ACCA Financial Reporting (F7) Practice Exam

What are performance obligations in financial reporting?

1. Generally accepted accounting principles for revenue recognition

2. Promises in a contract to transfer goods or services to a customer

3. Legal obligations to provide services to clients

4. Financial commitments made by an entity to its stakeholders

The correct answer is: Promises in a contract to transfer goods or services to a customer

Performance obligations in financial reporting refer specifically to the promises made in a contract to transfer goods or services to a customer. This concept is central to the recognition of revenue under the revenue recognition standards, particularly IFRS 15 and ASC 606, which outline how and when revenue should be recognized. When a company enters into a contract with a customer, it may promise to deliver several products or services; each of these promises is considered a separate performance obligation if they are distinct. A performance obligation is fulfilled when the promised goods or services have been transferred to the customer, which solidifies the basis for revenue recognition. Understanding this definition is crucial, as it directly impacts how businesses report their financial performance. Other choices, while related to financial reporting or contractual obligations, do not accurately define the concept of performance obligations. The first choice refers to general principles of accounting and does not specifically address the nature of obligations in contracts with customers. The third option discusses legal obligations but lacks the specific focus on revenue contracts and performance. The fourth option about financial commitments relates more to liabilities and stakeholder relationships rather than the distinct promises related to revenue generation.