Performance Obligation Identification Rules
A performance obligation is a distinct promise in the contract to transfer goods or services to the customer.
Revenue recognition is based on the satisfaction of a contract's performance obligations rather than billing. It is important to correctly identify and create performance obligations for revenue recognition.
Performance obligation identification rules are similar to contract identification rules except that they're used to indicate how to group order lines into distinct performance obligations within a revenue contract. The rules specify the matching attributes that provide a common link for grouping the source document lines into performance obligations. You can use any of the common attributes, such as purchase order number or item classification, as a matching attribute. You can also use descriptive attributes as matching attributes. The rules also determine how revenue recognition is handled, including the satisfaction method and allocation exemption that will be used.
When creating performance obligation identification rules, you should ask yourself whether:
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Contract lines represent distinct obligations.
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Parts of a bundled obligation are represented as individual lines.
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There are implied obligations that aren't included on a line.
Revenue Management provides three predefined performance obligation identification rules. However, if these rules don't meet your company's needs, you can create a rule specific to your company.
|
Rule |
Description |
|---|---|
|
Identify performance obligation based item |
This rule groups source document lines as a performance obligation based on the item number on the line. |
|
Identify performance obligation based on item classification |
This rule groups source document lines as a performance obligation based on the item classification on the line. |
|
Identify performance obligation based on source document line |
This rule identifies each source document line as performance obligation. |
Rules are executed in the order of priority.
Extensible Attributes
If you need to create a new performance obligation identification rule because the identifier you're using isn't a named attribute, you can use an extensible attribute.