What Are Remaining Performance Obligations?

Remaining Performance Obligations (RPO) is a financial metric representing the total value of contracted future revenue that has not yet been recognized. Mandated under the accounting standard ASC 606, RPO combines deferred revenue with the value of contracted work that has not yet been invoiced. This provides a forward-looking view of the committed, but undelivered, goods and services a company is obligated to provide.

Identifying Components of RPO

A performance obligation is a concept from ASC 606 representing a distinct promise in a contract to transfer a good or service to a customer. These promises are considered distinct if the customer can benefit from the good or service on its own and if the promise is separately identifiable from other promises in the contract. A contract can contain multiple performance obligations, each requiring separate accounting consideration.

For example, consider a company that sells a one-year software subscription for $1,200 and also charges a one-time $300 fee for initial setup and training. In this scenario, there are two separate performance obligations. The first is the continuous access to the software over the year, and the second is the professional service of setting it up. The company must identify these distinct promises to properly account for revenue as each is delivered.

The transaction price is the amount of consideration a company expects to receive in exchange for transferring promised goods or services. After identifying performance obligations, the total transaction price of the contract must be allocated among them. This allocation is based on the standalone selling price of each distinct good or service, which is the price at which the company would sell it separately to a customer.

Calculating Remaining Performance Obligations

The calculation of RPO begins with a contract’s total transaction price and subtracts the revenue that has already been recognized to date. The resulting figure represents the value of all unsatisfied or partially unsatisfied performance obligations. This calculation includes all non-cancelable portions of contracts and any fixed fees or other committed amounts.

Certain items are excluded from the RPO calculation. For instance, some forms of variable consideration, which are amounts that can change due to factors like discounts or performance bonuses, may be excluded if they are constrained and not yet included in the transaction price.

For a practical example, imagine a company signs a three-year service contract with a customer for a total transaction price of $30,000. At the end of the first year, the company has provided one-third of the services and has recognized $10,000 in revenue. The RPO at this point would be $20,000, representing the value of the services yet to be delivered in years two and three.

RPO should be distinguished from deferred revenue. Deferred revenue, a liability on the balance sheet, represents only the portion of contracted revenue that has been billed and collected but not yet earned. RPO is a broader measure because it includes this deferred revenue plus the value of contracted work that has not yet been invoiced, often referred to as backlog.

Disclosure and Reporting Requirements

Companies are subject to specific disclosure rules under ASC 606. The primary requirement is to disclose the aggregate RPO figure in the footnotes to the financial statements. This information is found within the “Revenue Recognition” or a similarly titled note in a company’s annual report, such as a Form 10-K filed with the Securities and Exchange Commission.

Beyond the numerical total, companies must also provide qualitative disclosures. These disclosures explain when the company anticipates recognizing the RPO as revenue. A common presentation format is to break down the RPO into amounts expected to be recognized within the next 12 months and the amount to be recognized thereafter.

The accounting standards provide practical expedients that can simplify reporting duties. One widely used expedient allows a company to omit the RPO disclosure for contracts that had an original duration of one year or less. Companies that elect this option must disclose that they have used the expedient.

Another practical expedient relates to contracts where revenue is recognized based on the amount billed to the customer. If the amount billed corresponds directly to the value transferred to the customer to date, the company may not need to disclose the RPO for that contract. The use of these expedients must be applied consistently to similar types of contracts.