Contract modifications

A contract modification is a change in scope, price or both that the parties have approved — in writing, orally or through customary practice (IFRS 15.18). An approved change in scope whose price hasn't been agreed yet (an unpriced change order) is still a modification: the entity estimates the price change as variable consideration, subject to the constraint (IFRS 15.19).

Ask the questions in this order:

1. Is it a separate contract? It is when both (IFRS 15.20): - the scope increases because distinct goods or services are added, and - the price increases by an amount that reflects their stand-alone selling prices, adjusted for the circumstances of the contract (for example, a discount equal to the selling costs saved on an existing customer).

Then the original contract is untouched and the new goods are accounted for as a new contract.

2. If not, are the remaining goods or services distinct from those already transferred? Then treat the modification as if the old contract were terminated and a new contract created (IFRS 15.21(a)) — a prospective treatment. The consideration for the remaining obligations is: > consideration not yet recognised under the original contract (including amounts already received) + the new consideration promised, allocated to the remaining distinct goods or services. Revenue already recognised is not adjusted.

3. If the remaining goods or services are not distinct — they form part of a single performance obligation that is partly satisfied (a building, a bespoke system) — treat the modification as part of the existing contract (IFRS 15.21(b)). Update the transaction price and the measure of progress, and recognise the effect as a cumulative catch-up adjustment to revenue at the date of the modification.

Mixed cases apply each treatment to the relevant parts (IFRS 15.21(c)). ASC 606 has the same three outcomes.