Contract modifications: test prospective versus catch-up effects
A contract amendment can change current revenue even when no new cash arrives. Determine whether the added promise is a separate contract, changes only future delivery, or updates one continuing performance obligation. The useful output is a before-and-after contract calculation with the modification date preserved.
Identify what was approved
The relevant IFRS framework is IFRS 15. The historical December 2022 AASB 15 compilation, paragraphs 18–21, makes its IFRS-aligned modification mechanics publicly inspectable. That Australian compilation has a specified applicability period; the example illustrates a general commercial mechanism and does not assert that the historical edition governs every current issuer.
Copy the approved scope, consideration, approval evidence and enforceable date. A commercial discussion is not necessarily an approved change. Distinguish added distinct goods priced consistently with standalone selling prices from changes to work already integrated into one performance obligation. A signed amendment is evidence to examine, not sufficient by itself to select the accounting outcome.
Hypothetical continuous project
Assume a project is one performance obligation satisfied over time. Original consideration is 1,000 thousand and expected total cost is 800. Before modification, incurred qualifying cost is 400 and cost-to-cost progress is appropriate. Cumulative revenue is therefore 500.
An approved modification adds integrated work and 200 of consideration. Revised expected total cost becomes 1,000, including the original 400 already incurred. Assume the remaining work is not distinct from the existing obligation. Revised progress is 40%, and revised cumulative revenue is 1,200 times 40%, or 480. The immediate catch-up adjustment is negative 20.
| Project calculation | Before change | After change |
|---|---|---|
| Total consideration | 1,000 | 1,200 |
| Expected total cost | 800 | 1,000 |
| Cost incurred | 400 | 400 |
| Assumed valid progress | 50% | 40% |
| Cumulative revenue | 500 | 480 |
A larger contract value has reduced cumulative recognized revenue in this hypothetical case. The reason is that the work needed to earn the enlarged consideration increased faster than the measured progress. Describing the amendment only as 20% additional revenue capacity would miss the current-period consequence.
Contrast a distinct future service
Now assume an unrelated maintenance service is added at its standalone selling price and is distinct from the project. Under the stated separate-contract assumptions, it does not remeasure the project’s already recognized 500 merely because the same customer signs it. Future maintenance revenue follows its own performance.
For remaining distinct goods where separate-contract conditions are not met, a prospective allocation can instead be relevant. Do not force all modifications into either the negative-20 example or the separate-service example. Record the issuer’s actual treatment and the facts supporting it before calculating any adjustment.
Use an amendment worksheet
Create columns for original obligation, delivered portion, remaining goods, distinctness assessment, added consideration, revised costs, progress measure, cumulative revenue before change and required revenue after change. Separate the immediate catch-up from later delivery revenue and invoicing. Include change orders that are disputed or not yet priced as unresolved items with their own status.
Recheck whether the cost base includes inefficiencies or uninstalled materials that require special treatment. A mechanically correct percentage can still misrepresent progress if its inputs do not depict performance. Public project notes may omit the necessary cost data; label any reconstruction as conditional rather than manufacturing a complete bridge.
Observe repeated scope amendments, declining estimated margins and retroactive price concessions. These triggers help distinguish additional work from a revised assessment of already promised economics. The final memo should say which event changed the calculation, why the treatment applies under stated assumptions and how much current revenue reflects the update rather than new physical delivery.
A useful audit trail preserves the old budget exactly as it stood before approval, so the negative catch-up can be independently reproduced later.
FAQ
Does a higher contract price always increase current revenue?
No. The example’s revised progress reduces cumulative revenue despite a larger total price.
Is a catch-up adjustment automatically an accounting error?
No. An approved change to a continuing obligation can require an update without implying that the previous estimate was erroneous.