Identifying performance obligations under IFRS 15

Step 2 decides how many revenue streams a contract has, and therefore when revenue is recognised. Get it wrong and revenue lands in the wrong period. This guide sets out the two tests, the factors that point to combining promises, and the special cases of warranties, options and series of services.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Under IFRS 15, performance obligations are the promises in a contract to transfer distinct goods or services. A performance obligation is a promise to transfer a distinct good or service, or a series of substantially the same services. A good or service is distinct if the customer could benefit from it on its own or with readily available resources, and if it is separately identifiable from the other promises in the contract. Promises that fail either test are combined until they form something distinct.

At a glance

Test 1
Capable of being distinct
Test 2
Distinct within the contract
Combine when
Integrated, customised or interdependent
Series rule
Same services, same pattern
Warranties
Assurance or service type
Options
A material right is an obligation
Identifying performance obligations under IFRS 15Test 1: Capable of being distinct; Test 2: Distinct within the contract; Combine when: Integrated, customised or interdependent; Series rule: Same services, same pattern; Warranties: Assurance or service type; Options: A material right is an obligation.KEY FACTS AT A GLANCEIdentifying performance obligations under IFRS 15Test 1Capable of being distinctTest 2Distinct within thecontractCombine whenIntegrated, customised orinterdependentSeries ruleSame services, samepatternWarrantiesAssurance or service typeOptionsA material right is anobligationChecked against official sourcesTax BakersIdentifying performance obligations under IFRS 15Test 1: Capable of being distinct; Test 2: Distinct within the contract; Combine when: Integrated, customised or interdependent; Series rule: Same services, same pattern; Warranties: Assurance or service type; Options: A material right is an obligation.KEY FACTS AT A GLANCEIdentifying performanceobligations under IFRS 15Test 1Capable of being distinctTest 2Distinct within the contractCombine whenIntegrated, customised or interdependentSeries ruleSame services, same patternWarrantiesAssurance or service typeOptionsA material right is an obligationChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

The two tests

Is it a separate performance obligation?Is it a separate performance obligation?Could the customer benefit from iton its own or with other resources?NoCombine withother promisesYesIs it separately identifiablewithin this contract?NoCombine withother promisesYesSeparate performance obligation
Both tests must be passed. Promises that fail are combined until they form a distinct bundle.
  1. Capable of being distinct. The customer can benefit from the good or service on its own or together with resources it can readily obtain. Goods the company regularly sells separately usually pass.
  2. Distinct within the context of the contract. The promise is separately identifiable from the other promises. It fails when the company is really promising a combined output to which the individual items are inputs.

When should promises be combined?

IFRS 15 lists three factors that indicate promises are not separately identifiable:

  • The company provides a significant service of integrating the goods or services into a combined output, such as building a factory from materials and labour.
  • One promise significantly modifies or customises another, such as tailoring software heavily for the customer.
  • The goods or services are highly interdependent or interrelated, so that each significantly affects the others.

An example: software, installation and support

PromiseScenario A: standard installationScenario B: heavy customisation
Software licenceSeparate obligationCombined with installation
InstallationSeparate obligation: other firms could install itCombined: it significantly modifies the software
Two years of support and updatesSeparate obligationSeparate obligation
Number of obligations32

In scenario B the licence and installation become one obligation, usually satisfied as the customised system is delivered, so less revenue is recognised up front. For when a separate licence earns its revenue, see licences of intellectual property.

What is the series rule?

A series of distinct goods or services that are substantially the same and transfer to the customer in the same pattern is treated as a single performance obligation. Daily cleaning, monthly payroll processing and hosting services are common examples. This simplifies accounting without changing the overall pattern of revenue.

Are warranties performance obligations?

It depends on the type. An assurance-type warranty, which only promises that the product works as agreed, is not a separate obligation; the expected cost is a provision under IAS 37. A service-type warranty, which gives the customer something more, such as an extended period or extra services, is a separate performance obligation and receives part of the price. A warranty the customer can buy separately is always service-type.

What about options for future purchases?

An option to buy more goods at a discount is a separate obligation if it gives the customer a material right it would not get without the contract, such as loyalty points. Part of the price is allocated to the option and recognised when the option is used or expires.

What do performance obligations look like by industry?

IndustryTypical performance obligationsCommon judgement
TelecomHandset; network serviceWhether installation or activation is a separate promise
Software and SaaSLicence or hosted access; implementation; supportWhether implementation significantly modifies the software
ConstructionUsually one: the finished buildingWhether design and build are one integrated output
RetailGoods; loyalty points; extended warrantiesWhether points are a material right
ManufacturingEquipment; installation; spare partsWhether installation is complex enough to combine

Where to go next

If another party provides some of the goods or services, decide whether you are principal or agent for them. Once the obligations are identified, the price is allocated to them: see allocating the transaction price. For the full sequence, read the five-step model.

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Questions people ask

What is a performance obligation?

A promise in a contract to transfer a distinct good or service, or a series of substantially the same services, to the customer.

When is a good or service distinct?

When the customer can benefit from it on its own or with readily available resources, and it is separately identifiable from the other promises.

Is a warranty a performance obligation?

Only a service-type warranty. An assurance-type warranty is accounted for as a provision.

Are loyalty points a performance obligation?

Yes, when they give the customer a material right; part of the price is allocated to them.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 15 Revenue from Contracts with Customers

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IFRS 15The IFRS 15 five-step model with examplesIFRS 15Allocating the transaction price using stand-alone selling pricesIFRS 15IFRS 15 revenue from contracts with customers explained

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This guide is general information. It is not tax or legal advice for your situation.