Q5-24RQ - Horngren'S Financial And Managerial Accounting

Question

When a company has a contract involving multiple performance obligations, how must the company recognize revenue?

Step-by-Step Solution

Answer

The company can recognize its revenues only when all the performance obligations written in the contract are satisfied or fulfilled.

Meaning of Performance Obligation

In business terms, performance obligation denotes the responsibility or a promise made by a business concerned to its customers for delivering the goods or services in lieu of the payments. 

Revenue recognition in a contract involving multiple performance obligations

When a contract contains multiple performance obligations, all those should be considered one single performance obligation if each service is interlinked and interdependent.  Revenues must be realized when the performance obligation is performed by the business concerned by delivering the promised goods or services to the customers.

It should be noted that the performance obligation is considered satisfied or fulfilled if the ownership of the goods is transferred to the customers before recognizing the revenues.