Revenue from Contracts with Customers, PRESENTED the concept of Contract Modification IFRS 15 and further outlined how entities should recognize and report revenue from customer contracts.
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What is Contract Modification IFRS 15?
A Contract Modification occurs when the terms of a contract are changed, either through an agreement between the parties or due to changes in circumstances.
This can INCLUDE changes to the goods or services to be provided, the price, the timing, or other key terms of the contract.
Modifications can be made BEFORE or AFTER the performance obligations have been fulfilled.
Impact of Contract Modification IFRS 15
Under IFRS 15, a contract modification has a SIGNIFICANT impact on the accounting for revenue from customer contracts. Depending on the nature of the modification, it may result in the recognition of additional revenue, a change in the timing of revenue recognition, or a change in the amount of revenue recognized.
One of the Key Implications of contract modification under IFRS 15 is the requirement to REASSESS the performance obligations in the contract. This reassessment is necessary to determine the impact of the modification on the contract’s transaction price and performance obligations. e.g, if the modification adds new goods or services to the contract, the entity may need to recognize ‘additional revenue‘ as a result.
Another Impact is that it may result in a CHANGE in the timing of revenue recognition. This can occur if the modification affects the timing of when performance obligations are fulfilled. e.g, if a modification changes the delivery date of goods or services, the entity may need to recognize revenue at a different point in time.
Finally, contract modification may also Impact the amount of revenue recognized under the contract. This can occur if the modification changes the transaction price. e.g, if the modification results in a price increase, the entity will need to recognize the additional revenue.
Contract Modification IFRS 15 – Accounting
The accounting treatment required for contract modification under IFRS 15 depends on the NATURE of the modification and the impact it has on the contract.
In general, contract modifications are treated as separate contracts if they meet the criteria for separate contracts under IFRS 15.
If a contract modification MEETS the criteria for separate contracts, the entity must APPLY the revenue recognition requirements of IFRS 15 to each contract separately. This means that the entity must reassess the performance obligations and transaction price for each contract and recognize revenue accordingly.
However, if the contract modification does NOT MEET the criteria for separate contracts, it is accounted for as a single contract. In this case, the entity must REASSESS the performance obligations and transaction price for the entire contract and recognize revenue accordingly.
The Bottom Line
Contract Modification IFRS 15 is a SIGNIFICANT issue, as it can impact the ‘recognition’ and ‘reporting’ of Revenue from Contracts with Customers.
To ensure COMPLIANCE with IFRS 15, entities must understand the impact of Contract Modification and apply the appropriate accounting treatments. This may involve reassessing the performance obligations and transaction price and recognizing additional revenue, changing the timing of revenue recognition, or changing the amount of revenue recognized.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)