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Function documentationCompound Performance Obligations

 

Certain items in a contract with your customer are not distinct items and cannot be posted separately for revenue recognition. These items are identified as non-distinct performance obligations and must be combined with other non-distinct items to form a distinct performance obligation. The performance obligation that results from the combination is called a compound performance obligation.

Example

Jolin’s Software Ltd. sells business software. One of her best sellers is an accounting tool. In a contract with a customer, Jolin’s Software Ltd. promises to deliver a software license for 15 users and a maintenance service to make sure that the software is properly installed and running.

Neither the software nor the service can work on its own, so the accountant decides that the software and service are not distinct items. The software and service must be combined for revenue recognition even though they are separate items on the sales order created for the transaction.

In this case, the revenue accounting contract includes the following performance obligations:

  • A non-distinct performance obligation that corresponds to the software license

  • A non-distinct performance obligation that corresponds to the maintenance service

  • A compound performance obligation that represents the composition of the two items