4.8 Wholly Unperformed Contracts
An entity may have entered into a legal contract with a customer under which neither party has
performed and either party can cancel the contract for no consideration.
ASC 606-10
25-4 For the purpose of applying the guidance in this Topic, a contract does not exist if each party to the
contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating
the other party (or parties). A contract is wholly unperformed if both of the following criteria are met:
- The entity has not yet transferred any promised goods or services to the customer.
- The entity has not yet received, and is not yet entitled to receive, any consideration in exchange for promised goods or services.
As previously discussed in Section
4.3.1, the revenue standard does not apply to wholly unperformed
contracts that allow either party the unilateral ability to terminate a contract.
See Section 4.4.1 for further
discussion of termination provisions. If an entity enters into a contract with a
customer and only the entity can cancel the contract (i.e., the customer does not
have an ability to terminate the contract), the contract exists for accounting
purposes under ASC 606 because the entity has an enforceable right to consideration
if it chooses to perform (e.g., transfer goods or services to the customer).