Contract modification

A contract modification begins when the parties approve a change that creates or changes enforceable rights and obligations. Approval can be written, oral, or implied by customary business practice. Until approval occurs, continue to account for the existing contract. An approved scope change can exist before the parties settle its price; in that case, estimate the price change under the variable-consideration guidance. These boundaries come before the three accounting paths in ASC 606-10-25-10 through 25-11.

Use a separate contract only when the added goods or services are distinct. The added price must also reflect standalone selling price. Adjust that price for supported contract circumstances. ASC 606-10-25-12 allows a supported adjustment, such as selling costs avoided with an existing customer. A price below a public list price therefore does not decide the path.

If the separate-contract test fails, classify what remains under ASC 606-10-25-13:

• Remaining goods or services that are distinct from those already transferred use prospective accounting. Combine unrecognized consideration from the original contract with modification consideration and allocate it to the remaining performance.
• Remaining work that is not distinct from a partially satisfied performance obligation changes transaction price and progress through a cumulative catch-up on the modification date.
• A mix of those facts requires an approach consistent with both paths.

“Change order” is only a document label. The decision record must preserve approval, enforceability, added scope and price, standalone-selling-price evidence, remaining distinctness, and the resulting schedule. Study the worked Cedar Trail modification, then complete the independent Northstar practice.