9.3 Reassessing Step 1 Upon a Contract Modification
Contract modifications tend to occur because despite all of the planning that an
entity and its customer can do, unforeseen challenges can cause business needs to
change. A modification could change the terms of a contract so significantly that
the modified contract does not resemble the original contract. Once a contract is
modified, a company might question whether the contract still meets the contract
existence criteria in step 1 (see Chapter 4).
ASC 606-10-25-5 states that an entity should reassess the criteria
in ASC 606-10-25-1 for identifying a contract with a customer only if “there is an
indication of a significant change in facts and circumstances.” The nature of a
contract modification and the circumstances in which it is made will determine
whether it should be deemed to reflect a significant change in facts and
circumstances as contemplated in ASC 606-10-25-5. For example, a contract
modification may sometimes be caused by a significant deterioration in the
customer’s ability to pay (i.e., a significant change in the expectation of
collectibility since contract inception), which is included in ASC 606-10-25-5 as an
example of a circumstance necessitating reassessment of the ASC 606-10-25-1
criteria.
If a reassessment is deemed necessary and leads to a conclusion that
one or more of the criteria in ASC 606-10-25-1 are not met (e.g., if it is no longer
probable that the entity will collect the consideration to which it will be
entitled), the contract should subsequently be accounted for in accordance with ASC
606-10-25-7.
The required accounting for modifications of contracts that continue
to meet the criteria in ASC 606-10-25-1 is described in ASC 606-10-25-10 through
25-13.