Contract modifications

A contract modification is a change in the scope and/or price of a contract

that is approved by the contracting parties, in writing, orally or implied by
customary business practices. Similar terms are "change order," "variation"
and "amendment."
If the contract modification is not approved, the entity continues to
apply PFRS 15 to the existing contract until the modification is approved.
A contract modification may exist even though the contracting parties
have a dispute about the scope and/or price of the modification or the
change in the scope has been approved but the corresponding change in
price is not yet determined. In the latter case, the entity shall estimate the
change to the transaction price arising from the modification.
A contract modification is accounted for as a separate contract if both
the following conditions are met:
a. The scope of the contract increases because of the addition of
promised goods or services that are distinct; and
b. The contract price increases by an amount that reflects the stand-
alone selling prices of the additional promised goods or services.
A contract modification that is not accounted for as a separate contract
is accounted for as follows:
 If the additional goods or services are distinct but the increase in the
contract price does not reflect the stand-alone selling price, the contract
modification is accounted for as if it were a termination of the existing
contract and the creation of a new contract.
Accordingly, the sum of (a) the consideration from the original contract
that is not yet recognized as revenue and (b) the consideration from the
contract modification is allocated to all of the remaining performance
obligations.
 If the additional goods or services are not distinct, they are essentially a
part of a single performance obligation that is only partially satisfied.
Therefore, the contract modification is accounted for as if it were a part of
the existing contract.
Accordingly, the effect of the contract modification on the transaction
price, and on the entity's measure of progress towards the complete
satisfaction of the performance obligation, is recognized as an increase or
decrease in revenue at the date of the contract modification. The
adjustment to revenue is made on a cumulative catch-up basis.
Remember: A contract modification is accounted for as a separate contract if
the modification results to additional goods or services that are distinct and
the modified contract price reflects the stand-alone selling prices of those
additional goods or services.
Illustration: Contract modification
(Based on IFRS 15 Illustrative Examples, IE19 to 1E24)

Fact pattern
ABC Co. sells 120 units of a product to a customer for P12,000 (P100 per
unit). Deliveries will be made over the next six months.
Control is transferred at a point in time as each delivery is made, After 60
units have been delivered, the contract is modified to require the delivery of
additional 30 units.
Case A – Price reflects the stand-alone selling price
The sale price of the additional 30 units is P2,850 (P95 per unit). The
additional units are distinct from the original units and the P95 sale price
reflects the stand-alone selling price of those units at the time of contract
modification.

Accounting treatment:
Since the additional units are distinct and the sale price reflects the stand-
alone selling price of those additional units, the contract modification is
accounted for as a new and separate contract.
Accordingly, ABC Co. recognizes revenue of P100 per unit for the 120
units in the original contract and P95 per unit for the 30 units in the new
contract.
Case B – Price that does NOT reflect the stand-alone selling price
The parties initially agreed on a sale price of P80 per unit on the 30
additional units. The additional units are distinct from the 60 units that have
already been delivered but the P80 sale price does not reflect the stand-
alone selling price of the additional units. Additionally, the customer
discovers that the first 60 units that have been delivered contain minor
defects that were unique to those units. ABC Co. promises a discount of P15
per unit to compensate the customer for the poor quality of those units.

Accounting treatment:
Since the additional units are distinct but the sale price does not reflect the
stand-alone selling price of those additional units, the contract modification
is accounted for as a termination of the original contract and the creation of
a new contract.
Accordingly, ABC Co. will recognize revenue of 193.33 on each of the
90 remaining units to be delivered. This is computed as follows:
Total price of the undelivered units from the original contract
6,000
[(120 units - 60 units delivered) x P100]
Total price of the additional units from the new contract
2,400
(30 units x P80)
Transaction price not yet recognized as revenue 8,400
Divide by: Total remaining units to be delivered (60+30) 90
Revenue per remaining unit 93.33
 As for the P15 discount, ABC Co. recognizes the total discount of P900
(P15 x 60 defective units) as a reduction of revenue for the initial 60 units
delivered.
Changes in the transaction price
After contract inception, the transaction price can change for various
reasons, including the resolution of uncertain events.
A subsequent change in the transaction price, arising from other than a
contract modification, is allocated to the performance obligations based on
the relative stand-alone prices of the distinct goods at contract inception.
Accordingly, subsequent changes in stand-alone selling prices are ignored.
The amount allocated to a satisfied performance obligation is recognized as
revenue, or as a reduction in revenue, in the period in which the transaction
price changes.
A subsequent change in the transaction price is allocated to all of the
performance obligations in the contract unless it is clear that it relates only
to a specific part of the contract.
A change in the transaction, price after a contract modification is
accounted for as follows:
 If the change in the transaction price is attributable to a variable
consideration that existed before a modification that was accounted for as
a termination of the original contract and the creation of a new contract,
the change in the transaction price is allocated to the performance
obligations in the original contract (before the modification).
 In all other cases in which the modification was not accounted for as a
separate contract, the change in the transaction price is allocated to the
unsatisfied performance obligations in the modified contract.
Illustration: Changes in the transaction price
(Based on IFRS 15 Illustrative Examples, IE25 to 1632)

Original contract:
On July 1, 20x0, ABC Co. sells two distinct products to a customer. Product X
is delivered at contract inception, while Product Y will be delivered on March
31, 20x1. The total consideration for the two products is P1,200 (which
consists of P1,000 fixed consideration and P200 estimated variable amount).
Product X and Product Y have the same stand-alone selling prices.

Accounting treatment:
The P1,200 transaction price is allocated equally to the two products
because the products have the same stand-alone selling prices and it is not
clear that the variable consideration relates to only one, but not both, of the
products. ABC Co. recognizes revenue of P600 at contract inception when
Product X is delivered to the customer.
Contract modification:
On November 20x0, the contract is modified to require the delivery of an
additional product (Product Z) on June 30, 20x1 for P300 (fixed
consideration). Both the remaining products (Product Y and Product Z) are
distinct from the product already delivered (Product X). However, the P300
sale price does not reflect Product Z's stand-alone selling price. The stand-
alone selling price of Product Z is the same as the stand-alone selling prices
of Products X and Y.
Accounting treatment:
Since Product Z is distinct but the sale price does not reflect its stand-alone
selling price, the contract modification is not be accounted for as a separate
contract but as a termination of the original contract and the creation of a
new contract.
Accordingly, ABC Co. will recognize revenue of P450 on each of the two
remaining products to be delivered. This is computed as follows:
Price of undelivered Product Y from the original contract 600
Price of Product Z from the new contract 300
Transaction price not yet recognized as revenue 900
Divide by: Remaining products to be delivered (Products Y & Z) 2
Revenue per remaining product 450

Change in transaction price after contract modification:

After the modification but before the delivery of Products Y and Z, ABC Co.
revises its estimate of the variable consideration from P200 to P240.
Accounting treatment:
Since the change in the transaction price is attributable to a variable
consideration that existed before the November 20, 20x1 contract
modification, which was accounted for as a termination of the original
contract and the creation of a new contract, the change in the transaction
price is allocated to the performance obligations in the original contract
(Products X and Y). The allocation is as follows:
Estimate of variable consideration before modification 200
Estimate of variable consideration after modification 240
Change in transaction price (increase) 40
Divide by: 2 (Products X and Y) same stand-alone selling prices 2
Allocation of change in transaction price per product 20

ABC Co. recognizes revenue of P20 for Product X (the product already
delivered) on the date the transaction price was. changed and allocates the
other P20 to the undelivered products (Products Y and Z) equally because
those products have the same stand-alone selling prices. ABC Co. recognizes
revenue of 1460 (450+ 10) on each of Product Y and Product Z when they
are delivered to the customer.