Revenue – ifrs 15 handbook

Example 2 – Contract claim for delays caused by the customer
Construction Company B enters into a contract with Customer C to build an 
office block on C’s land for 500,000. The contract specifies the construction 
start date – 1 March – but B is not able to start its work until 15 March because 
the site is not ready. The contract does not include specific terms that apply if 
C fails to provide access to the land on time. Based on the advice of its legal 
counsel, B raises a claim under the general disputes clause in the contract for 
costs incurred as a result of the delay in the amount of 10,000. C disagrees with 
the claim and the parties enter into negotiations. 
B determines that the claim does not represent variable consideration because 
it is not a contractual penalty. Instead, B accounts for the claim as a contract 
modification. 
Assessment focuses on enforceability
The assessment of whether a contract modification exists focuses on whether 
the new or amended rights and obligations that arise under the modification 
are enforceable. This determination requires an entity to consider all related 
facts and circumstances, including the terms of the contract and relevant laws 
and regulations. This may require significant judgement in some jurisdictions 
or for some modifications, particularly if the parties to the contract have a 
dispute about the scope or the price. In cases of significant uncertainty about 
enforceability, written approval and legal representation may be required 
to support a conclusion that the parties to the contract have approved 
the modification.
Criteria to determine when a modification is approved
IFRS 15.13
The standard’s guidance on contract modifications does not explicitly address 
whether the entity should assess the collectability of consideration when 
determining that a modification has been approved. However, the objective of 
the guidance and its focus on whether the modification creates enforceable 
rights and obligations are consistent with the guidance on identifying a contract 
in Step 1 of the model (see 
Chapter 1
). 
Also, in many cases a modification of the contract will be a ‘significant change 
in facts and circumstances’ and therefore will require the entity to reassess 
whether the Step 1 criteria for a contract are met. Under that guidance, the 
following criteria are used to determine whether a contract exists and to help 
assess whether a modification exists.

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8 Contract modifications | 197
8.1 Identifying a contract modification
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