Obligations and Distinct Goods

Treating every item in the contract as a separate performance obligation because each has a separate price in the invoice.
Students assume the invoice shows the accounting. Separate pricing is only one piece of evidence.
Fix: Apply both distinct tests. If the items are highly interdependent or customised, combine them regardless of invoice lines.
Applying only the first test (capable of being distinct) and stopping.
It is easy to say the customer could use an item alone. The second test needs careful reading of the scenario.
Fix: Always write both tests. Show the second one explicitly, using integration, customisation and interdependence.
Treating all warranties as separate performance obligations.
Students remember that warranties can be separate and apply it everywhere.
Fix: Ask if the customer can buy the warranty separately or if it provides an extra service. If not, account for it under IAS 37.
Treating every customer option as a performance obligation.
An option to buy more is confused with a right the customer gets only by signing the contract.
Fix: Check for a material right. A discount equal to what is normally offered to similar customers is not a material right.
Forgetting that a series of identical services is a single performance obligation.
Students split a multi-year service contract into yearly or monthly obligations.
Fix: Check whether the services are substantially the same and transferred in the same pattern. If so, treat as one obligation.
Giving a conclusion without linking it to the scenario facts.
Students recite the rule from memory and do not apply it.
Fix: Quote facts such as 'the software is modified by the supplier' and say which indicator they trigger.

Worked examples

Example 1

Alpha Co sells a software licence and a two-year installation and customisation service to a customer for $500,000. The customisation significantly modifies the software, and the customer cannot use the software without the customisation. Alpha also offers a separate optional help-desk service for $20,000 a year, sold to other customers on its own. Identify the performance obligations.

Show the solution

List the promises: software licence, installation and customisation, and the optional help-desk service.
Test the licence and customisation together. The customisation significantly modifies the software, and the customer cannot use the licence without it.
The licence and customisation are not separately identifiable, so they form one combined performance obligation.
The help-desk service is sold separately, so the customer can benefit from it on its own, and it does not modify the software. It is distinct.
Because it is optional and priced separately, it is a separate contract choice, not part of the $500,000 unless the customer buys it.

Answer: The $500,000 contract has one performance obligation: the customised software. The help-desk service is a separate performance obligation only if the customer buys it, and it is accounted for separately.

Example 2

Beta Co sells a machine for $200,000 with a standard one-year warranty covering manufacturing defects. The customer can also buy a three-year extended warranty for $15,000. Separately, Beta gives each buyer a voucher for 30% off a future purchase, while Beta's regular discount to customers is 10%. Identify the performance obligations and the treatment of the warranties and voucher.

Show the solution

The machine is a distinct good, so it is a performance obligation.
The standard one-year warranty covers defects that exist at sale. It assures the machine meets its specification, so it is accounted for under IAS 37, not as a performance obligation.
The extended warranty is sold separately and gives a service beyond the assurance. If the customer buys it, it is a separate performance obligation recognised over the three years.
The voucher gives 30% off, while regular customers get only 10%. The extra 20% is a discount the customer receives only by buying the machine, so it is a material right.
The material right is a separate performance obligation. Part of the $200,000 price is allocated to it and deferred until the voucher is used or expires.

Answer: The machine and the voucher (a material right) are performance obligations in the $200,000 contract. The extended warranty is a separate performance obligation if purchased. The standard warranty falls under IAS 37.

Exam tips

Always state both tests for distinct, then apply them to the facts. Marks are given for the application, not for reciting the rule.
For SBR scenarios, say what the answer means for revenue: separate obligations are allocated their own price and recognised separately.
Check whether a warranty can be bought separately. That one fact usually decides the treatment.
For options, compare the discount with what ordinary customers get. Write the comparison in your answer.
Link integration or customisation to a specific fact in the scenario, as professional skills marks reward clear, reasoned judgement.

Practice questions from Revenue

Identifying Performance Obligations and Distinct Goods in other exams

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

Identifying Performance Obligations and Distinct Goods: frequently asked questions

What makes a good or service distinct under IFRS 15?

It must be capable of being distinct, meaning the customer can benefit from it on its own or with readily available resources. It must also be separately identifiable from other promises in the contract. Both tests must be met.

When is a warranty a separate performance obligation?

It is separate if the customer can buy it separately or if it provides a service beyond assuring the product meets its specification. A warranty that only covers defects present at sale is accounted for under IAS 37.

Is a customer option always a performance obligation?

No. It is a performance obligation only if it gives the customer a material right that it would not receive without entering the contract. A discount equal to what similar customers normally receive is not a material right.

How do I decide when to bundle goods and services together?

Bundle them when they fail the separately identifiable test. Typical signs are a significant integration service, significant customisation of one item by another, or high interdependence between items.