---
title: "Step 2: Identify Performance Obligations"
description: Learn how to identify distinct goods or services in a contract under ASC 606, including the "capable of being distinct" and "distinct within the context of the contract" criteria.
sidebar_position: 3
slug: /asc-606/step-2-identify-performance-obligations
keywords:
  - ASC 606 step 2
  - performance obligations
  - distinct goods and services
  - SaaS revenue recognition
---

# 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.