Revenue – ifrs 15 handbook

Partial contract terminations are accounted for as contract 
modifications
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. On termination, any penalties, whether they 
are included in the original contract or negotiated when the parties agree to the 
partial termination, are accounted for as a contract modification.
For example, Company B enters into a contract with Customer C to provide a 
monthly service for a three-year period. C has the right to cancel the service in 
Year 3 by paying a substantive termination penalty. Therefore, 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, C decides to cancel Year 3 of the contract and pay the 
termination penalty. 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). C’s termination payment is accounted for as consideration 
under the modified contract and recognised prospectively (see 
Section 8.2
).
8.2 
Accounting for a contract modification
An entity accounts for a contract modification either as a separate contract (i.e. on 
a prospective basis) or as part of the original contract (i.e. on a cumulative catch-up 
basis). The following flowchart illustrates 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.

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8 Contract modifications | 199
8.2 Accounting for a contract modification
| 
Yes
No
Yes
No
Yes
No
Account for as
separate contract
(prospective)
Account for as
termination of existing
contract and creation
of new contract
(prospective)
Account for as part
of original contract
(cumulative catch-up)
Are remaining goods or
services distinct from
those already transferred?
Does it add distinct goods
or services that are priced
commensurate with stand-
alone selling prices?