Under IFRS 15, an entity identifies each performance obligation in a contract, which is a promise to transfer either a distinct good or service, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

A good or service (or bundle of goods or services) is distinct if both of the following criteria are met:

1. The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. This means the good or service is capable of being distinct.
2. The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. This means the good or service is distinct within the context of the contract.

If these criteria are not met, the entity would bundle the goods or services until it identifies a bundle that is distinct. In some cases, that might result in an entity accounting for all the goods or services promised in a contract as a single performance obligation.

Example of Separate Performance Obligations:

Suppose a software company sells a software license and a post-contract customer support service in one contract. The customer can benefit from the software on its own because it can run the software on its systems. The customer can also benefit from the customer support on its own, as it has the option to call for support when needed. Further, the software and customer support are separately identifiable; they are not inputs to a combined item in the contract and they do not significantly affect each other. Therefore, the software and the customer support are two separate performance obligations.

Example of Bundled Performance Obligations:

Now, suppose the software company promises to deliver a fully customized software solution, including designing, developing, and installing the software, and providing post-installation support. Here, the customer cannot benefit from any of these services on their own, as the value lies in the fully functioning software system. The services are all inputs to that combined output and significantly affect each other. Therefore, the entire project would be treated as a single performance obligation.