Contract Modification under ASC 606: Understanding the Basics
ASC 606, or Accounting Standards Codification 606, is the new revenue recognition standard that has been implemented by the Financial Accounting Standards Board (FASB). It replaces the previous revenue recognition standard ASC 605. One of the key changes that ASC 606 has brought about is the way in which companies account for contract modifications.
A contract modification is any change made to an existing contract. It can be a change to the terms and conditions of the contract, the scope of work, or the price. Under ASC 605, companies were required to account for contract modifications separately. This meant that they had to determine whether the modification was a separate contract or a modification to an existing contract.
Under ASC 606, however, companies are required to take a different approach. They are now required to account for contract modifications as part of the original contract. This means that any changes made to the original contract must be accounted for in the same way as the original contract.
To understand this better, let`s take an example. Suppose a company enters into a contract with a customer to provide services for a year for a total price of $100,000. After six months, the customer decides to add additional services for an additional $50,000. Under ASC 605, the company would have to determine whether the modification was a separate contract or a modification to the existing contract. However, under ASC 606, the company would simply add the additional $50,000 to the original contract and account for it as part of the original contract.
This change in approach has significant implications for companies. Under ASC 606, companies are required to estimate the transaction price for the entire contract, including any modifications. This means that they must take into account any potential changes that may be made to the contract, and estimate the impact of those changes on the transaction price.
Another key aspect of the new standard is that companies are required to assess the impact of contract modifications on the timing of revenue recognition. This means that companies must determine whether the modification results in a change to the timing of revenue recognition, and if so, adjust their revenue recognition accordingly.
In conclusion, contract modification under ASC 606 is a significant change from the previous revenue recognition standard. Companies are now required to account for contract modifications as part of the original contract, and to estimate the transaction price for the entire contract, including any modifications. They must also assess the impact of contract modifications on the timing of revenue recognition. As a professional, it is important to ensure that any articles or content related to ASC 606 and contract modification are clear and easy to understand for readers.