Financial Reporting · Ind AS 115 Revenue from Contracts with Customers

Identifying Performance Obligations under Ind AS 115

Updated 5 October 2026 · Fact-checked

A performance obligation is a promise in a customer contract to transfer a distinct good or service, or a series of distinct goods or services that are substantially the same. To solve a question, list all promises, test each for distinctness, group any series, check customer options, and decide principal or agent.

Understand Identifying Performance Obligations

Ind AS 115 recognises revenue when you satisfy a performance obligation. So before you can allocate the transaction price or decide the timing of revenue recognition, you must first decide what the units of account are. This is Step 2 of the five-step model, after identifying the contract.

Start with the promises in the contract. Promises can be explicit (written in the contract) or implied by customary business practice, published policies or specific statements, if they create a valid expectation in the customer. Setup activities that do not transfer a good or service to the customer, such as internal administrative tasks, are not promises.

A promised good or service is a separate performance obligation only if it is distinct. Two tests must both be met. First, the customer can benefit from the good or service on its own or with readily available resources (capable of being distinct). Second, your promise to transfer it is separately identifiable from other promises in the contract (distinct within the context of the contract). Indicators of not being separately identifiable: you provide a significant service of integrating the items into a combined output, one item significantly modifies or customises another, or the items are highly interdependent or interrelated.

If a good or service is not distinct, combine it with others until you have a bundle that is distinct. There is also a series rule: a series of distinct goods or services that are substantially the same and have the same pattern of transfer is treated as a single performance obligation. This applies if each distinct item would be a performance obligation satisfied over time and the same method would measure progress. Examples are daily cleaning or monthly payroll processing.

Two further points are examined often. A customer option to acquire additional goods or services at a discount gives rise to a performance obligation only if it provides a material right the customer would not receive without entering the contract. And where another party is involved in providing goods or services, you must decide whether you are a principal (you control the good or service before it goes to the customer, so you report gross revenue) or an agent (you arrange for another party to provide it, so you report only your fee or commission, net).

Key rules to remember

Distinct good or service (both tests): Distinct = capable of being distinct AND separately identifiable in the contract; If either test fails, combine the item with others until the bundle is distinct.
Indicators of not separately identifiable: Significant integration service OR significant modification/customisation OR high interdependence; These are indicators. Use judgement on the facts; they are not an exhaustive checklist.
Series of distinct goods or services: Substantially the same + same pattern of transfer + each satisfied over time with the same progress measure = one performance obligation; The series is a single performance obligation, even though each period's service is itself distinct.
Customer option as a material right: Option gives a right the customer would not get without the contract = separate performance obligation; A discount available to all customers, or a market-rate discount, is not a material right. Allocate part of the transaction price to the option.
Principal vs agent: Principal if you control the specified good or service before transfer to the customer; revenue = gross amount. Agent: revenue = fee or commission, net; Indicators of control: primary responsibility for fulfilment, inventory risk, discretion in setting the price. Indicators are aids to assessing control, not the test itself.

How to solve Identifying Performance Obligations questions

Use this sequence for any Step 2 question. Write each step as a short heading in your answer so the examiner can award marks.

1List every promise in the contract, including implied promises and promises to arrange for another party to provide goods or services. Ignore pure setup activities.
2For each promise, test whether the customer can benefit from it alone or with readily available resources.
3Test whether the promise is separately identifiable: check integration, significant customisation or modification, and interdependence.
4If an item fails either test, combine it with other items until the bundle is distinct. State the resulting number of performance obligations.
5Check for a series of distinct goods or services that are substantially the same with the same pattern of transfer. If yes, treat it as one performance obligation.
6Check for customer options, such as discount vouchers or loyalty points. Decide if there is a material right. If yes, add a performance obligation.
7Where a third party is involved, decide principal or agent by assessing control of the good or service before transfer. Conclude gross or net revenue.
8Write the conclusion: the number of performance obligations and the link to the next step, allocation of the transaction price.

Quickest way: Two-question screen

When to use it: Use this when time is short in an MCQ or a short-note question with a clear fact pattern.

Ask: can the customer use this item by itself? If no, it is combined with something else.
Ask: does the seller transform or heavily integrate this item with others into one combined output? If yes, one performance obligation.
Spot the keyword: 'every month or every day, same service' means series, so one performance obligation.
Spot the keyword: 'discount on future purchases' means test for a material right: is the discount more than what other customers get?
Spot the keyword: 'arranges', 'commission' or 'platform' means test for agent. Ask who controls the item before the customer gets it.

Common mistakes in Identifying Performance Obligations

Treating every item listed in the contract as a separate performance obligation.
Students count line items on the invoice rather than applying the distinct tests.
Fix: Apply both tests to each item. Combine items that are highly interdependent or are inputs to a single integrated output.
Testing only whether the item can be sold separately and stopping there.
The first test (capable of being distinct) feels sufficient.
Fix: Always run the second test too. An item can be capable of being distinct yet not separately identifiable, for example a bespoke installation that significantly modifies the software.
Treating a discount offered to all customers as a material right.
Any option to buy later at a discount looks like a promise.
Fix: Compare with discounts given to customers who have not entered the contract. Only a right that exists because of this contract is a material right.
Reporting gross revenue for an agency arrangement because the entity collects the cash.
Collecting money from the customer looks like owning the sale.
Fix: Decide on control of the specified good or service before transfer. Collecting cash alone does not prove control. If you are an agent, record only your commission.
Splitting a series such as monthly services into separate performance obligations for each month.
Each month is indeed distinct, so students stop at the distinct test.
Fix: Apply the series requirements. Where they are met, treat the whole series as one performance obligation.
Treating internal setup activities as performance obligations.
Setup work takes effort and is sometimes billed separately.
Fix: Ask whether the activity transfers a good or service to the customer. If not, it is not a performance obligation, even if it is charged.

Worked examples

Example 1

Case: Zenith Software Ltd sells a licence of its accounting software to a customer for ₹12,00,000 and also agrees to install it and provide 12 months of technical support. Installation is routine, takes two days, and can be done by other vendors. The software is not modified. The customer can use the software with or without the support. Identify the performance obligations.

Show the solution

List the promises: software licence, installation, and technical support.
Licence: the customer can benefit from it with readily available resources, namely routine installation that other vendors can provide, so it is capable of being distinct. Zenith does not significantly modify the software or integrate it with the other items, so it is separately identifiable.
Installation: it is routine, and other vendors can perform it, so the customer can benefit from it with readily available resources. It does not significantly customise the software, so it is separately identifiable.
Technical support: the customer can use the software without it, and the support does not modify the software, so it is distinct.
No item is highly interdependent with another. None of them has to be combined.
Nature of the licence (Ind AS 115, B52): the software works as it exists when the licence is granted, and Zenith's support does not change its functionality. So the licence is a right to use, not a right to access. It is satisfied at a point in time, when the customer can use and benefit from the software.
Timing preview for Step 5: the licence is recognised at a point in time. Installation is recognised when the two-day service is performed. Technical support is satisfied over time, so it is recognised over the 12 months.

Answer: There are three separate performance obligations: the software licence (a right to use, satisfied at a point in time), installation, and technical support (satisfied over time across 12 months). Zenith allocates the ₹12,00,000 transaction price to the three on the basis of their stand-alone selling prices (Step 4) and recognises revenue as each is satisfied (Step 5).

Example 2

Case: Kartik Travels Ltd runs an online platform. A customer buys an airline ticket through the platform for ₹8,000. Kartik Travels is not responsible for the flight, does not hold ticket inventory, cannot set the fare, and earns a fixed 5% commission from the airline. It also gives the customer a coupon for 30% off on his next hotel booking on the platform. The same 30% coupon is given to every visitor who signs up, with or without a purchase. Determine revenue and performance obligations.

Show the solution

Principal or agent: the airline is responsible for providing the flight. Kartik Travels has no inventory risk and no discretion over price. So it does not control the ticket before transfer to the customer.
Kartik Travels is therefore an agent. Revenue is the commission, 5% × ₹8,000 = ₹400, not ₹8,000.
Coupon: the 30% discount is given to every visitor who signs up, whether or not they buy a ticket. The customer does not receive it only because of this contract.
So the coupon is not a material right and is not a separate performance obligation. No part of the ₹400 is allocated to it.
The only performance obligation is arranging the airline ticket for the customer, satisfied when the ticket is booked.

Answer: Kartik Travels is an agent and recognises revenue of ₹400 (net commission), not ₹8,000. The 30% coupon is not a material right and creates no separate performance obligation.

Exam tips

In written answers, use the provision-facts-conclusion pattern: state the test, apply it to the facts given, then conclude the number of performance obligations.
Always name both distinct tests, and quote the specific indicator in the facts, such as significant customisation or integration.
For principal-agent questions, lead with control and then use indicators as support. Conclude clearly with gross or net revenue and the amount.
In customer option cases, compare the discount with what a customer outside the contract would get before calling it a material right.
Link your conclusion to Step 4. Say that the transaction price is allocated across the performance obligations you identified.

Practice questions from Ind AS 115 Revenue from Contracts with Customers

Identifying 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 Performance Obligations: frequently asked questions

What is a performance obligation under Ind AS 115?

It is a promise in a contract with a customer to transfer 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 is recognised as each performance obligation is satisfied.

How do I know if a good or service is distinct?

Two conditions must both be met. The customer can benefit from it on its own or with readily available resources, and your promise to transfer it is separately identifiable from the other promises in the contract. If either fails, combine it with other items.

How do I decide between principal and agent?

Ask whether you control the specified good or service before it is transferred to the customer. Indicators include primary responsibility for fulfilment, inventory risk and discretion in pricing. A principal records gross revenue and an agent records only its fee or commission.

When does a customer option create a performance obligation?

Only when the option gives the customer a material right that it would not receive without entering the contract. In that case you allocate part of the transaction price to the option and recognise it when the future goods or services are transferred or the option expires.