Distinct or a Bundle? The “Gotchas” in the new Revenue Recognition Standard

The confusing complexities that just may come back to bite you

In our continuing series covering the major and minor points of the new Revenue Recognition rules contained within ASC 606, we wanted to shedGotcha.jpg some light on some of the nuances laced through the rules’ verbiage. While on the surface the rules sound fairly straightforward, there are some confusing complexities that it’s important for your organization to be aware of and to understand. Here we look at just one component of the rule – identifying the performance obligations of a contract - to illustrate how a seemingly simple concept gets a bit more complicated the deeper we look.

What are you selling?

The new rules specify that you must identify and then determine a transaction price for each performance obligation (deliverable) in the contract. While many contracts promise to deliver multiple goods or services, from the customer’s viewpoint, they are not purchasing individual items. Rather, they are purchasing the final solution that the individual items create when they are combined.

There lies the gotcha. How do you decide if the various goods and services in your contract should be considered distinct deliverables, or bundled together as a single performance obligation?

To bundle or not to bundle

Deciding if your deliverable is distinct should be simple, right? But consider the case of a technology firm, selling a software license and custom programming services. Are the custom programming services a separate deliverable? Are they capable of being distinct from the sale of the software itself? Do we have two distinct deliverables – or a bundle?

The rule says that a good or service is distinct if either of the following criteria is met:

  • The entity regularly sells the good or service separately.
  • 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.


And the rule says that your goods and services should be bundled if both of these criteria are met:

  • The goods or services in the bundle are highly interrelated, and transferring them to the customer requires that you also provide a significant service of integrating the goods or services into the combined item(s).
  • The bundle of goods or services is significantly modified or customized to fulfill the contract.

It all depends

So in the case of selling a software license and custom programming services, the answer is - it depends. If the customer can benefit from the software alone, without the customizations, it is a separate obligation. If the programming services are so extensive, or vital for operation, that the software has no value to the customer without them, they could be considered a bundle.

The new rule requires your organization use good judgment, discretion and consistency. You’d be well advised to seek professional advice regarding your firm’s specific contracts.

By BTerrell Group, Texas- based Intacct Partner

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