Identifying performance obligations: PwC breaks it down

Identifying performance obligations in revenue contracts continues to be a hot topic as more companies are exploring business models that include a combination of products and services. In this week’s episode, Mike Coleman and Angela Fergason, partners in PwC’s National Office, join host Heather Horn to help navigate the accounting guidance in this area.Topics include:1:04 - Background. The most critical step in the ASC 606 5-step model for recognizing revenue is identifying performance obligations, as it determines the unit of account to apply to the rest of the model. Mike breaks down why we are talking about this now.3:35 - Identifying performance obligations: an overview of the accounting model. Angela provides an overview of the guidance and criteria around identifying performance obligations.5:45 - Separately identifiable. Angela highlights some of the indicators that a good or service might not be separately identifiable.9:50 - Real life example: Sale of equipment with installation and consulting services. Mike walks us through a real life example and how to apply the guidance to determine whether there are separate performance obligations. 13:30 - Real life example: Licenses of software. Angela and Mike explain some other real life examples commonly seen with software licenses and how these could impact the identification of performance obligations. 22:14 - Real life example: Hardware and software. We talk about scenarios where products are also sold with software and how companies should determine whether the software is integral to the functionality of the equipment. We also discuss when the product is sold with cloud-based subscription services and whether to combine these elements into a bundled performance obligation.26:24 - Key takeaways. Diligence and outreach across your organization is necessary to understand your contracts and get the right accounting and disclosure.Want to learn more? Read chapter 3 of our Revenue from contracts with customers guide.Mike Coleman is a partner in PwC's National Office with over 30 years of experience specializing in accounting for revenue and software arrangements. In addition, Mike has been one of the firm's representatives on the AICPA Software Task Force. Prior to his time in National, Mike was an audit partner in the firm's NY Metro assurance practice serving technology clients.Angela Fergason is a partner in PwC's National Office with over 20 years of experience who specializes in accounting for revenue and employee compensation arrangements. She is a frequent speaker on accounting and financial reporting topics and is a contributor to many PwC National Office publications, including our accounting guides on revenue and stock-based compensation.Heather Horn is PwC’s National Office thought leader, responsible for developing our communications strategy and conveying firm positions on accounting and financial reporting matters. She is the engaging host of PwC’s accounting and reporting weekly podcast and quarterly webcast series, as well as periodic webcasts for the power and utilities industry. With nearly 30 years of experience, Heather’s accounting and auditing expertise includes financial instruments and rate-regulated accounting.Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to [email protected] you enjoy this episode? Text us your thoughts and be sure to include the episode name.