A customer adds products, negotiates a discount or changes a project halfway through delivery. Before changing the revenue schedule, decide whether the amendment creates a separate contract, changes revenue for the remaining deliveries or requires a catch-up adjustment today.
That decision depends on what the customer will receive and how the additional price relates to standalone selling prices. A new purchase order or an amendment labelled “renewal” does not settle the accounting.
The examples below use fictional contracts and original calculations. They assume approved, enforceable modifications, fixed consideration, collectibility and no financing, tax, refund or other complications. They isolate modification accounting; your contract assessment still needs to address its full terms.
Start with the contract change
Under ASC 606-10-25-10 through 25-13, approval creates or changes enforceable rights and obligations. Approval can be written, oral or established through customary business practices; an unsigned document alone does not answer the question. If scope is approved while price remains unsettled, assess enforceability and the variable-consideration requirements. FASB, ASU 2014-09, paragraphs 606-10-25-10 through 25-13.
Apply these criteria once you have established the modification:
- Additional distinct goods or services, with additional consideration reflecting their standalone selling prices, including appropriate contract-specific adjustments: Separate contract.
- Separate-contract test fails, but remaining goods or services are distinct from those already transferred: Prospective accounting for the remaining goods or services.
- Remaining work forms part of an existing, partially satisfied performance obligation and is not distinct: Cumulative catch-up adjustment.
- Remaining promises include both distinct and non-distinct elements: Apply the principles to the relevant parts under paragraph 25-13(c).
For the broader framework, see our ASC 606 revenue recognition explainer.
Example 1: Added products at standalone selling price
A supplier contracts to deliver 100 identical units for $20,000, or $200 each. Each unit is distinct, and the customer obtains control on delivery.
After delivering 40 units, the supplier agrees to provide 30 additional units for $6,600. The supported standalone selling price at the modification date is $220 per unit, and the original 60 undelivered units retain their terms.
The addition meets the separate-contract test. The supplier keeps the original order's accounting and records revenue on the added order as it delivers those units.
- Original units already delivered: Units: 40; Revenue per unit: $200; Revenue: $8,000.
- Original units still to deliver: Units: 60; Revenue per unit: $200; Revenue: $12,000.
- Additional units: Units: 30; Revenue per unit: $220; Revenue: $6,600.
- Total: Units: 130; Revenue: $26,600.
Assume the supplier invoices each shipment when control transfers and has an unconditional right to payment. For a later shipment of 10 original units and 5 additional units, the revenue entry is:
- Accounts receivable: Debit: $3,100.
- Revenue: Credit: $3,100.
The calculation is 10 × $200 plus 5 × $220. The supplier also records the associated inventory and cost-of-sales entry, omitted here because the example does not specify unit costs.
Review point: Keep support for the $220 standalone selling price. A price below a published list price can still reflect standalone selling price after appropriate adjustments; document the circumstances instead of treating any discount as an automatic failure.
Example 2: Added products at a price that fails the separate-contract test
Use the same original order: 100 units for $20,000, with 40 units delivered and $8,000 recognized. This time, the customer adds 30 units for $3,000.
Assume the $100 incremental unit price does not reflect standalone selling price, even after considering appropriate adjustments. The discount relates entirely to future units; it does not compensate the customer for defects or other issues with earlier deliveries.
The supplier has 90 distinct units left to deliver: 60 from the original order and 30 from the amendment. It allocates the remaining $12,000 plus the additional $3,000 across those 90 identical units.
Remaining revenue per unit = ($12,000 + $3,000) ÷ 90 = $166.6667.
- Before modification: Units: 40; Revenue: $8,000.
- First remaining shipment: Units: 30; Revenue: $5,000.
- Second remaining shipment: Units: 30; Revenue: $5,000.
- Final shipment: Units: 30; Revenue: $5,000.
- Total: Units: 130; Revenue: $23,000.
The supplier leaves the $8,000 already recognized unchanged. At the modification date, these assumptions produce no immediate revenue entry; the supplier updates the schedule for future deliveries.
Assume all amounts are unbilled at the modification date and each subsequent 30-unit shipment is billed at $5,000 when control transfers. Each shipment produces:
- Accounts receivable: Debit: $5,000.
- Revenue: Credit: $5,000.
Different billing terms would change the receivable or contract-balance entries. They would not, by themselves, change the revenue allocation calculated above.
Review point: Reconcile both the units and the money. The revised schedule must account for 130 units and $23,000 in total, including the 40 units already delivered. Rounding each remaining unit to $166.67 without a final adjustment would overstate total revenue by $0.30.
FASB's Revenue Recognition Implementation Q&As also distinguish prospective treatment from catch-up accounting by reference to whether the remaining goods or services are distinct from those already transferred. The number of performance obligations in the original contract alone does not resolve that assessment.
Example 3: A change to an integrated construction project
A contractor agrees to build a facility for $1,000,000 and expects $800,000 of total costs. Assume the project is one performance obligation satisfied over time, and an unadjusted cost-to-cost measure faithfully depicts progress.
The contractor has incurred $320,000 of costs. Before the modification, it has recognized $400,000 of revenue: $320,000 ÷ $800,000 × $1,000,000.
The customer approves an integrated design change that adds $200,000 to the contract price. The contractor revises total expected costs to $1,000,000, including the work already performed, and concludes that the remaining work is not distinct from the partially completed facility.
- Revised transaction price: $1,200,000.
- Revised total expected costs: $1,000,000.
- Costs incurred to date: $320,000.
- Revised progress: $320,000 ÷ $1,000,000: 32%.
- Revised cumulative revenue: 32% × $1,200,000: $384,000.
- Revenue previously recognized: $400,000.
- Catch-up adjustment: $(16,000).
The contractor reduces revenue by $16,000 at the modification date. The larger contract price does not guarantee an upward adjustment: expected costs have increased enough to reduce cumulative revenue under these assumptions.
Assume cumulative billings and collections remain $300,000, so the contractor has a $100,000 contract asset immediately before the modification. The entry is:
- Revenue: Debit: $16,000.
- Contract asset: Credit: $16,000.
The remaining contract asset is $84,000, equal to $384,000 cumulative revenue less $300,000 billings. The entry does not create a refund or reverse a receivable under the stated facts.
If the contractor later reaches $600,000 of cumulative costs with no further estimate changes, cumulative revenue becomes $720,000. Revenue since the modification is therefore $336,000: $720,000 less $384,000.
Review point: Recalculate the percentage of completion using the revised cost forecast before applying it to the revised transaction price. Carrying forward the old 40% measure would produce $480,000 and miss the effect of the expanded scope.
Build a reviewable modification memo
Attach the original contract, amendment and approval evidence. Record the effective date, consideration, delivered items and remaining promises in one reconciliation, so the reviewer can reproduce the opening position.
Then explain the judgment with contract facts. Identify what makes the added or remaining promises distinct, show the standalone-price evidence where relevant and name the applicable paragraph of ASC 606-10-25-12 or 25-13.
Finish with the revised revenue schedule and the entry, including a reconciliation to receivables, contract assets or contract liabilities. Assign someone to confirm that billing and revenue systems use the approved schedule from the same effective date.
For contracts with variable consideration, credits for past performance, material rights or mixed promises, expand the analysis before using one of these examples. Give the reviewer the facts that could change the conclusion alongside the calculation you propose to book.
