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Page | 11 Assessing Multiple Performance Obligations > OVERVIEW The determination of the various performance obligations in contracts with customers requires a great deal of analysis and judgment on the part of a contractor. After identifying the contract, an entity will evaluate the contract terms and its customary business practices to identify all promised goods and services within the contract and determine which of those promised goods and services (or bundled goods and services) should be accounted for as separate performance obligations (i.e., the unit of account for purposes of applying the standard). The revenue standard identifi es several activities common to engineering and construction entities that are considered promised goods and services, including the construction, manufacture or development of an asset on behalf of a customer and the performance of a contractually agreed-upon task for a customer (e.g., design and engineering services). The criteria in the new revenue standard for identifying performance obligations diff er from the contract segmentation guidance in ASC 605-35, which could result in diff erent conclusions about the units of account. For example, today a contractor may consider an entire contract to be a profi t center (i.e., a single unit of account), but under the new standard, it may determine that the contract contains two or more performance obligations that would be accounted for separately. These judgments may be more complex when, for example, a construction contract also includes design, engineering or procurement services. The following section walks through the specifi cs of the new revenue standard related to identifying performance obligations in a contract, which is followed by a couple of best practices for implementing controls related to the identifi cation of performance obligations within a contract. There are also some examples included which may be helpful to a contractor in their determinations surrounding performance obligations in their individual contracts. ACCOUNTING GUIDANCE AND CHALLENGES According to ASC 606-10-25 et al, promised goods and services represent separate performance obligations if (1) the goods or services are distinct (by themselves or as part of a bundle of goods and services) or (2) if the goods and services are part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer. Determining whether goods and services are distinct involves a signifi cant degree of judgment based on the facts and circumstances of a given contract. According to ASC 606-10-25-19, goods and services are distinct if both of the following are met: • The customer can benefi t from the goods and services on their own or with other readily-available resources (capable of being distinct); and • The contractor's promise to transfer goods and services is separately identifi able from other promises in the contract (distinct in the context of the contract). Identifying performance obligations and how they are satisfi ed will directly affect when revenue is recognized.

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