Why does “Identify the performance obligation(s) in the contract,” is important? Explain with example.
Why does “Identify the performance obligation(s) in the contract,” is important? Explain with example.
Definition:
Performance obligation: A performance obligation is a promise to transfer to the customer a good or service (or a bundle of goods or services) that is distinct. At a contract inception, entities need to identify the goods or services promised in that contract. This is a starting point in identifying performance obligations. In addition to the goods or services explicitly stated in the contract, all implied promises (e.g. by past business practices or published policies) that create a valid expectation of the customer that the entity will transfer a distinct good or service are also treated as separate performance obligations, even though they may not be enforceable by law.
Activities that do not transfer a good or service to a customer are not a performance obligation even though they may be necessary to fulfil a contract. Examples of such activities are setup of a manufacturing process or connecting a customer to a telecommunications network.
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