Performance obligation
A performance obligation is a distinct promise in a contract, and it is the unit revenue recognition is measured against.
A contract is decomposed into distinct promises, the transaction price is allocated across them, and each is recognised as it is satisfied. Distinctness is the whole question: a promise is distinct if the customer can benefit from it on its own and it is separately identifiable in the contract.
This is why offer structure is a finance concern rather than a marketing one. A bundle whose components cannot be separated cannot be allocated cleanly, and a discount applied at the total rather than the component level forces a manual allocation every time such a deal closes.
Where it breaks
A bundled discount is applied at the total, so finance re-derives the component allocation by hand at every quarter close.
Related terms
- Revenue recognition
- Revenue recognition is the determination of when earned revenue may be recorded, governed by performance obligations rather than by cash timing.
- Offer structure
- Offer structure is the decomposition of what a company sells into priceable, deliverable, and governable components.
- Deferred revenue
- Deferred revenue is a liability representing cash collected or invoiced for obligations not yet satisfied.
- Packaging
- Packaging is the grouping of capabilities into purchasable units, and the rules governing what a buyer must take together and what they may take separately.
Field notes on this
- Four clocks: bookings, billings, revenue, and cash
Commercial commitment, invoicing, recognition, and collection answer different questions. Reconcile the clocks without treating them as one metric.