A vendor modifies an existing contract partway through performance to add more units of a good that is distinct from the goods already delivered, but the additional units are priced below their standalone selling price given the customer's specific circumstances (not at the price the vendor charges other customers). Under ASC 606-10-25-13, how should this modification be accounted for?
- As a termination of the original contract and creation of a new, separate contract for only the additional units
- Prospectively, as if it were the termination of the existing contract and the creation of a new contract, with the unrecognized consideration from the original contract combined with the additional consideration and reallocated across the remaining distinct goods or services
- Retrospectively, by restating all revenue recognized to date under the original contract as if the modified terms had always applied
- By recognizing a cumulative catch-up adjustment to revenue in the period of modification, as if the additional units had already been part of the original performance obligation
Why B? And why not the others?
Correct answer: B. Prospectively, as if it were the termination of the existing contract and the creation of a new contract, with the unrecognized consideration from the original contract combined with the additional consideration and reallocated across the remaining distinct goods or services
ASC 606-10-25-13(b) addresses modifications where the remaining goods or services are distinct from those already transferred but are not priced at their standalone selling price (for example because of a customer-specific discount); the standard requires accounting for such a modification prospectively as if the existing contract had been terminated and a new contract created, in which the consideration not yet recognized under the original contract is combined with the additional consideration promised under the modification and allocated to the remaining performance obligations. The option that creates a separate contract only for the additional units, ignoring the leftover unrecognized consideration from the original contract, misses that this treatment specifically requires combining both pools of consideration rather than accounting for the addition in isolation. Retrospective restatement of revenue already recognized is never appropriate for a contract modification under ASC 606, since the standard is built around accounting prospectively from the point of modification forward and never reopens performance obligations already satisfied. A cumulative catch-up adjustment applies instead to the separate scenario in ASC 606-10-25-13(c), where the remaining goods or services are not distinct from those already delivered, which is a different fact pattern from the distinct-but-discounted units described here.
Source: FASB Accounting Standards Codification: ASC 606-10-25-13(b), Revenue from Contracts with Customers — Contract Modifications