Contract modification
A contract modification is an approved change in the scope or price, or both, of a contract. It is accounted for as a separate contract, prospectively as a termination of the old contract and creation of a new one, or by cumulative catch-up, depending on whether the added goods or services are distinct and priced at standalone selling price.
Standard references
- ASC 606606-10-25-10 to 25-13
- IFRS 15paragraphs 18–21
- Ind AS 115paragraphs 18–21
Worked example
Illustrative: a three-year subscription at $36,000 a year. At the start of year 2 the customer adds 50 seats for the remaining two years.
- Case A: the seats cost $10,000 a year, which reflects their SSP. The seats are distinct and priced at SSP, so the add-on is a separate contract; the original schedule is untouched.
- Case B: the seats cost $6,000 a year, a discount that does not reflect SSP. The remaining months are distinct, so the modification is prospective.
- Case B remaining consideration: unrecognised original $72,000 + new $12,000 = $84,000, over 24 months = $3,500 a month.
Result: Case A adds a new $10,000-a-year schedule; Case B replaces the remaining schedule with $3,500 a month.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Accounting for unapproved change orders, or ignoring approved but unpriced changes whose price must be estimated.
- Forgetting that price-only changes are modifications too.
- Using a cumulative catch-up when the remaining services are distinct.
How Soluqube handles this
Soluqube does not automate contract-modification accounting today; it is on the roadmap. The engine handles the original allocation and schedule.