Contract Modifications under IFRS 15

Contract Modifications under IFRS 15

INTRO – Contract Modifications under IFRS 15 – A ‘contract modification’ occurs when the parties to a contract approve a change in its scope, price, or both. The accounting for a contract modification depends on whether distinct goods or services are added to the arrangement, and on the related pricing in the modified arrangement. This page discusses both identifying and accounting for a contract modification, including comprehensive examples.

1 Identifying a contract modification

A contract modification is a change in the scope or price of a contract, or both. This may be described as a change order, a variation, or an amendment. When a contract modification is approved, it creates or changes the enforceable rights and obligations of the parties to the contract. Consistent with the determination of whether a contract exists in Step 1 of the model, this approval may be written, oral, or implied by customary business practices, and should be legally enforceable. [IFRS 15.18]

If the parties have not approved a contract modification, then an entity continues to apply the requirements of IFRS 15 to the existing contract until approval is obtained.

If the parties have approved a change in scope, but have not yet determined the corresponding change in price – i.e. an unpriced change order – then the entity estimates the change to the transaction price by applying the guidance on estimating variable consideration and constraining the transaction price (see variable consideration and the constraint) in Step 3 of IFRS 15. [IFRS 15.19]

Worked example – Assessing whether a contract modification is approved

Shipbuilder S is an experienced shipbuilder. One of its largest customers is CruiseLines C, for whom Shipbuilder S has previously built 11 cruise ships. Shipbuilder S agrees to build a 12th cruise ship for CruiseLines C and begins work on January 1, Year 1.

On January 1, Year 3, CruiseLines C informs Shipbuilder S that it wishes to amend the specifications of the new cruise ship to accommodate 50 additional staterooms. Shipbuilder S determines that in order to meet the request it would need to redesign three of the decks and procure additional materials.

Shipbuilder S and CruiseLines C discuss these changes and start preparing an amendment to the contract.

To determine whether to account for the contract modification, Shipbuilder S assesses whether it has created new, or changed existing, enforceable rights and obligations under the contract.

In making this determination, Shipbuilder S notes the following.

  • Although Shipbuilder S and CruiseLines C have not executed a contract amendment or formal change order for the additional materials, design services, or the construction labor necessary to complete the requested re- design and construction, changes of this nature are common.
  • When changes resulting from redesign have occurred in previous projects, CruiseLines C has compensated Shipbuilder S for the incremental costs along with a margin, as long as Shipbuilder S has been able to demonstrate that the additional costs are reasonable.
  • Despite the fact that there has been no formal written agreement on the change in scope or price, after consultation with its legal counsel Shipbuilder S determines that there is legal precedent for enforceability of similar types of arrangements in the jurisdiction.
  • Shipbuilder S has significant, relevant history with CruiseLines C through 11 previous shipbuilding contracts, which supports a conclusion that
  • CruiseLines C will agree to pay Shipbuilder S for additional costs along with a reasonable margin.
    Shipbuilder S fully expects that CruiseLines C will agree to, and be able to pay, the incremental fees in this specific case.
  • Considering all relevant facts and circumstances, Shipbuilder S has the necessary documentation to support its conclusion that enforceable rights and obligations have been established.

Shipbuilder S therefore concludes that the contract modification has been approved.

Conversely, if the facts and circumstances had been different, then the following factors may have indicated that the contract modification had not been approved.

There is an absence of legal precedent in the jurisdiction related to oral agreements of this nature, or Shipbuilder S’s counsel cannot determine whether the un-priced change order would be enforceable.

This is Shipbuilder S’s first project with CruiseLines C, so Shipbuilder S does not have relevant history or an established business practice with CruiseLines C to support a conclusion that there is an agreement between the parties that CruiseLines C will pay Shipbuilder S for additional costs along with a reasonable margin to create enforceable rights and obligations in the contract.

Previous experience with CruiseLines C has shown them to be reluctant or even unwilling to pay for incremental costs and related margin on any scope changes before their formal approval, which has usually been given only after extensive negotiations.

At the time of the contract modification, it was not probable that CruiseLines C would be able to pay any incremental fees resulting from the scope changes.

Applicable to all revenue contracts with customers

Under IFRS 15, the guidance on contract modifications applies to all contracts with customers, and may therefore result in a change in practice for entities in industries without construction- and production-type contracts – and even for industries with such contracts, depending on the type of modification.

Some entities will need to develop new processes – with appropriate internal controls – to identify and account for contract modifications on an ongoing basis under the new guidance.

Assessment focuses on enforceability

The assessment of whether a contract modification exists focuses on whether the new or amended rights and obligations that arise under the modification are enforceable. This determination requires an entity to consider all related facts and circumstances, including the terms of the contract and relevant laws and regulations.

This may require significant judgment in some jurisdictions or for some modifications, particularly if the parties to the contract have a dispute about the scope or the price. In cases of significant uncertainty about enforceability, written approval and legal representation may be required to support a conclusion that the parties to the contract have approved the modification.

Additional criteria to evaluate, including probability of collection

IFRS 15’s guidance on contract modifications does not explicitly address whether the entity should assess the collectibility of consideration when determining that a modification has been approved. However, the objective of the guidance and its focus on whether the modification creates enforceable rights and obligations are consistent with the guidance on identifying a contract in Step 1 of the model (see Step 1 Identify the contract with the customer ). [IFRS 15.13]

Also, in many cases a modification of the contract will be a ‘significant change in facts and circumstances’ and therefore will require the entity to reassess whether the Step 1 criteria for a contract are met. Under that guidance, the following criteria are used to determine whether a contract exists and to help assess whether a modification exists.

A contract exists if collection of consideration is highly probable

A contract exists if rights to goods or services and payment terms can be identified

A contract exists if it has commercial substance

A contract exists if it is approved and the parties are committed to their obligations

Relevant considerations when assessing whether the parties are committed to perform their respective obligations, and whether they intend to enforce their respective contract rights, may include whether:

  • the contractual terms and conditions are commensurate with the uncertainty, if any, about the customer performing the modification;
  • there is experience of the customer (or class of customer) not fulfilling its obligations in similar modifications under similar circumstances; and
  • the entity has previously chosen not to enforce its rights in similar modifications with the customer (or class of customer) under similar circumstances.

No specific guidance on accounting for contract claims

Contract claims are evaluated using the guidance on contract modifications. Assessing whether a contract modification related to a claim exists may require a detailed understanding of the legal position, including third-party legal advice, even when a master services agreement or other governing document prescribes the claim resolution process under the contract.

The assessment may be more straightforward if an objective framework for resolution exists – e.g. if the contract includes a defined list of cost overruns that will be eligible for reimbursement and a price list or rate schedule. Conversely, the mere presence of a resolution framework – e.g. a requirement to enter into binding arbitration instead of litigation – will generally not negate an entity’s need to obtain legal advice to determine whether its claim is enforceable. If enforceable rights do not exist for a contract claim, then a contract modification has not occurred and no additional contract revenue is recognized until either approval or legal enforceability is established.

An entity’s accounting for any costs incurred before approval of a contract modification will depend on the nature of the costs. In some circumstances, those costs will be expensed as they are incurred. In other circumstances, an entity will need to consider whether the expectation of costs without a corresponding increase in the transaction price requires the recognition of an onerous contract provision (see 10.7). Or, a contract modification may be considered a specifically anticipated contract such that the costs incurred before approval of the contract modification – i.e. pre-contract costs – may be considered for capitalization based on the new standard’s fulfillment cost guidance (see costs of fulfilling a contract in the link).

Partial contract terminations are accounted for as a contract modification

Termination clauses are evaluated in Step 1 of the model to determine the contract term for which enforceable rights and obligations exist. A substantive termination penalty is evidence that rights and obligations exist throughout the term to which the penalty applies. Once the contract term is established, the entity accounts for the contract on that basis – i.e. if the contract term is established on the basis that the customer will not terminate it, then the termination penalty is not included. Upon termination, any penalties whether included in the original contract or negotiated at the time the parties agree to the partial termination, are accounted for as a contract modification.

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For example, Company B enters into a contract with Customer C to provide a monthly service for a three-year period. Customer C has the right to cancel the service in Year 3 by paying a substantive termination penalty. Therefore, Company B determines that it has a three-year contract to provide a series of distinct services (i.e. a single performance obligation satisfied over time).

At the end of Year1, Customer C decides to cancel Year 3 of the contract and pay the termination penalty. Company B accounts for this partial termination as a contract modification because the existing enforceable rights and obligations under the contract have been changed – i.e. there is now only a two-year contract (one remaining year). Customer C’s termination payment is accounted for as consideration under the modified contract and recognized prospectively (see the next section ‘Accounting for a contract modification).

2 Accounting for a contract modification

To faithfully depict the rights and obligations arising from a modified contract, the new standard requires an entity to account for modifications either on a prospective basis (when the additional goods or services are distinct) or on a cumulative catch-up basis (when the additional goods or services are not distinct).

A contract modification is treated as a separate contract (prospective treatment) if the modification results in:

If these criteria are not met, then the entity’s accounting for the modification is based on whether the remaining goods or services under the modified contract are distinct from those goods or services transferred to the customer before the modification. [IFRS 15.21]

If they are distinct, then the entity accounts for the modification as if it were a termination of the existing contract and the creation of a new contract. In this case, the entity does not reallocate the change in the transaction price to performance obligations that are completely or partially satisfied on or before the date of the contract modification. Instead, the modification is accounted for prospectively and the amount of consideration allocated to the remaining performance obligations is equal to the:

  • consideration included in the estimate of the transaction price of the original contract that has not been recognized as revenue; plus or minus
  • increase or decrease in the consideration promised by the contract modification.

If the modification to the contract does not add distinct goods or services, then the entity accounts for it on a combined basis with the original contract, as if the additional goods or services were part of the initial contract – i.e. a cumulative catch- up adjustment. The modification is recognized as either an increase in or reduction to revenue at the date of modification.

The key decision points to consider when determining whether a contract modification should be accounted for as part of the original contract or a separate contract are illustrated in the following flow chart.

Accounting for a contract modification

If the transaction price changes after a contract modification, then an entity applies the guidance on changes in the transaction price (see changes in the transaction price part of step 2 in IFRS 15 in the link). [IFRS 15.90]

The following table provides examples of contract modifications, as well as how to account for these modifications.

Account for the contract modification as a separate contract

Account for the contract modification as a termination of an existing contract and creation of a new contract

Account for the contract modification as part of the original contract

Addition of a distinct good or service at an undiscounted price (e.g. a customer adds a text messaging package to an existing cellular phone service package and pays the standard price offered to customers for that additional package)

Contract Modifications under IFRS 15 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

Addition of a distinct good or service at a price that is discounted from its stand-alone selling price (e.g. a customer receives free premium channel cable service); all remaining services provided under the original contract are distinct

Modification of the contract price, with no change in the contracted goods or services and the remaining goods and services are distinct from those already delivered (e.g. a change in the unit price for the remaining quantity of homogeneous item)

Addition of a good or service to a contract that consists of a single, integrated performance obligation where that additional good or service is highly interrelated with the single performance obligation (e.g. changing the floor plan of a partially constructed house)

Modification of the contract price, with no change in the contracted goods or services and the remaining goods and services are not distinct from those already delivered (e.g. a change in the contract price of a highly customized piece of software)

Worked example – Contract modification – Additional goods or services

Construction Company G enters into a contract with Customer M to build a road for a contract price of 1,000. During the construction of the road, Customer M requests that a section of the road be widened to include two additional lanes. Construction Company G and Customer M agree that the price will increase by 200.

In evaluating how to account for the contract modification, Construction Company G first needs to determine whether the modification adds distinct goods or services.

  • If the road widening is not distinct from the construction of the road, then it becomes part of a single performance obligation that is partially satisfied at the date of the contract modification, and the measure of progress is updated using a cumulative catch-up method.
  • If the road widening is distinct, then Construction Company G needs to determine whether the additional 200 is commensurate with the stand-alone selling price of the distinct good.
    • If the 200 reflects its stand-alone selling price, then construction of the additional two lanes is accounted for separately from the original contract for construction of the road. This will result in prospective accounting for the modification as if it were a separate contract for the additional two lanes.
    • If the 200 does not reflect its stand-alone selling price, then the agreement to construct the additional two lanes is combined with the original agreement to build the road and the unrecognized consideration is allocated to the remaining performance obligations. Revenue is recognized when or as the remaining performance obligations are satisfied – i.e. prospectively.

Worked example – Contract modification – An un-priced change order

Company A enters into a contract with Customer B to build a specialized asset (Product S) for 1,000,000. Company A determines that revenue for the contract should be recognized over time using the cost-to-cost method. Company A estimates that the total cost of Product S will be 800,000 and incurs 600,000 in the first two years of the contract.

At the end of Year 2, Customer B asks Company A to make a complex change to Product S. Company A agrees and begins the work immediately. However, the corresponding change in transaction price will be determined subsequently. Company A estimates that the costs of Product S will increase by 200,000 and the consideration will increase by 300,000.

Company A assesses that the modification has created enforceable rights and obligations and that Company B will pay for the incremental efforts. Company A therefore concludes that the contract has been modified.

Because the contract includes only one performance obligation, which is being satisfied over time, the modification will be accounted for as part of the original contract. However, before including the estimated consideration in the transaction price, Company A considers whether the amount should be constrained.

Company A assesses all relevant factors and determines that it has sufficient experience in fulfilling similar change orders on similar contracts and past experience with this customer such that it is probable (highly probable under IFRS) that a reversal of revenue will not occur upon resolution of the uncertainty (i.e. agreement with Customer B on a price for the change order). Therefore, Company A updates its measure of progress and adjusts revenue for the modification as follows.

At the end of Year 2 Before modification After modification
Cumulative revenue 750,000a 780,000b
Adjustment to revenue 30,000c

Notes
a. Calculated as 1,000,000 x 600,000 ÷ 800,000.
b. Calculated as (1,000,000 + 300,000) x 600,000 ÷ (800,000 + 200,000).
c. Calculated as 780,000 – 750,000.

Company A therefore increases the cumulative amount of revenue recognized at the end of Year 2 by 30,000 to 780,000.

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Worked example – Contract modification – Partially satisfied performance obligation and additional distinct goods or services

Company A enters into a contract with Customer B for a specialized asset for consideration of 1,000,000. Company A has determined that the revenue should be recognized over time using the cost-to-cost method.

At the end of Year 1, Company A has satisfied 30% of its performance obligation. Therefore, Company A has recognized 300,000 of revenue up to the end of Year 1.

At the beginning of Year 2, the parties agree to change the specification of the customized asset and increase the consideration by 100,000. Additionally, Company A agrees with Customer B to deliver Product X for 120,000 along with the specialized asset.

Products S and X are distinct goods. The price of Product X is significantly discounted from its stand-alone selling price of 150,000.

Because the price of Product X is not commensurate with its stand-alone selling price, Product X cannot be accounted for as a separate contract. Therefore, both Product S and Product X are considered part of the same contract when accounting for the modification.

Company A accounts for the modification as follows.

Step (i) – Calculate the remaining consideration

Remaining consideration on original contract not yet recognized as revenue 700,000
Change order 100,000
Product X 120,000
Total remaining consideration 920,000

Step (ii) – Allocate the remaining consideration between Products S and X

The remaining consideration of 920,000 is allocated to Products S and X under the general guidance in Step 4 of the model as follows.

Stand-alone selling
prices
Percent allocated Allocated amounts
Remaining for Product S 900,000 85.7% 788,571
Product X 150,000 14.3% 131,429
Total 1,050,000 100.0% 920,000

Step (iii) – Record a cumulative catch-up adjustment for the partially satisfied performance obligation

For the partially satisfied performance obligation (Product S), Company A accounts for the contract modification as part of the original contract. Therefore, Company A updates its measure of progress and estimates that it has satisfied 27.4% of its performance obligation after revising its cost-to-cost measure of progress for the revised expected costs. As a consequence, Company A calculates the following adjustment to reduce revenue previously recognized:
1,732 = 27.4% complete × 1,088,571a modified transaction price allocable to Product S – 300,000 revenue recognized to date.

When Company A transfers control of Product X it recognizes revenue in the amount of 131,429.

Note
a. Calculated as 300,000 + 788,571.

Different approaches for common types of contract modifications

To determine the appropriate accounting under the new standard, an entity will need to evaluate whether the modification adds distinct goods or services, and, if so, whether the prices of those distinct goods or services are commensurate with their stand-alone selling prices. This determination will depend on the specific facts and circumstances of the contract and the modification, and may require significant judgment.

Companies entering into construction-type contracts or project-based service contracts (e.g. a service contract with a defined deliverable such as a valuation report) may often account for contract modifications on a combined basis with the original contract. However, modifications to other types of contracts for goods (e.g. a sale of a number of distinct products), or services (e.g. residential television or internet services, or hardware/software maintenance services) may often result in prospective accounting.

Distinct goods or services in a series that are treated as a single performance obligation are considered separately

Sometimes an entity needs to apply the contract modification guidance in the new standard to a series of distinct goods or services that is accounted for as a single performance obligation. In this case, the entity considers the distinct goods or services in the contract, rather than the single performance obligation.

3 The IFRS 15 contract modification example

Just two practical examples, to better understand all kind of things for IFRS 15.

On 1 January 20X1, Wireless Company enters into a two-year contract with a customer for a 2-gigabyte (GB) data plan with unlimited talk and text for CU60/month and a subsidised handset for which the customer pays CU200. Contract Modifications under IFRS 15

The handset has a stand-alone selling price of CU600. Contract Modifications under IFRS 15

For purposes of this illustration, the time value of money has not been considered, the stand-alone selling price of the wireless plan is assumed to be the same as the contractual price and the effect of the constraint on variable consideration is not considered. Wireless Company allocates the transaction price, as follows: Contract Modifications under IFRS 15

Amounts in CU

Consideration

Stand-alone selling price

Allocated transaction price

Handset

200

600

482

Wireless plan

1,440

1,440¹ ²

1,158¹

Total

1,640³

2,040² ³

1,640

¹ CU1,440 (SSP Wireless plan) -/- CU282² = CU1,158 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
² (CU400³ X CU1,440 / CU 2,040) = CU282 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
³ Discount CU2,040 -/- CU1,640 = CU400 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

The allocated transaction price for the handset (CU482) is recognised as revenue when the customer takes possession of the handset (at the time of sale). The CU1,158 service revenue is recognised over the two-year contract term (or CU48.25/month). A contract asset of CU282 is established at the time the handset revenue is recognised, representing the difference between the revenue recognised and the cash received. This asset is reduced each month by the portion of the monthly service fee that was allocated to the handset (CU11.75). Follow this for additional explanations on allocating the transaction price. Contract Modifications under IFRS 15

The following two scenarios address when a customer modifies the terms of their contract to decrease (Scenario 1) or increase (Scenario 2) their data service plan.Contract Modifications under IFRS 15

Scenario 1

On 1 July 20X1, the customer downgrades his wireless data plan from 2GB to the 1GB data plan for the remaining term of the contract (18 months). The 1GB plan is priced at CU50/month, which is the current price that is available to all customers. Contract Modifications under IFRS 15

Wireless Company determines that this modification does not create a separate contract because it does not add goods and services to the arrangement.

However, to determine the appropriate accounting for the modification, Wireless Company assesses whether the remaining goods and services (18 months of service) are distinct from the goods and services already provided to the customer (handset and six months of service). Contract Modifications under IFRS 15

At contract inception, the entity had determined that each month of wireless data service was distinct. Therefore, at the date of the modification, Wireless Company determines that the remaining monthly services are distinct from the handset and services already provided to the customer. Contract Modifications under IFRS 15

As a result, Wireless Company allocates the remaining consideration to be received to the remaining performance obligations (CU50 per month x 18 months remaining in contract), less the amount that has already been allocated to the delivered goods or services (i.e., the contract asset). Contract Modifications under IFRS 15

In this fact pattern, the contract asset was initially CU282, but is reduced to CU211.50 at the date of the modification. As a result, the entity has CU688.50 to allocate to the remaining monthly service, or CU38.25 per month. Contract Modifications under IFRS 15

Scenario 2Scenario

Assume the customer increases his data plan from 2GB to 3GB for the remaining term of the contract (18 months). The 3G plan is priced at CU70/month, which is the current price that is available to all customers. Contract Modifications under IFRS 15

This modification results in an additional 1GB of data for the remaining term of the contract and, therefore, represents the addition of goods and services.

In narrow circumstances, such as this scenario, where the modified service will be delivered monthly over the remaining term of the contract with no other performance obligations added that have a different delivery of service, the distinction of whether the modification is treated as a separate contract or as the termination of an old contract and creation of a new contract has no effect on the accounting result, as illustrated below. Contract Modifications under IFRS 15

If Wireless Company determines that the additional 1GB of data is distinct (Note – The customer can benefit from the 1GB of data on its own or together with other resources and the promise to provide that data is separately identifiable from the other services in the contract) and the price of the contract has increased by the additional good or service’s stand-alone selling price, the additional service would be treated as a separate contract. Wireless Company would recognise the CU10 each month over the remaining contract term in addition to the original amount of service revenue of CU48.25, resulting in a total amount of revenue of CU58.25 recognised each month. Contract Modifications under IFRS 15

Alternatively, Wireless Company may determine that the 1GB of data for CU10 is not at the wireless entity’s stand-alone selling price. In this case, the modification cannot be treated as a separate contract. Instead, it is accounted for as a termination of the existing contract and the creation of a new contract.Contract Modifications under IFRS 15

Wireless Company may also view the contract modification simply as a termination of the 2 GB data plan and the addition of a 3 GB data plan.

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At contract inception, the entity had determined that each month of wireless data service was distinct. Contract Modifications under IFRS 15

Therefore, at the date of the modification, Wireless Company determines that the remaining monthly services are distinct from the handset and services already provided to the customer. As a result, Wireless Company allocates the consideration to be received to the new performance obligation (CU70 per month x 18 months remaining in contract), less the amount that has already been allocated to the delivered goods or services (i.e., the contract asset) (Note – The contract asset was initially CU282, but it has been reduced to CU211.50 at the date of the modification). As a result, the entity has CU1,048.50 to allocate to the remaining monthly service (CU58.25 per month). Contract Modifications under IFRS 15

IFRS 15 Telecom Family share plan (or Master service agreements)

A potential complexity for telecom entities, as it relates to accounting for contract modifications, pertains to family share plans. Under those plans, telecom entities frequently allow their customers to modify their contractual obligations (i.e., the goods and services signed up for under the plan) at will and many customers have a history of making frequent modifications. This practice will likely result in telecom entities needing systems to track and adjust their accounting for frequent modifications. Contract Modifications under IFRS 15

For example, a common modification to a family share plan involves adding an additional handset, offered at a subsidised price, to the existing data plan. An access fee is charged for the new line each month and the shared data plan is extended to two years from the date of the modification (i.e., if the new handset is added three months into an existing 24-month data plan, the data plan is extended from 21 remaining months to 24 months). Contract Modifications under IFRS 15

The following illustration highlights the complexity of accounting for a modification to a family share plan. Contract Modifications under IFRS 15

In January 20X1, two individuals (Family A) enter into a wireless share plan with a two-year contract with Wireless Company. Family A agrees to pay CU150/month for a 4GB shared data plan (that includes unlimited talk and text), the same amount as the stand-alone selling price. Both individuals select the same smartphone at the subsidised price of CU200 (with a stand-alone selling price of CU600). Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

For simplicity, assume that Wireless Company does not charge activation fees. Any data in excess of 4GB is rounded up to the next GB and priced at CU10 per extra GB. This is the standard pricing for all customers. There is a CU320 early termination penalty for cancelling the plan. This penalty decreases over the contract term.

For purposes of this example, there are no rebates, incentives or other discounts provided and the time value of money has not been considered. Furthermore, to simplify this example, there is no variable consideration, and we do not consider the effect of the constraint on variable consideration.  Contract Modifications under IFRS 15

The following table illustrates, at contract inception, the allocation of the transaction price and revenue recognised under the new standard:

Amounts in CU

Consideration

Stand-alone selling price

Allocated transaction price

Handset Contract Modifications under IFRS 15

400

1,200

1,000

Wireless plan Contract Modifications under IFRS 15

3,600

3,600¹ ²

3,000¹

Total

4,000³

4,800² ³

4,000

¹ CU3,600 (SSP Wireless plan) -/- CU600² = CU3,000 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
² (CU800³ X CU3,600 / CU 4,800) = CU600 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
³ Discount CU4,800 -/- CU4,000 = CU800 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

On day 1, the day the contract is signed and the handsets are activated and delivered to the individuals, Wireless Company will recognise the CU400 cash received from Family A; CU1,000 of revenue, which represents the allocated transaction price for the handset; and a contract asset of CU600, or the difference between the cash received and the revenue recognised.

The amounts allocated to the service plan will be recognised over the two-year service term (or CU125 per month), and contract asset will be reduced over the same period (or CU25 per month).

On 1 April 20X1, Family A contacts Wireless Company and adds another smartphone to share in their existing data plan. Family A purchases a phone for CU200 (stand-alone selling price of CU600) and signs up for a two-year agreement; the 4GB data is not changed. Contract Modifications under IFRS 15

The shared data plan will now be priced at CU190/month. Because the additional handset was sold at a subsidised price, the data plan is extended for three months to match the full 24-month period of the contract (required in order to receive a subsidised device). Cont ract Modifications under IFRS 15

In addition, while not common in practice, assume for simplicity that all three lines in the example are required to stay for the full two-year term starting from the date of the modification.

Wireless Company must now determine whether this modification represents a change in the previously promised goods or services under the arrangement, the addition of distinct goods or services or a combination of the two. The addition of the handset for the third individual and the three additional months of the data plan are additions of distinct goods and services.

However, the handset would not have been offered at a subsidised price without the previously contracted data plan. Therefore, the modification cannot be treated as a separate contract.

As a result, Wireless Company has to determine the remaining consideration associated with the contract and allocate it to the remaining performance obligations.

This amount is calculated as CU200 (handset consideration) + CU4,560 (CU190 x 24 for the monthly service) – CU525 (remaining contract asset allocated to the handsets already delivered) = CU4,235. The allocation after the modification in this scenario would be the following: Contract Modifications under IFRS 15

Amounts in CU

Stand-alone selling price

Allocated transaction price

Handset Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

600

492

Wireless plan Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

4,560

3,743

Total

5,160

4,235

On 1 April 20X1 (the day the contract is modified and the handset for the third individual is activated and delivered to the customer), Wireless Company will record the CU200 cash received from Family A for the handset and CU492 in revenue, which represents the allocated transaction price for the handset. Contract Modifications under IFRS 15

A contract asset of CU292 is also recognised and represents the difference between the cash received and the revenue recorded.Construction contracts revenue - over time or at a point in time?

At the end of April and going forward, Family A will pay the CU190 bill at the end of each month and the Wireless Company will recognise CU155.96 as service revenue with the remaining CU34.04 (composed of CU21.87 reduction from original contract asset and CU12.17 from modification) applied against the remaining contract asset. Contract Modifications under IFRS 15

Since there has been a change in the estimated useful life for the initial contract asset (because the first two lines were required to extend three additional months, as noted above) the remaining amount for the initial contract asset will be amortised over the modified contract period of 24 months. Contract Modifications under IFRS 15

Therefore, the initial contract asset will be reduced by the same amount each month (CU21.87) through the end of the contract term, and the contract asset associated with the modification is reduced each month (CU12.17) over the contract term. Contract Modifications under IFRS 15

(Note: This illustration addressed a contract modification to a family share plan in which all of the lines are under a subsidised handset plan combined with a shared data service arrangement. Wireless entities that offer handset installment plans for handsets will reach different conclusions based on the facts and circumstances of their handset installment plans.)

Contract Modifications under IFRS 15

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Contract Modifications under IFRS 15

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