Performance obligations
In one sentencePromises in a contract to deliver a distinct good or service to the customer; the revenue for each is recognized separately when it is satisfied, after the contract price is allocated among them.
Simply put
If you sell a device with one year of maintenance for one price, you have promised two things: the device and the maintenance. Each promise is a performance obligation with its share of the price.
The price is allocated in proportion to the price at which each obligation is sold on its own. The device's revenue is then recognized on delivery, and the maintenance revenue over the year.
Worked example
An appliance store sold a coffee machine with one year of maintenance for a single price of 9,000 SAR. The machine on its own sells for 8,000 SAR, and the maintenance on its own for 2,000 SAR.
Total standalone prices: 8,000 + 2,00010,000 SAR
Machine's share: 9,000 × 8,000 ÷ 10,0007,200 SAR
Maintenance share: 9,000 × 2,000 ÷ 10,0001,800 SAR
Monthly maintenance revenue: 1,800 ÷ 12150 SAR
Revenue on the delivery date7,200 SAR
Don't confuse it with
Deferred revenueThe amount received for a performance obligation not yet performed is what appears as deferred revenue or a contract liability.