A vendor's existing contract with a customer is modified to add an additional quantity of a distinct product that is priced at the same standalone selling price the vendor charges other customers for that product in similar circumstances, and the total contract price increases by exactly that additional amount. Under ASC 606-10-25-12, how should the vendor account for this modification?
- As a separate contract, with the accounting for the original contract unaffected by the modification
- As a cumulative catch-up adjustment to revenue already recognized under the original contract
- As a termination of the original contract and creation of an entirely new contract combining all remaining goods and services
- As a change requiring restatement of all revenue previously recognized under the original contract
Correct answer: A. As a separate contract, with the accounting for the original contract unaffected by the modification
ASC 606-10-25-12 requires a contract modification to be accounted for as a separate contract when it adds distinct goods or services and the price increases by an amount that reflects the standalone selling price of those additional goods or services, adjusted as appropriate for the circumstances — exactly the facts given here — and in that case the original contract's accounting is left unaffected. A cumulative catch-up adjustment is instead the approach used under ASC 606-10-25-13(b) when the modification is not treated as separate and the remaining goods or services are not distinct from those already transferred, which is not what these facts describe. Treating the modification as a termination of the old contract and creation of a new one describes the prospective approach under ASC 606-10-25-13(a), used when the remaining goods or services are distinct from those already provided but the additional goods are not priced at standalone selling price, which again does not match a modification priced exactly at standalone selling price. Because this modification qualifies as a separate contract, there is no basis for restating revenue already recognized under the original, unmodified contract.
Source: FASB Accounting Standards Codification: ASC 606-10-25-12 and 606-10-25-13, Revenue from Contracts with Customers — Contract Modifications