the existing contract and the creation of a
the remaining performance obligations (both
new contract. Allocate the total remaining
from the existing contract and the
transaction price (unrecognised transaction
modification). Adjust revenue previously
price from the existing contract plus
recognised based on an updated measure of
additional transaction price from the
progress for the partially satisfied performance
modification) to the remaining goods or
obligations. Do not adjust the accounting for
services (both from the existing contract
completed performance obligations that are
and the modification).
distinct from the modified goods or services.
Under IFRS 15, a contract modification can be approved in writing, by oral agreement or implied by
*
customary business practices. Paragraph 19 of IFRS 15 states that an entity may have to account for a
contract modification prior to the parties reaching final agreement on changes in scope or pricing (or both),
provided the rights and obligations that are created or changed by a modification are enforceable .
In accordance with paragraph 20 of IFRS 15, an entity may make appropriate adjustments to the stand -
** alone selling price to reflect the circumstances of the contract and still meet the criteria to account for the
modification as a separate contract.
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2029
When assessing how to account for a contract modification, an entity must consider
whether any additional goods or services are distinct, often giving careful consideration
to whether those goods or services are distinct within the context of the modified
contract (see 5.2.1 below for further discussion on evaluating whether goods or services
are distinct). That is, although a contract modification may add a new good or service
that would be distinct in a stand-alone transaction, that new good or service may not be
distinct when considered in the context of the contract, as modified. For example, in a
building renovation project, a customer may request a contract modification to add a
new room. The construction firm may commonly sell the construction of an added room
on a stand-alone basis, which would indicate that the service is capable of being distinct.
However, when that service is added to an existing contract and the entity has already
determined that the entire project is a single performance obligation, the added goods
or services would normally be combined with the existing bundle of goods or services.
In contrast to the construction example (for which the addition of otherwise distinct
goods or services are combined with the existing single performance obligation and
accounted for in that manner), a contract modification that adds distinct goods or
services to a single performance obligation that comprise a series of distinct goods or
services (see 5.2.2 below) is accounted for either as a separate contract or as the
termination of the old contract and the creation of a new contract (i.e. prospectively).
In the Basis for Conclusions, the Board explained that it clarified the accounting for
modifications that affect a single performance obligation that is made up of a series of
distinct goods or services (e.g.
repetitive service contracts) to address some
stakeholders’ concerns that an entity otherwise would have been required to account
for these modifications on a cumulative catch-up basis. [IFRS 15.BC79].
As illustrated in Example 28.12 at 4.4.1 below, a contract modification may include
compensation to a customer for performance issues (e.g. poor service by the entity,
defects present in transferred goods). An entity may need to account for the
compensation to the customer as a change in the transaction price (see 7.5 below)
separate from other modifications to the contract.
The requirement to determine whether to treat a change in contractual terms as a
separate contract or a modification to an existing contract is similar to the legacy
requirements in IAS 11 for construction contracts. [IAS 11.13]. In contrast, IAS 18 did not
provide detailed application guidance on how to determine whether a change in
contractual terms should be treated as a separate contract or a modification to an
existing contract. Despite there being some similarities to legacy IFRS, the requirements
in IFRS 15 for contract modifications are much more detailed. Therefore, the
requirements in IFRS 15 could result in a change in practice for some entities. Before
adopting the new standard, entities should evaluate whether their previous processes
and controls for contract modifications need to be updated for the new requirements.
4.4.1
Contract modification represents a separate contract
Certain contract modifications are treated as separate, new contracts. [IFRS 15.20]. For
these modifications, the accounting for the original contract is not affected by the
modification and the revenue recognised to date on the original contract is not adjusted.
Furthermore, any performance obligations remaining under the original contract
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continue to be accounted for under the original contract. The accounting for this
modification approach reflects the fact that there is no economic difference between a
separate contract for additional goods or services and a modified contract for those
same items, provided the two criteria required for this modification approach are met.
The first criterion that must be met for a modification to be treated as a separate
contract is that the additional promised goods or services in the modification must be
distinct from the promised goods or services in the original contract. This assessment is
done in accordance with IFRS 15’s general requirements for determining whether
promised goods or services are distinct (see 5.2.1 below). Only modifications that add
distinct goods or services to the arrangement can be treated as separate contracts.
Arrangements that reduce the amount of promised goods or services or change the
scope of the original promised goods or services cannot, by their very nature, be
considered separate contracts. Instead, they would be considered modifications of the
original contract (see 4.4.2 below). [IFRS 15.20(a)].
The second criterion is that the amount of consideration expected for the added
promised goods or services must reflect the stand-alone selling prices of those promised
goods or services. However, when determining the stand-alone selling price entities
have some flexibility to adjust the stand-alone selling price, depending on the facts and
circumstances. For example, a vendor may give an existing customer a discount on
additional goods because the vendor would not incur selling-related costs that it would
typically incur for new customers. In this example, the entity (vendor) may determine
that the additional transaction consideration meets the criterion, even though the
discounted price is less than the stand-alone selling price of that good or service for a
new customer. In another example, an entity may conclude that, with the additional
purchases, the customer qualifies for a volume-based discount (see 5.6.1.E and 5.6.1.G
In situations with highly variable pricing, determining whether the additional
consideration in a modified contract reflects the stand-alone selling price for the
additional goods or services may not be straightforward. Entities need to apply
judgement when making this assessment. Evaluating whether the price in the modified
contract is within a range of prices for which the goods or services are typically sold to
similar customers may be an acceptable approach.
The following example illustrates a contract modification that represents a separate
contract. [IFRS 15.IE19-IE21].
Example 28.12: Modification of a contract for goods
An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in
time. After the entity has transferred control of 60 products to the customer, the contract is modified to require
the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional
30 products were not included in the initial contract.
Case A – Additional products for a price that reflects the stand-alone selling price
When the contract is modified, the price of the contract modification for the additional 30 products is an
additional CU2,850 or CU95 per product. The pricing for the additional products reflects the stand-alone
selling price of the products at the time of the contract modification and the additional products are distinct
(in accordance with paragraph 27 of IFRS 15) from the original products.
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2031
In accordance with paragraph 20 of IFRS 15, the contract modification for the additional 30 products is, in
effect, a new and separate contract for future products that does not affect the accounting for the existing
contract. The entity recognises revenue of CU100 per product for the 120 products in the original contract
and CU95 per product for the 30 products in the new contract.
4.4.2
Contract modification is not a separate contract
In instances in which the criteria discussed at 4.4.1 above are not met (i.e. distinct goods
or services are not added or the distinct goods or services are not priced at their stand-
alone selling price), contract modifications are accounted for as changes to the original
contract and not as separate contracts. This includes contract modifications that modify
or remove previously agreed-upon goods or services or reduce the price of the contract.
An entity would account for the effects of these modifications differently, depending on
which of the following three scenarios ((A)-(C) below) described in paragraph 21 of
IFRS 15 most closely aligns with the facts and circumstances of the modification.
[IFRS 15.21].
(A) If the remaining goods or services after the contract modification are distinct from
the goods or services transferred on, or before, the contract modification, the
entity accounts for the modification as if it were a termination of the old contract
and the creation of a new contract.
The amount of consideration to be allocated to the remaining performance obligations
(or to the remaining distinct goods or services in a single performance obligation
identified in accordance with paragraph 22(b) of IFRS 15, see 5.2.2 below) is the sum of:
(i) the consideration promised by the customer (including amounts already received
from the customer) that was included in the estimate of the transaction price and
that had not been recognised as revenue; and
(ii) the consideration promised as part of the contract modification.
For these modifications, the revenue recognised to date on the original contract (i.e. the
amount associated with the completed performance obligations) is not adjusted. Instead,
the remaining portion of the original contract and the modification are accounted for,
together, on a prospective basis by allocating the remaining consideration (i.e. the
unrecognised transaction price from the existing contract plus the additional transaction
price from the modification) to the remaining performance obligations, including those
added in the modification. This scenario is illustrated as follows. [IFRS 15.IE19, IE22-IE24].
Example 28.13: Modification of a contract for goods
An entity promises to sell 120 products to a customer for CU12,000 (CU100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in
time. After the entity has transferred control of 60 products to the customer, the contract is modified to require
the delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional
30 products were not included in the initial contract.
Case B – Additional products for a price that does not reflect the stand-alone selling price
During the process of negotiating the purchase of an additional 30 products, the parties initially agree on
a price of CU80 per product. However, the customer discovers that the initial 60 products transferred to
the customer contained minor defects that were unique to those delivered products. The entity promises
a partial credit of CU15 per product to compensate the customer for the poor quality of those products.
The entity and the customer agree to incorporate the credit of CU900 (CU15 credit × 60 products) into
the price that the entity charges for the additional 30 products. Consequently, the contract modification
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specifies that the price of the additional 30 products is CU1,500 or CU50 per product. That price
comprises the agreed-upon price for the additional 30 products of CU2,400, or CU80 per product, less
the credit of CU900.
At the time of modification, the entity recognises the CU900 as a reduction of the transaction price and,
therefore, as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the
additional 30 products, the entity determines that the negotiated price of CU80 per product does not reflect
the stand-alone selling price of the additional products. Consequently, the contract modification does not meet
the conditions in paragraph 20 of IFRS 15 to be accounted for as a separate contract. Because the remaining
products to be delivered are distinct from those already transferred, the entity applies the requirements in
paragraph 21(a) of IFRS 15 and accounts for the modification as a termination of the original contract and
the creation of a new contract.
Consequently, the amount recognised as revenue for each of the remaining products is a blended price of
CU93.33 {[(CU100 × 60 products not yet transferred under the original contract) + (CU80 × 30 products to
be transferred under the contract modification)] ÷ 90 remaining products}.
In Example 28.13 above, the entity attributed a portion of the discount provided on the
additional products to the previously delivered products because they contained
defects. This is because the compensation provided to the customer for the previously
delivered products is a discount on those products, which results in variable
consideration (i.e. a price concession) for them. The new discount on the previously
delivered products was
recognised as a reduction of the transaction price (and,
therefore, revenue) on the date of the modification. Changes in the transaction price
after contract inception are accounted for in accordance with paragraphs 88-90 of
IFRS 15 (see 7.5 below).
In similar situations, it may not be clear from the change in the contract terms whether
an entity has offered a price concession on previously transferred goods or services to
compensate the customer for performance issues related to those items (that would be
accounted for as a reduction of the transaction price) or has offered a discount on future
goods or services (that should be included in the accounting for the contract
modification). An entity needs to apply judgement when performance issues exist for
previously transferred goods or services to determine whether to account for any
compensation to the customer as a change in the transaction price for those previously
transferred goods or services.
(B) The remaining goods or services to be provided after the contract modification may
not be distinct from those goods or services already provided and, therefore, form part
of a single performance obligation that is partially satisfied at the date of modification.
If this is the case, the entity accounts for the contract modification as if it were part
of the original contract. The entity adjusts revenue previously recognised (either
up or down) to reflect the effect that the contract modification has on the
transaction price and updates the measure of progress (i.e. the revenue adjustment
is made on a cumulative catch-up basis). This scenario is illustrated as follows.
[IFRS 15.IE37-IE41].
Example 28.14: Modification resulting in a cumulative catch-up adjustment to
revenue
An entity, a construction company, enters into a contract to construct a commercial building for a customer
on customer-owned land for promised consideration of CU1 million and a bonus of CU200,000 if the building
is completed within 24 months. The entity accounts for the promised bundle of goods and services as a single
Revenue
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performance obligation satisfied over time in accordance with paragraph 35(b) of IFRS 15 (discussed at 8.1.3
below) because the customer controls the building during construction. At the inception of the contract, the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 401
