Prospective method (modifications)
Under the prospective method, a contract modification is treated as if the existing contract were terminated and a new one created. Revenue already recognised is left unchanged; the unrecognised consideration from the original contract plus any new consideration is allocated to the remaining distinct goods or services.
Standard references
- ASC 606606-10-25-13(a)
- IFRS 15paragraph 21(a)
- Ind AS 115paragraph 21(a)
Worked example
Illustrative: a 24-month subscription for $48,000 ($2,000 a month). After 12 months, the parties agree a $3,000 reduction for the remaining 12 months with no change in service.
- Recognised to date: $24,000. This is not adjusted.
- Remaining consideration: $24,000 − $3,000 = $21,000.
- The remaining months are distinct, so spread prospectively: $21,000 / 12 = $1,750 a month.
Result: $1,750 a month for months 13–24; no catch-up entry.
Illustrative figures for explanation only, not taken from a real contract.
Common mistakes
- Confusing the prospective modification method with the prospective transition method used on adopting the standard.
- Going back to adjust revenue already recognised.
- Leaving existing contract asset balances out of the remaining consideration.
How Soluqube handles this
Soluqube does not automate this assessment today; modification accounting is on the roadmap.