Contract Modification
A contract modification is a change in the scope, the price, or both, of a contract that is approved by the parties. It can be written, oral, or implied by customary business practice.
Revenue Recognition
Explanation
ASC 606 and IFRS 15 define three accounting treatments:
1. Separate contract – if distinct goods or services are added at prices reflecting their standalone selling prices. The original contract is unchanged.
2. Prospective treatment – if the remaining goods or services are distinct from those already transferred. The original contract is treated as terminated and a new contract is created; remaining consideration is allocated to remaining obligations.
3. Cumulative catch-up – if the remaining goods or services are part of a single, partially satisfied performance obligation. Revenue to date is adjusted at the modification date.
A single modification can require a combination of these treatments.
Why It Matters
In subscription, service, and leasing businesses, modifications happen constantly: upgrades, extensions, price changes, early terminations. Each change type needs a defined accounting treatment and a system process. SAP Revenue Accounting and Reporting (RAR) supports both prospective and retrospective handling of contract changes, depending on configuration.
Related Terms
Performance Obligation · Allocation · Standalone Selling Price · Contract Combination · Lease Modification
Related Articles
• Contract Modifications: Prospective vs. Cumulative Catch-up
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