What is Contract Modification?
A contract modification is a change to the scope or price of an existing contract that is approved by both parties. Under IFRS 15, the modification is either treated as a separate contract, as a termination and creation of a new contract, or as part of the existing contract, depending on its nature.
How It Works
- Determine if the modification adds distinct goods or services at standalone prices.
- If yes, treat as a separate contract.
- If it adds distinct goods or services at non-standalone prices, terminate the old contract and create a new one.
- If goods or services remain part of an existing performance obligation, adjust revenue prospectively or cumulatively.
Saudi Context
Saudi contractors regularly handle variation orders under construction contracts, applying the IFRS 15 modification framework to determine whether each variation is a separate contract or part of the original.
Example
A SAR 1 million addition to a construction contract at the same unit price as the original work and adding new distinct scope is accounted for as a separate contract.