Revenue – ifrs 15 handbook

Example 3 – 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 construction of the road, M requests that a 
section of the road be widened to include two additional lanes. G and M agree 
that the price will increase by 200.
In evaluating how to account for the contract modification, 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 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 unrecognised consideration 
is allocated to the remaining performance obligations. Revenue is 
recognised when or as the remaining performance obligations are 
satisfied – i.e. prospectively.
Example 4 – Contract modification: An unpriced change order
Company M enters into a contract with Customer B to build a specialised asset 
(Product S) for 1 million. M determines that building S is a single performance 
obligation and that revenue for the contract should be recognised over time 
using the cost-to-cost method. M estimates that the total cost of S will be 
800,000 and incurs 600,000 in the first two years of the contract.
At the end of Year 2, B asks M to make a complex change to S. M agrees 
and begins the work immediately. However, the corresponding change in 
transaction price will be determined subsequently. M estimates that the costs 
of S will increase by 200,000 and the consideration will increase by 300,000. 
M assesses that the modification has created enforceable rights and obligations 
and that B will pay for the incremental efforts. M therefore concludes that the 
contract has been modified.

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202 | Revenue – IFRS 15 handbook
Because the contract includes only one performance obligation, which is 
being satisfied over time, M accounts for the modification as part of the 
original contract. However, before including the estimated consideration in the 
transaction price, M considers whether the amount should be constrained. 
M assesses all relevant factors and determines that it has sufficient experience 
in fulfilling similar change orders on similar contracts and past experience with 
B such that it is highly probable that a reversal of revenue will not occur on 
resolution of the uncertainty (i.e. agreement with B on a price for the change 
order). Therefore, M updates its measure of progress and adjusts revenue for 
the modification as follows.