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Step 2: Identify Performance Obligations

After identifying a contract, the second step in the ASC 606 framework is to identify the performance obligations. A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer.

Identifying Distinct Goods or Services​

A promise to transfer a good or service is a performance obligation if it is distinct. A good or service is distinct if it meets both of the following criteria:

  1. Capable of being distinct: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.
  2. Distinct within the context of the contract: The promise to transfer the good or service is separately identifiable from other promises in the contract.

Common SaaS Performance Obligations​

In the context of software-as-a-service (SaaS) and technology contracts, identifying performance obligations often involves evaluating several components:

1. Software Licenses​

  • Right to Access (SaaS): The customer accesses the software hosted by the vendor. This is typically recognized over time (the subscription period).
  • Right to Use (On-Premise): The customer takes possession of the software. This may be recognized at a point in time when the license is delivered.

2. Support and Maintenance​

Regular updates, bug fixes, and technical support are often considered a single performance obligation, typically recognized over the term of the support agreement.

3. Professional Services​

Implementation, training, and consulting services must be evaluated to see if they are distinct. If the software is highly functional "out of the box," the implementation may be a separate performance obligation. If the software requires significant customization to work, the services and the software might be combined into a single obligation.

Platform Implementation​

The Finance Automation Platform streamlines Step 2 by using Performance Obligation Templates mapped to your product SKUs.

Automated SKU Mapping​

When a contract is imported from your CRM, the platform automatically categorizes line items:

  • Automatic Grouping: If your policy dictates that "Implementation" and "Subscription" are a single obligation, the platform bundles them automatically based on pre-defined rules.
  • Stand-alone Selling Price (SSP): The platform maintains a library of SSPs for each distinct service, which is critical for the allocation step later in the process.

Modification Tracking​

If a contract is modified (e.g., adding more seats or a new module), the platform evaluates whether the modification creates a new, distinct performance obligation or if it should be treated as part of the existing contract.

Practical Examples​

Standard SaaS Bundle​

A contract for a 12-month subscription that includes "Gold Support" and "Standard Implementation."

  • Obligation 1: SaaS Subscription (Over time)
  • Obligation 2: Standard Implementation (Point in time or over time depending on distinctness)

Combined Solution​

A contract for specialized hardware and a proprietary software license that is required for the hardware to function.

  • Combined Obligation: The hardware and software may be treated as a single performance obligation because the customer cannot benefit from one without the other.