This free, guided checker walks your finance team through the key decision points for ASC 606 Contract Modification Accounting. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level US GAAP screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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A contract modification is an approved change in the scope or the price (or both) of a contract that creates new or changes existing enforceable rights and obligations (ASC 606-10-25-10). A movement in the transaction price caused only by re-estimating variable consideration promised at inception is not a modification; it is allocated under ASC 606-10-32-42 through 32-45. The common trap is treating a price concession that was anticipated at inception as a modification when it was already variable consideration.
Not a contract modification - allocate the change in the transaction price under ASC 606-10-32-42 through 32-45.
Official guidance: FASB Accounting Standards Codification
Approval can be written, oral, or implied by customary business practices; the accounting question is whether enforceable rights and obligations changed, which can require legal input depending on the contract and jurisdiction (ASC 606-10-25-10 and 25-11). Until a modification is approved, continue to apply ASC 606 to the existing contract. Do not recognize revenue for unapproved extra work merely because performance has already begun.
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Official guidance: FASB Accounting Standards Codification
A contract modification can exist even though the parties dispute the scope or the price, or have approved the scope but not yet the price (ASC 606-10-25-11). When the scope change is approved but unpriced, account for the modification now and estimate the change to the transaction price using the variable consideration guidance in ASC 606-10-32-5 through 32-9, constrained under ASC 606-10-32-11 through 32-13. The trap is recognizing claim revenue before enforceable rights to consideration are supportable under the contract terms and the legal framework.
No enforceable modification yet - continue applying ASC 606 to the existing contract until the modification is approved (ASC 606-10-25-10). Assess enforceability; until enforceable rights exist, continue accounting for the existing contract and constrain any claim amounts (ASC 606-10-25-11; ASC 606-10-32-11 through 32-13).
Official guidance: FASB Accounting Standards Codification
Separate-contract treatment under ASC 606-10-25-12 is available only when the scope of the contract increases because of the addition of promised goods or services. Price-only changes, scope reductions, and respecifications of existing promises can never be separate contracts; they move directly to the analysis of the remaining goods and services under ASC 606-10-25-13. Partial terminations are modifications too - do not simply stop recognizing the descoped items without running this analysis.
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Official guidance: FASB Accounting Standards Codification
Apply the two-part distinct test: the customer can benefit from the added good or service on its own or together with readily available resources, and the promise is separately identifiable from the other promises in the contract (ASC 606-10-25-19 through 25-21). Added work on a single combined output - common in construction and integration arrangements - typically is not distinct because the entity provides a significant integration service. Evaluate each added promise, not the change order as a whole.
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Official guidance: FASB Accounting Standards Codification
Determine standalone selling price under ASC 606-10-32-31 through 32-34: observable standalone prices where available, otherwise the adjusted market assessment, expected cost plus a margin, or residual approaches. ASC 606-10-25-12(b) permits adjustments for the circumstances of the particular contract, such as a discount because the entity does not incur the selling-related costs it would incur with a new customer. Document why any difference from list or standalone pricing still reflects standalone selling price - unsupported discounts fail this test.
Account for the modification as a separate contract; the original contract is unaffected (ASC 606-10-25-12).
Official guidance: FASB Accounting Standards Codification
ASC 606-10-25-13 turns on whether the goods or services not yet transferred at the modification date are distinct from those transferred on or before that date. Distinct remaining items are accounted for prospectively, as if the old contract terminated and a new one began; a partially satisfied single performance obligation is updated through a cumulative catch-up to revenue; a mixture applies each approach to the respective elements. Run the assessment promise by promise - a single change order frequently touches both populations.
Account for the modification as a termination of the existing contract and creation of a new contract - prospective treatment (ASC 606-10-25-13(a)). Account for the modification as part of the existing contract with a cumulative catch-up adjustment to revenue (ASC 606-10-25-13(b)). Apply both treatments to the respective elements of the modified contract (ASC 606-10-25-13(c)).
Official guidance: FASB Accounting Standards Codification
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