Revenue – ifrs 15 handbook

8.1 
Identifying a contract modification
IFRS 15.18
A contract modification is a change in the scope or price of a contract, or both. 
This may be described as a change order, a variation or an amendment. When a 
contract modification is approved, it creates or changes the enforceable rights and 
obligations of the parties to the contract. Consistent with the determination of 
whether a contract exists in Step 1 of the model, this approval may be written, oral 
or implied by customary business practices and should be legally enforceable.
If the parties have not approved a contract modification, then an entity continues 
to apply the requirements of the standard to the existing contract until approval 
is obtained.
IFRS 15.19
If the parties have approved a change in scope, but have not yet determined 
the corresponding change in price – i.e. an unpriced change order – then the 
entity estimates the change to the transaction price by applying the guidance 
on estimating variable consideration and constraining the transaction price (see 
Section 3.1
).
Example 1 – Assessing whether a contract modification is 
approved
Shipbuilder S is an experienced shipbuilder. One of its largest customers is 
CruiseLines C, for whom S has previously built 11 cruise ships. S agrees to build 
a 12th cruise ship for C and begins work on 1 January Year 1.
On 1 January Year 3, C informs S that it wishes to amend the specifications of 
the new cruise ship to accommodate 50 additional staterooms. S determines 
that in order to meet the request it would need to redesign three of the decks 
and procure additional materials. S and C discuss these changes and start 
preparing an amendment to the contract.

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8 Contract modifications | 195
8.1 Identifying a contract modification
| 
To determine whether to account for the contract modification, S assesses 
whether it has created new, or changed existing, enforceable rights and 
obligations under the contract.
In making this determination, S notes the following.
– Although S and C have not executed a contract amendment or formal change 
order for the additional materials, design services or the construction labour 
necessary to complete the requested redesign and construction, changes of 
this nature are common.
– When changes resulting from redesign have occurred in previous projects, C 
has compensated S for the incremental costs along with a margin, as long as 
S has been able to demonstrate that the additional costs were reasonable.
– Despite the fact that there has been no formal written agreement on 
the change in scope or price, after consultation with its legal counsel S 
determines that there is legal precedent for enforceability of similar types of 
arrangements in the jurisdiction. 
– S has significant, relevant history with C through 11 previous shipbuilding 
contracts, which supports a conclusion that C will agree to pay S for 
additional costs along with a reasonable margin.
– S fully expects that C will agree to, and be able to pay, the incremental fees in 
this specific case.
– Considering all relevant facts and circumstances, S has the necessary 
documentation to support its conclusion that enforceable rights and 
obligations have been established.
S therefore concludes that the contract modification has been approved.
Conversely, if the facts and circumstances had been different, then the 
following factors may have indicated that the contract modification had not 
been approved.
– There was no legal precedent in the jurisdiction related to oral agreements of 
this nature or S’s counsel could not determine whether the unpriced change 
order would be enforceable.
– This was S’s first project with C, so S did not have relevant history or an 
established business practice with C to support a conclusion that there was 
an agreement between the parties that C would pay S for additional costs 
along with a reasonable margin to create enforceable rights and obligations in 
the contract.
– Previous experience with C had shown it to be reluctant or even unwilling to 
pay for incremental costs and related margin on any scope changes before 
their formal approval, which has usually been given only after extensive 
negotiations.
– At the time of the contract modification, it was not probable that C would be 
able to pay any incremental fees resulting from the scope changes.

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196 | Revenue – IFRS 15 handbook