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Identifying performance obligations: PwC breaks it down · PwC's accounting podcast

• 0:00
  SPEAKER_03: Welcome to PWC's Accounting Podcast Series.
• 0:03
  SPEAKER_03: I'm Heather Horn.
• 0:05
  SPEAKER_03: The theme for this week is revenue.
• 0:07
  SPEAKER_03: In today's episode, we're talking about revenue performance obligations.
• 0:11
  SPEAKER_03: And then tomorrow, May 19th, I'm hosting a rebuilding revenue webcast focusing on the accounting and reporting trends in revenue.
• 0:19
  SPEAKER_03: To register for that, go to viewpoint.pwc.com.
• 0:24
  SPEAKER_03: And if you're listening after May 19th, go there for the replay.
• 0:29
  SPEAKER_03: But back to today, identifying performance obligations is a topic that frequently comes up in consultations, and it's becoming even more relevant as more companies are exploring business models that include a combination of products and service elements.
• 0:44
  SPEAKER_03: To help cover the topic and answer all my questions, I'm joined by two partners from PWC's national office, Mike Coleman and Angela Ferguson.
• 0:54
  SPEAKER_03: They have a lot of experience in this area, so I'm looking forward to an informative discussion.
• 0:59
  SPEAKER_03: And now let's get started.
• 1:04
  SPEAKER_03: Mike, Angela, thanks so much for joining me today for a topic that is perennially popular with our audience, which is the topic of revenue.
• 1:12
  SPEAKER_03: And specifically today, talking about the area of performance obligations, which I know can get complicated very quickly.
• 1:19
  SPEAKER_03: So looking forward to providing some more information in this area.
• 1:35
  SPEAKER_03: So, Mike, just to kick things off today, can you give us some background on the topic and why we keep getting questions in this area?
• 1:44
  SPEAKER_00: Sure, Heather.
• 1:45
  SPEAKER_00: So identifying performance obligations is the second step of the five-step model.
• 1:50
  SPEAKER_00: It's generally considered the most critical step because it determines the unit of account to apply the rest of the model to.
• 1:57
  SPEAKER_00: And if you get that wrong, all the other steps are going to be wrong.
• 2:01
  SPEAKER_00: So that's where the focus on step two is.
• 2:04
  SPEAKER_00: It can significantly impact the timing of revenue, especially if the contract includes goods or licenses, which are a point-in-time revenue recognition, and services, which are typically recognized over time.
• 2:20
  SPEAKER_00: As business models change, such as increased digitization, uh, this means companies need to reassess promises in contracts.
• 2:28
  SPEAKER_00: Some promises may now be material in the context of the contract where they weren't before, or some which were accounted for separately may now be need to be bundled together, or vice versa.
• 2:39
  SPEAKER_00: Also, we see offerings that involve multiple goods and services, uh such as a device or piece of equipment, embedded software, a software license with cloud-based software and maintenance, or a combination of those types of elements.
• 2:53
  SPEAKER_00: The more things that you add to the mix, the more judgment you're gonna have in trying to figure out what is separate and what is bundled.
• 3:02
  SPEAKER_00: And in these types of fact patterns, there's a fair amount of judgment that is involved in making that determination.
• 3:09
  SPEAKER_03: All right, Mike, that's a good background.
• 3:11
  SPEAKER_03: And it's funny, I've been talking to the podcast producer about we always want to make sure at the beginning we say something that makes people want to continue listening.
• 3:20
  SPEAKER_03: And when you said if you get this wrong, going to get everything wrong, I think that's a good reason people should stay focused on this area.
• 3:29
  SPEAKER_03: So with that then, Angela, why don't we move on and start with just the overall guidance in this area, and then we'll come back to some of these fact patterns that Mike talked about.
• 3:40
  SPEAKER_01: Sure.
• 3:41
  SPEAKER_01: So let's start with the definition of a performance obligation, which is a promise to provide a distinct good or service to a customer or a series of distinct goods or services.
• 3:53
  SPEAKER_01: But we'll focus here on what is a distinct good or service.
• 3:57
  SPEAKER_01: Goods and services that are not distinct are going to get bundled together and accounted for together.
• 4:03
  SPEAKER_01: If they are distinct, you account for them separately.
• 4:07
  SPEAKER_01: So there are two parts to assessing whether a good or service is distinct, and you have to meet both criteria.
• 4:15
  SPEAKER_01: The first criterion is that the good or service is capable of being distinct.
• 4:20
  SPEAKER_01: And then the second is that it's separately identifiable from the other promises in the contract.
• 4:26
  SPEAKER_01: And some people refer to this as being distinct in the context of the contract.
• 4:31
  SPEAKER_01: So let's start with the first requirement, which is capable of being distinct.
• 4:35
  SPEAKER_01: And this one is a little bit more straightforward.
• 4:38
  SPEAKER_01: And a good or service is capable of being distinct if it can be used on its own or together with other readily available goods or services.
• 4:49
  SPEAKER_01: And it's a sort of a hypothetical assessment, it's whether it could be used on its own, not necessarily whether the customer is going to use it on its own.
• 4:58
  SPEAKER_01: And just to give an example, a piece of equipment would be capable of being distinct if it could be resold for an amount greater than scrap value, or it could be used together with other goods and services that could be purchased separately.
• 5:16
  SPEAKER_01: And another way to think about this is if a company or even one of its competitors sells the good or service separately, you sort of automatically meet this step.
• 5:27
  SPEAKER_01: It's capable of being distinct.
• 5:29
  SPEAKER_01: If you do not meet the first requirement, you would stop there.
• 5:33
  SPEAKER_01: The good or service is not distinct and needs to be combined together with other things.
• 5:39
  SPEAKER_01: However, if you do meet this first requirement, then you're going to move on to the second requirement, which is assessing whether the good or service is separately identifiable.
• 5:50
  SPEAKER_01: And this is the one that we're going to spend more time talking about because it's the one that requires usually more judgment.
• 5:57
  SPEAKER_01: The objective when you're assessing whether a good or service is separately identifiable is determining whether the company is promising to transfer individual goods or services to the customer, or whether they're promising to transfer a combined item.
• 6:17
  SPEAKER_01: And the individual goods or services are inputs into that combined item.
• 6:21
  SPEAKER_03: All right.
• 6:22
  SPEAKER_03: So, Angela, then just to recap before we go on, key question we're answering here is whether or not the good or service is distinct.
• 6:30
  SPEAKER_03: And then the two criteria is that it's capable of being distinct, and then it's separately identifiable.
• 6:38
  SPEAKER_03: And separately identifiable requires more judgment.
• 6:41
  SPEAKER_03: So what can you tell us about that?
• 6:45
  SPEAKER_01: Good recap, by the way.
• 6:46
  SPEAKER_01: Thank you.
• 6:47
  SPEAKER_01: So there are three, then we have three indicators of whether uh actually the indicators are that a good or service is not separately identifiable.
• 6:58
  SPEAKER_01: So the three indicators are first, the entity provides a significant service of integrating the goods and services into a combined output.
• 7:10
  SPEAKER_01: The second is that one or more of the goods or services significantly modifies or customizes the other goods or services in the contract.
• 7:20
  SPEAKER_01: And then the third is that the goods or services are highly interdependent or highly interrelated with one another.
• 7:27
  SPEAKER_01: And again, these are all situations where you would combine the goods or services together.
• 7:32
  SPEAKER_03: All right.
• 7:33
  SPEAKER_03: So then, which makes sense then if you think about being highly interdependent or highly interrelated, why you would combine them.
• 7:41
  SPEAKER_03: But what do we mean when we use those terms?
• 7:44
  SPEAKER_01: This is new terminology that was introduced by ASC 606.
• 7:49
  SPEAKER_01: And there's not really a specific definition, but another way this is described is that the customer's ability to derive the intended benefit or utility from the contract depends on the vendor transferring all of the goods and services in the contract.
• 8:10
  SPEAKER_01: Also, another way to think about it is that there needs to be a two-way dependency between the elements.
• 8:17
  SPEAKER_01: So to try to explain that a little bit better, if you had a contract to sell a piece of equipment and then also maintenance for that equipment, it is true that a customer wouldn't would never buy maintenance without also buying the equipment.
• 8:34
  SPEAKER_01: So there is some dependency there.
• 8:36
  SPEAKER_01: However, you could buy the equipment on its own and get benefit from it without the maintenance.
• 8:44
  SPEAKER_01: So there's not a two-way dependency.
• 8:47
  SPEAKER_01: And so you would likely conclude that those elements are distinct.
• 8:52
  SPEAKER_03: All right.
• 8:52
  SPEAKER_03: So then, Angela, you gave three indicators that they are not separately identifiable, so that they should be combined.
• 9:00
  SPEAKER_03: Do you have to meet all of those in order to reach that conclusion?
• 9:05
  SPEAKER_01: No, no.
• 9:06
  SPEAKER_01: Usually there's going to be one of the three that's most applicable in the situation.
• 9:11
  SPEAKER_01: So it's not intended to be a checklist.
• 9:14
  SPEAKER_01: In fact, it's not even intended to be a complete list.
• 9:18
  SPEAKER_01: It's really three examples of when you have a situation where the goods and services should be combined because the promise is really the combined output.
• 9:29
  SPEAKER_01: However, if none of these indicators are present, you typically would conclude that the good or service is separately identifiable and therefore distinct and accounted for separately.
• 9:43
  SPEAKER_03: All right.
• 9:44
  SPEAKER_03: That is very helpful.
• 9:45
  SPEAKER_03: But maybe to kind of bring this to life, Mike, I know it often helps to kind of click if we give some examples.
• 9:52
  SPEAKER_03: So can you walk us through an example of how a company might apply this guidance?
• 9:57
  SPEAKER_00: Uh sure.
• 9:57
  SPEAKER_00: Let's start with a more straightforward example.
• 10:01
  SPEAKER_00: So let's take an arrangement that includes the sale of equipment along with installation and consulting services.
• 10:08
  SPEAKER_00: And the consulting services would be to help the customer use the equipment and maximize the benefit of it.
• 10:14
  SPEAKER_00: So there are three promises: the equipment, the installation services, and the consulting services.
• 10:20
  SPEAKER_00: And for this, let's assume that the installation is not overly complex, and then the customer could do it themselves or hire somebody else to do it.
• 10:27
  SPEAKER_00: All right, so the assessment would have the two requirements, capable of being distinct and distinct in the context of the contract.
• 10:33
  SPEAKER_00: So let's take the first one, capable of being distinct.
• 10:36
  SPEAKER_00: They all would be.
• 10:37
  SPEAKER_00: So the three elements here would be considered capable of being distinct because each good or service is available for sale on its own.
• 10:45
  SPEAKER_00: Okay, so now let's move to uh the second requirement, which is distinct in the context of the contract.
• 10:50
  SPEAKER_00: Those are the three indicators Angela was just discussing.
• 10:54
  SPEAKER_00: Right?
• 10:55
  SPEAKER_00: First, there's not an integration service in the arrangement.
• 10:58
  SPEAKER_00: There's no significant customization that's going on.
• 11:01
  SPEAKER_00: And then you're left with are they highly interrelated or interdependent?
• 11:05
  SPEAKER_00: That's the difficult one typically, because they are interrelated, because they work together.
• 11:12
  SPEAKER_00: But since there isn't that two-way dependency between any of the goods or services, they aren't considered highly interrelated or highly interdependent.
• 11:21
  SPEAKER_00: Your entity would then generally conclude that each of those goods or services separately identifiable.
• 11:27
  SPEAKER_00: So they're not inputs into some combined item.
• 11:30
  SPEAKER_00: It's the customer purchasing three things and we're delivering three things.
• 11:34
  SPEAKER_00: And so then the entity would fulfill those promises to transfer each good or service separately.
• 11:41
  SPEAKER_03: All right.
• 11:41
  SPEAKER_03: So then just to be clear, once you conclude that each of the elements is distinct, then what are the implications for the rest of the model?
• 11:50
  SPEAKER_00: The entity would then determine the total transaction price for that arrangement.
• 11:54
  SPEAKER_00: The price would be allocated to each of those three performance obligations based upon their relative standalone selling price.
• 12:02
  SPEAKER_00: Revenues recognized for a point in time, most likely for the equipment as it's delivered, and then overtime for the services for these types of services via as those services are performed.
• 12:14
  SPEAKER_00: Now, if you change the facts a little, um, you may get to a different answer.
• 12:18
  SPEAKER_00: Let me illustrate that.
• 12:19
  SPEAKER_00: So let's assume the installation of the equipment is highly complex.
• 12:23
  SPEAKER_00: And so we're gonna incorporate the customer's existing manufacturing process and related systems.
• 12:31
  SPEAKER_00: If the entity concludes those two assessments, it'll likely conclude it's still capable of being distinct.
• 12:38
  SPEAKER_00: But then when we get into distinct in the context of the contract, this entity may say, hey, that installation is providing a significant service of integrating this equipment into their system, their process.
• 12:51
  SPEAKER_00: So if they had that significant integration, then the installation and the equipment would be considered not separable and bundled together as one.
• 13:01
  SPEAKER_00: The consulting services still don't have that two-way dependency and would consider its own.
• 13:07
  SPEAKER_00: So you'd have in this case two performance obligations and not one.
• 13:11
  SPEAKER_00: The significance here is that the equipment wouldn't be recognized at a point in time.
• 13:16
  SPEAKER_00: It would be recognized over time.
• 13:18
  SPEAKER_03: So I can definitely see where this can get very judgmental very fast.
• 13:22
  SPEAKER_03: So, Angela, what are some other types of arrangements that we see that are more challenging to assess under this model?
• 13:30
  SPEAKER_01: Yeah, our experience is that a type of contract where this is particularly challenging is when contracts include licenses of IP along with other goods and services.
• 13:41
  SPEAKER_01: So a common scenario is when an arrangement includes a software license, so on-premise software, along with ongoing updates and upgrades to that software, also called post-contract customer support or PCS.
• 13:58
  SPEAKER_01: So often a software license is going to be distinct because it has utility on its own, even without the updates.
• 14:07
  SPEAKER_01: And in that situation, you allocate revenue to the license, which would be recognized up front because it's functional IP.
• 14:15
  SPEAKER_01: And then you would allocate revenue to the PCS, which is generally going to be recognized over time.
• 14:22
  SPEAKER_01: However, there are some scenarios where the software license might be combined with the future updates into a single performance obligation.
• 14:33
  SPEAKER_01: And this is where the judgment really comes in.
• 14:36
  SPEAKER_03: All right.
• 14:37
  SPEAKER_03: So then let's go back to the indicators that you talked about earlier.
• 14:41
  SPEAKER_03: Which ones would be relevant in making this assessment?
• 14:45
  SPEAKER_03: And in which cases would you conclude that the license and the post-customer support should be combined?
• 14:53
  SPEAKER_01: Well, we'd typically be looking at whether the updates and upgrades significantly modify the software or whether the software and PCS are highly interdependent or highly interrelated.
• 15:08
  SPEAKER_01: And ultimately, the question comes down to whether those updates are critical to maintaining the utility of the software.
• 15:17
  SPEAKER_01: So some things that come into play here when looking at whether the updates are critical.
• 15:24
  SPEAKER_01: First, the utility of the software declines quickly and significantly without those updates.
• 15:31
  SPEAKER_01: Another thing to look at is whether those updates are expected to be frequent, you know, relative to the term of the contract.
• 15:39
  SPEAKER_01: You would also need to look at whether customers actually download or accept those updates when they're made available.
• 15:47
  SPEAKER_01: Because if they don't, that would seem to indicate that those updates are not critical.
• 15:53
  SPEAKER_01: And then you would also look at whether the customer could obtain updates from another source.
• 16:00
  SPEAKER_03: All right.
• 16:00
  SPEAKER_03: So Angela, it still sounds very judgmental, particularly you use words like significantly frequent kind of scenario analysis.
• 16:09
  SPEAKER_03: So I assume that those aren't defined terms and there's no bright lines here.
• 16:15
  SPEAKER_01: Yeah, there are no bright lines.
• 16:18
  SPEAKER_01: And that's what can make this challenging, right?
• 16:21
  SPEAKER_01: And there is an example in the guidance, and it involves antivirus protection software.
• 16:27
  SPEAKER_01: And the conclusion is that the software and then the updates and upgrades to that software should be combined into a single output.
• 16:38
  SPEAKER_01: And the reason is because you the company is proactively and continuously monitoring whether updates need to be made to the software to protect against new viruses and then provides those updates.
• 16:53
  SPEAKER_01: And without those updates, the software would fail to provide that virus protection.
• 16:58
  SPEAKER_01: At the end of the day, you're really providing a promise to provide the antivirus protection, which requires both the initial software and then the updates to that software.
• 17:08
  SPEAKER_00: Yeah, now let me jump in and add even more complexity to it and some arrangements that we've been seeing.
• 17:14
  SPEAKER_00: Typically offerings that include on-premises software and cloud-based services.
• 17:20
  SPEAKER_00: So in those, if the on-premises software, if its only purpose is to connect to the cloud-based service, it doesn't really have a function on its own, those are pretty straightforward.
• 17:31
  SPEAKER_00: The on-premise software wouldn't be considered distinct.
• 17:34
  SPEAKER_00: It doesn't really have any functionality without the cloud.
• 17:37
  SPEAKER_00: However, if the on-premise software does have some level of standalone functionality, that's where you get into what the judgment uh would be, a more judgmental assessment.
• 17:47
  SPEAKER_00: So typically you'd look to see if those two elements, that on-premise software that has its own functionality and the cloud, are highly independent and highly interrelated.
• 17:58
  SPEAKER_00: So some things to consider.
• 18:00
  SPEAKER_00: Are there that significant regular two-way interaction between the software and the SaaS?
• 18:06
  SPEAKER_00: Is that interaction critical to obtain the intended benefit from the arrangement?
• 18:13
  SPEAKER_00: What the promise was?
• 18:14
  SPEAKER_00: And are those two elements together?
• 18:16
  SPEAKER_00: Do they provide new or different functionality that's transformative versus additive?
• 18:22
  SPEAKER_03: All right, so then let's hit on that last item because definitely have a question.
• 18:26
  SPEAKER_03: What do we mean when we say transformative versus additive?
• 18:30
  SPEAKER_00: So probably best to use an example to describe that, and one that would likely result in a combined performance obligation.
• 18:38
  SPEAKER_00: So let's say you have a cloud-based platform that's used for computationally intensive tasks.
• 18:44
  SPEAKER_00: Uh the customers utilize that on-premise software to consolidate and manipulate data.
• 18:51
  SPEAKER_00: The on-premises software interfaces with the cloud, and the cloud platform performs the computationally intensive tasks.
• 19:00
  SPEAKER_00: So the software that's on-premises wouldn't be able to do that.
• 19:04
  SPEAKER_00: So the software captures and manipulates the data, the cloud does the computational tasks.
• 19:11
  SPEAKER_00: So the cloud needs the on-prem software to gather the data, and the on-prem software needs the clouds to do the computational tasks, gets the results of that, and then reports.
• 19:23
  SPEAKER_00: So in that circumstance, there's the two-way interaction.
• 19:28
  SPEAKER_00: Both are communicating with one another, and both together transform what they do to give you the combined output of what they're looking for.
• 19:37
  SPEAKER_01: If I could just jump in here, I mean, I think sometimes what people focus on too much is the value that customers are getting from that, those cloud-based services, you know, thinking that if those services are really valuable, that must mean should be combined with the software.
• 19:56
  SPEAKER_01: But that's not really the case.
• 19:57
  SPEAKER_01: What you're looking at, like Mike was describing, is whether those services are additive, which could have a lot of value to the customer, or whether they really transform the functionality that the customer is getting from both both elements.
• 20:13
  SPEAKER_01: So just because the cloud-based services may have a lot of value, I mean, that's just going to impact later on how much of the revenue you allocate to that element, not necessarily whether it should be combined with the software.
• 20:27
  SPEAKER_03: So, Angela, with that point, if I go back to our original discussion, again, we're trying to figure out if these are distinct.
• 20:36
  SPEAKER_03: And the second case where we're more focused on whether or not they are distinct or there's more judgment involved, I should say, would be just want to make sure, get this exactly right, to say they're separately identifiable.
• 20:49
  SPEAKER_03: And then we had those criteria.
• 20:52
  SPEAKER_03: Specifically, when we talk about this idea of transformative or additive, how does that fit into what we talked about earlier?
• 20:58
  SPEAKER_01: Right.
• 20:59
  SPEAKER_01: So that's getting back to the highly interdependent and highly interrelated.
• 21:04
  SPEAKER_03: My favorite topic.
• 21:05
  SPEAKER_01: So if the cloud services are mere, are I don't want to say merely because it seems to downplay it, but if the cloud-based services are adding additional functionality, there's not necessarily that two-way dependency.
• 21:19
  SPEAKER_01: It's just two different things.
• 21:20
  SPEAKER_01: And they both probably have a lot of value to the customer, but they're separate.
• 21:25
  SPEAKER_01: It's when they're transforming the promise or the functionality into combined functionality that you can argue there's that two-way dependency.
• 21:34
  SPEAKER_03: Okay, got it.
• 21:35
  SPEAKER_03: So then basically you still go through the analysis we talked about earlier.
• 21:40
  SPEAKER_03: This is just an additional consideration when you're making that part of the evaluation.
• 21:45
  SPEAKER_03: Is that a fair comment?
• 21:46
  SPEAKER_03: Okay, got it.
• 21:47
  SPEAKER_03: Just wanted, like I said, want to make sure, particularly because I know some of our listeners won't be necessarily dealing with software.
• 21:53
  SPEAKER_03: And so if they're trying to think about how to apply this to another case, just wanted to reiterate how fidden.
• 22:00
  SPEAKER_03: The overall model.
• 22:01
  SPEAKER_03: So that said, sticking with sort of a software type of arrangements, what if you have hardware and software?
• 22:08
  SPEAKER_03: How would you think about that?
• 22:10
  SPEAKER_01: Yeah, so it's it's pretty common these days to have products that also contain software.
• 22:16
  SPEAKER_01: I mean, if you just think about products we use and the car you drive, probably even your refrigerator has an element of embedded software in it.
• 22:26
  SPEAKER_01: So you do need to assess when you have a product that includes both equipment or hardware along with software, whether those two elements are distinct.
• 22:37
  SPEAKER_01: Primarily the consideration in that case is whether the software is integral to the functionality of the piece of equipment.
• 22:46
  SPEAKER_01: If it is integral, then it is not distinct and you would combine.
• 22:51
  SPEAKER_01: However, this piece of the analysis is probably not the most critical because usually the equipment and the soft embedded software is all being delivered at the same point in time.
• 23:02
  SPEAKER_01: However, where it starts to get complicated is if that product is also sold along with cloud-based subscription services.
• 23:12
  SPEAKER_01: So now you're adding the element of the services to the arrangement.
• 23:17
  SPEAKER_01: And just think about smart devices or anything that falls under the category of Internet of Things, right?
• 23:23
  SPEAKER_01: You have both a piece of equipment and also a cloud-based service.
• 23:29
  SPEAKER_01: So the question comes down to whether that piece of hardware with embedded software should be combined with this subscription services.
• 23:40
  SPEAKER_01: And this does have a big impact because if you combine them together, then the entire offering would be recognized over time, even though that doesn't feel very intuitive when you're taking a piece of equipment basically over time.
• 23:56
  SPEAKER_01: So some of the things to consider when you're thinking about a you know a smart device or a piece of hardware with services is like what is the functionality of that device without the services?
• 24:10
  SPEAKER_01: And going back to this additive transformative conversation, you know, do the services just provide additive functionality?
• 24:19
  SPEAKER_01: If so, then that's probably separate.
• 24:23
  SPEAKER_01: Or does the functionality transform the benefit to the customer, then you would potentially combine?
• 24:31
  SPEAKER_01: And you would also need to understand how those elements interact with each other, the more significant and frequent the interaction between the piece of hardware and the services, the more likely that you could support combining them together.
• 24:46
  SPEAKER_01: And then again, thinking about that two-way dependency between the elements.
• 24:52
  SPEAKER_01: I'd also point out here, and really for all the examples we've talked about, to some extent, you would also consider marketing materials.
• 25:00
  SPEAKER_01: You know, how is this offering being sold to customers?
• 25:04
  SPEAKER_01: Is it being sold as one thing or is it being described as multiple elements?
• 25:11
  SPEAKER_01: And you know, this is sometimes helpful evidence, but I would caution not to over-rely on it.
• 25:18
  SPEAKER_01: Meaning that just because the marketing materials describe a you know a smart device as one offering, it doesn't automatically mean everything should be combined together, but it could you know be one piece of evidence that's helpful to that conclusion.
• 25:34
  SPEAKER_03: Well, and Angela, I think when I was listening to you, you know, when you say the word hardware, for a lot of people who aren't in this particular industry, you may think of hardware as like a mainframe computer in your office.
• 25:47
  SPEAKER_03: But when you guys talk about hardware in these examples, you're talking about any type of device that can include some software element.
• 25:56
  SPEAKER_03: And so I think again, a key point for our listeners here would be even if you don't think of yourself as a hardware company, and you may not think these examples apply to you, if you are selling devices or equipment or anything else that includes software, you need to stay focused on this.
• 26:14
  SPEAKER_01: Yeah, absolutely.
• 26:15
  SPEAKER_03: All right.
• 26:16
  SPEAKER_03: So then, Angela, Mike, definitely this complicated topic, I think, is very helpful.
• 26:21
  SPEAKER_03: All the examples we've run through.
• 26:23
  SPEAKER_03: If I were to ask each of you the key takeaway for our listeners, curious what you would say.
• 26:29
  SPEAKER_03: And Mike, I'll start with you for that.
• 26:31
  SPEAKER_00: Yeah, so for a lot of these arrangements, it's gonna require some diligence to make sure you make the assessment correctly.
• 26:39
  SPEAKER_00: And you'd look to talking to a bunch of different groups within the organization.
• 26:45
  SPEAKER_00: Um, you want to talk to marketing and sales, customer support to see how the product's being marketed.
• 26:52
  SPEAKER_00: But a lot of times you'd even want to talk to the product engineers to really understand the functionality of each of the individual pieces.
• 27:00
  SPEAKER_00: So that's probably the big takeaway for me.
• 27:02
  SPEAKER_00: And Angela?
• 27:04
  SPEAKER_01: Um I think I'd go back to the probably that last point I made is that just because you may be marketing an offering as a single solution to your customers, that doesn't mean you should automatically combine everything together into a single performance obligation.
• 27:21
  SPEAKER_01: I'd also say don't assume that combining everything together and taking revenue over time is more conservative.
• 27:29
  SPEAKER_01: I know sometimes people think that's like the safe answer, but it really is probably more the exception than the rule at this point.
• 27:38
  SPEAKER_01: And so you do need to do a very comprehensive analysis to assess whether the individual elements are distinct or should be combined together.
• 27:48
  SPEAKER_01: Um, and then of course, we can't have a conversation about revenue without talking about disclosures, Heather.
• 27:54
  SPEAKER_01: So, you know, this is particularly an area where disclosures are critical in order for the user to understand like what are the promises in the contract and what were the judgments around deciding whether to combine them together or account for them separately.
• 28:12
  SPEAKER_01: And you know, like everything else, this disclosure shouldn't be boilerplate, generic disclosure really should be specific to the company's situation and the conclusions that the company reached.
• 28:24
  SPEAKER_03: All right, definitely good reminders there.
• 28:26
  SPEAKER_03: And I think in particular, on that last point on disclosure, starting after Memorial Day, we're going to be doing a whole series of podcasts on presentation and disclosure types of issues, including talking about revenue.
• 28:40
  SPEAKER_03: So look forward to talking a little bit more about that.
• 28:42
  SPEAKER_03: Uh, but in the meantime, Angela, where should our listeners go for more information on performance obligations?
• 28:49
  SPEAKER_01: You can look to chapter three of our revenue guide, and that's where we go through all the details on identifying performance obligations.
• 28:58
  SPEAKER_03: All right.
• 28:58
  SPEAKER_03: Well, both, thank you so much for joining me today.
• 29:01
  SPEAKER_03: Really appreciate all the insight.
• 29:02
  SPEAKER_03: And just to wrap things up, we're looking ahead to summer, and uh definitely I know I'm very happy the warmer weather is here, but just curious if there's anything in particular you guys are looking forward to as um summer is approaching.
• 29:17
  SPEAKER_03: So, Angela, I'll start with you.
• 29:19
  SPEAKER_01: Yesterday, my two younger kids uh went in the pool for the first time uh in the afternoon, and I was so excited to see them in the pool because it's an activity that keeps them from being bored and also a way for them to get a little extra exercise.
• 29:34
  SPEAKER_01: So I'm definitely looking forward to more time in the pool now that the weather's warmer.
• 29:40
  SPEAKER_03: Very nice.
• 29:40
  SPEAKER_03: And Mike, how about you?
• 29:42
  SPEAKER_00: This may sound simple.
• 29:43
  SPEAKER_00: I'm just looking forward to it being warm.
• 29:45
  SPEAKER_00: In the Northeast, it's been just cold, even up until now.
• 29:50
  SPEAKER_00: It's still cold out.
• 29:51
  SPEAKER_00: So I'm just looking for warmth, nothing special.
• 29:54
  SPEAKER_03: I have a space heater sitting right next to me.
• 29:57
  SPEAKER_03: So I definitely understand being warm.
• 30:00
  SPEAKER_03: And I will say for myself, my son has been away at college for his first year, and I'm so excited he's almost home.
• 30:07
  SPEAKER_03: So definitely looking forward to that.
• 30:12
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• 30:17
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• 30:30
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• 30:40
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• 30:46
  SPEAKER_03: This Thursday, we're looking at tectonic forces, what they are, and how do they impact us from a business perspective.
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• 31:04
  SPEAKER_03: For PWC, I'm Heather Horn.
• 31:07
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