Contract Modifications
Changes to Existing Contracts
Contracts may change after inception through price adjustments, additional goods or services, or scope changes. ASC 606 provides guidance on whether modifications are treated as separate contracts or as changes to existing contracts.
- Separate contract if additional goods are distinct and priced at standalone selling prices.
- Prospective accounting when remaining goods are distinct.
- Cumulative catch-up adjustment when remaining goods are not distinct.
Note
Properly identifying the type of contract modification is essential for accurate revenue recognition.
Summary
Contract modifications may require separate accounting, prospective treatment, or cumulative adjustments depending on the circumstances.