C.8 Contract Modifications (Chapter 9 of the Roadmap)
C.8.1 Contract Asset Treatment in Contract Modifications — Implementation Q&A 81 (Compiled From TRG Agenda Papers 51 and 55)
The revenue standard provides an overall framework for modification
accounting.26 For example, when a contract modification meets the conditions in ASC
606-10-25-13(a), the modification is accounted for prospectively as a
termination of the existing contract and creation of a new one. The revenue
standard also requires entities to record contract assets27 in certain circumstances, and these assets may still be recorded at the
time of a contract modification.
When a contract modification meets the conditions in ASC
606-10-25-13(a), contract assets that existed before the modification should be
carried forward to the new contract and realized as receivables28 are recognized (i.e., revenue is not reversed, leading to prospective
accounting for the effects of the contract assets).
This accounting reflects the objective of ASC 606-10-25-13. As noted in
Implementation Q&A 81, ASC 606-10-25-13(a)(1) “explicitly states that the
starting point for the determination [of the allocation in a modification] is
the transaction price in the original contract less what had already been
recognized as revenue.” Further, this accounting is consistent with paragraph
BC78 of ASU 2014-09, which notes that the intent of ASC 606-10-25-13(a) is to
avoid adjusting revenue for performance obligations that have been satisfied
(i.e., such modifications would be accounted for prospectively).