Final answer:
A performance obligation is an accounting term for a commitment to transfer a distinct good or service to a customer, which is crucial for revenue recognition. It exists when the good or service is distinct and the promise to transfer is identifiable within a contract.
Step-by-step explanation:
A performance obligation is a term used in accounting that refers to a promise in a contract to transfer a good or service to a customer. A performance obligation exists when two conditions are met:
- The good or service is distinct, meaning 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.
- The entity's promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
This concept is a critical part of revenue recognition as outlined in the Accounting Standards Codification (ASC) Topic 606, which guides entities on how and when to recognize revenue arising from contracts with customers.