Contract modifications

Learning objectives

• Determine whether a modification is a separate contract (addition of distinct goods or services at a price that reflects their stand-alone selling prices).L2, L3
• Calculate the effects of a modification accounted for as a termination of the existing contract and the creation of a new one (remaining consideration allocated to the remaining goods or services) or as part of the existing contract (cumulative catch-up adjustment).L3, L4
• Explain that a modification whose price has not yet been approved may exist and that the change in price is then estimated as variable consideration.L3

Normative references

• IFRS 15 §18A contract modification is a change in scope and/or price approved by the parties; it may be called a change order, a variation or an amendment, and it exists when the parties approve a change that creates new enforceable rights and obligations or changes existing ones. Approval may be written, oral or implied by customary business practices. Until the modification is approved, the entity continues to apply the standard to the existing contract.
• IFRS 15 §19When the parties have approved a change in scope but have not yet determined the corresponding change in price, the entity estimates the change to the transaction price in accordance with the requirements on variable consideration and its constraint (paragraphs 50-54 and 56-58).
• IFRS 15 §20A modification is accounted for as a separate contract if two conditions are met: the scope increases because of the addition of promised goods or services that are distinct, and the price increases by an amount that reflects the stand-alone selling prices of those additions, adjusted as appropriate to reflect the circumstances of the contract.
• IFRS 15 §21If the modification is not a separate contract: (a) if the remaining goods or services are distinct from those already transferred, it is accounted for as if the existing contract were terminated and a new contract created; the consideration allocated to the remaining performance obligations is the sum of the consideration promised by the customer that is included in the transaction price and not yet recognised as revenue (including amounts already received) and the consideration promised as part of the modification — revenue already recognised is therefore not restated; (b) if they are not distinct and form part of a partially satisfied performance obligation, the effect on the transaction price and on the measure of progress is recognised as a cumulative catch-up adjustment to revenue at the date of the modification; (c) where both situations are combined, the entity applies each approach consistently with its objectives.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• Valtenor and its customer agree orally, during a site meeting, to extend the scope of the work. No written amendment is signed, but both parties customarily work on the basis of such verbal agreements. In the absence of a written amendment, there cannot be a contract modification under IFRS 15.L2
• The Orbéliane group is building a plant for a customer. The parties have approved in writing the addition of a loading dock but have not yet agreed on the corresponding price increase. Until that increase is set, Orbéliane must disregard the modification entirely in the transaction price.L3
• Under IFRS 15, under what conditions is a contract modification accounted for as a separate contract?L2
• Lumiréo has undertaken to deliver 1,000 light fittings at EUR 300 each; each light fitting is a distinct good whose control is transferred on delivery. After 400 deliveries, the customer orders 200 additional light fittings at EUR 285 each. The stand-alone selling price of a light fitting is EUR 300; Lumiréo has documented that the EUR 15 reduction corresponds to selling costs it does not need to incur for this existing customer, and treats it as an adjustment to the stand-alone selling price justified by the circumstances of the contract. How does Lumiréo account for the modification?L3
• Which of the following statements about the existence of a contract modification are correct?L2
• A contract modification is not a separate contract. Which of the following statements are correct?L3
• Sofaline has undertaken to deliver {initial_units} office chairs at EUR {initial_price} each; each chair is a distinct good whose control is transferred on delivery. After {units_delivered} chairs have been delivered, the parties approve the addition of {added_units} chairs at a unit price of EUR {added_price}, whereas the stand-alone selling price of a chair is EUR {ssp_at_modification} at that date; the reduction is a commercial gesture unrelated to that price. Compute the unit price at which Sofaline recognises revenue for each chair remaining to be delivered after the modification.L3
• Netalys provides a customer with a weekly office cleaning service for {initial_term} years, for EUR {annual_fee} per year. Each week of service is distinct and together they form a series treated as a single performance obligation. After {years_elapsed} years of performance, the customer agrees to extend the contract by {extension_term} years for EUR {extension_fee} per year, whereas the stand-alone selling price of the service is then EUR {ssp_annual} per year. The service is provided evenly. Compute the annual revenue that Netalys will recognise for each of the remaining years.L3
• Bâtiroc is constructing an office building on its customer's land; the contract is a single performance obligation satisfied over time, with progress measured as costs incurred relative to total expected costs. Price: EUR {initial_price}; total expected costs: EUR {initial_costs}. At the end of 20X1, costs incurred amount to EUR {costs_incurred} and the revenue recognised reflects progress. Early in 20X2, the parties approve a change to the plans: price increased by EUR {price_increase}, expected costs increased by EUR {additional_costs}. The remaining work is not distinct from the work already performed. Compute the cumulative catch-up adjustment (decrease in revenue) recognised at the modification date.L3
• The Navirex shipyard is building a research vessel for an oceanographic institute. The contract is a single performance obligation satisfied over time; progress is measured using costs incurred. Agreed price: EUR {contract_price}; expected costs: EUR {expected_costs}; costs incurred at 31 December 20X1: EUR {costs_to_date}. On 2 January 20X2, the institute approves the installation of an on-board laboratory integrated into the hull: the price increases by EUR {price_change} and expected costs by EUR {cost_change}. This work is not distinct from the vessel under construction. Compute the cumulative revenue after the modification and the cumulative catch-up adjustment (increase in revenue) recognised on 2 January 20X2.L4
• Ferlance sells 2,000 pallets of wood pellets at EUR 150 per pallet, a price equal to the stand-alone selling price; each pallet is a distinct good delivered separately. After 1,200 deliveries, the customer obtains the addition of 500 pallets at EUR 72, a discount granted to preserve the business relationship and unrelated to the stand-alone selling price, which remains EUR 150. The chief financial officer proposes to account for the 500 pallets as a separate contract at EUR 72. What analysis do you retain?L3
• Codexa is developing a loan management system for a bank; the contract is a single performance obligation, satisfied over time and 60% complete. The parties approve the addition of a credit-scoring module integrated into the core of the system: it modifies the architecture already delivered and can only work with it. The price increases by an amount below the stand-alone selling price of such a module. How does Codexa account for this modification?L4
• Hydrovia is performing a civil engineering contract. The customer has approved a change of route that adds work, but still disputes the amount of the price increase claimed by Hydrovia. How does Hydrovia treat the change in price at the reporting date?L3
• Kelvara provides a hospital with maintenance of its imaging equipment for 4 years, for EUR 200,000 per year; each year of service is distinct. At the beginning of the third year, the parties approve two changes: first, the addition of maintenance of 3 new scanners for 2 years at EUR 40,000 per year, a price equal to the stand-alone selling price of that service; second, the extension of night-time interventions on the existing equipment, approved by the hospital but with the price increase not yet negotiated. Write a memo analysing the treatment of each of these changes.L4
• During an industrial maintenance contract, Orvanel observes several events. Which of them may change the transaction price?L3
• Cendrine and its customer approve an amendment that adds services and increases the contract price. How does Cendrine account for the resulting change in the transaction price?L2
• Azurine's contract included a variable bonus from the outset. A modification, which is not a separate contract, was then accounted for as the termination of the existing contract and the creation of a new contract, the remaining goods being distinct from those already transferred. After that modification, the uncertainty about the bonus promised before the modification is resolved. To which performance obligations does Azurine allocate the price change?L3