IFRS 15 Performance Obligations — Core Rule

Under IFRS 15, an entity must identify each distinct performance obligation in a contract with a customer and allocate the transaction price to each on the basis of relative standalone selling prices, recognising revenue only when (or as) each obligation is satisfied.

How IFRS 15 Performance Obligations Works

Step 2 — Identifying performance obligations (IFRS 15.22–30):

• A promised good or service is a separate performance obligation if it is distinct: the customer can benefit from it on its own or with readily available resources (capable of being distinct, IFRS 15.27(a)), AND the promise to transfer it is separately identifiable from other promises in the contract (distinct within the contract, IFRS 15.27(b)). Both criteria must be met simultaneously.
• Where goods or services are highly interdependent or interrelated — for example, a complex integration service bundled with software licences — they are combined into a single performance obligation (IFRS 15.29). Indicators of non-separability include significant integration, modification of one item by another, and high interdependence (IFRS 15.29(a)–(c)).
• Series of distinct goods or services that are substantially the same and have the same pattern of transfer may be treated as a single performance obligation (IFRS 15.22(b)), simplifying accounting for repeating service contracts.

Step 4 — Allocating the transaction price (IFRS 15.73–90):

• The transaction price is allocated to each performance obligation in proportion to standalone selling prices (SSP) at contract inception (IFRS 15.74). SSP is the price at which the entity would sell the good or service separately to a similar customer in similar circumstances.
• Where SSP is not directly observable, entities must estimate it using suitable methods: adjusted market assessment, expected cost plus margin, or residual approach (only when SSP is highly variable or uncertain — IFRS 15.79).
• Discounts are allocated proportionately across all performance obligations unless evidence exists that the discount relates entirely to one or more (but not all) obligations (IFRS 15.82). Variable consideration is allocated to a specific obligation only when the allocation criteria in IFRS 15.84–85 are met.
• Contract modifications may create new performance obligations or change existing ones; the allocation methodology must be reassessed depending on whether the modification is treated as a new contract or a continuation (IFRS 15.18–21).

IFRS 15 Performance Obligations — Practical Example

Scenario: A SaaS vendor contracts with a customer for €120,000 covering: (1) software licence, (2) implementation services, and (3) one year of post-implementation support. SSPs are: licence €80,000, implementation €40,000, support €20,000 — total observable SSP €140,000.

Allocation (relative SSP method)

Assume the licence is transferred at contract inception, implementation completes in month 3, and support is delivered ratably. At contract signing, journal entry for licence (recognised at point in time, IFRS 15.38):

Support revenue of €17,143 is recognised over 12 months (~€1,429/month), with the unrecognised balance held as a contract liability (deferred revenue) on the balance sheet (IFRS 15.105–106).

IFRS 15 Performance Obligations — Common Pitfalls

• Misapplying the "distinct" test: Many preparers assess only whether the customer can benefit from the item, ignoring the separately identifiable limb (IFRS 15.27(b)). The indicators at IFRS 15.29 must be actively evaluated — auditors frequently challenge bundled SaaS or construction contracts on this point.
• Using list price as SSP by default: Contracted or publicly listed prices often include discounts and do not reflect true standalone selling prices. Using inflated list prices skews allocation, accelerates revenue on high-margin items, and is a common audit adjustment.
• Failing to reassess SSP on contract modifications: When a modification adds new goods or services at a price that does not reflect SSP, entities must determine whether it forms a new contract (IFRS 15.20) or requires reallocation across remaining obligations — omitting this step is a frequent error in multi-year enterprise contracts.

IFRS 15 Performance Obligations — Key Paragraphs

• IFRS 15.22–30 — Identifying performance obligations, the distinct criteria, and the series provision.
• IFRS 15.27 — The two-part "capable of being distinct" and "distinct within the contract" test.
• IFRS 15.73–74 — Allocation of transaction price based on relative standalone selling prices.
• IFRS 15.79 — Estimation methods for standalone selling price when not directly observable.
• IFRS 15.82–85 — Allocation of discounts and variable consideration to specific performance obligations.
• IFRS 15.105–106 — Presentation of contract assets and contract liabilities on the balance sheet.