STEP 1. IDENTIFY THE CONTRACT

Question 1

How to identify a contract with customers? What criteria must meet the contract?

Answer 1

Contracts can be written, oral, or implied by the entity’s business practices.

Contracts with customers must meet ALL the following criteria:

• The contract must have commercial substance.
• The contract must be approved by all parties to the contract.
• Each party’s rights regarding goods and services to be transferred can be identified.
• The payment terms for goods and services to be transferred can be identified.
• Each party is committed to perform their obligations.
• It is probable that the entity will collect the consideration to which it is entitled.

Question 2

What is a Combining contracts? How are accounted?

Answer 2

Combining contracts are one or more contracts that are entered into at (or near) the same time with the same customer (or related party)

Are accounted for as a single contract if any of the following applies:

• Package with a single commercial objective:
  The contracts are negotiated as a package with a single commercial objective.
• Interdependent consideration:
  The consideration receivable under each of the contracts is interdependent on each other.
• Single performance obligation:
  The goods or services to be provided under the contracts in total represents a single performance condition.

Question 3

What are Contract modifications?

Answer 3

Contract modifications are changes in the scope and/or price of the contract.

Question 4

When are Contract modifications accounted for as a separate contract?

Answer 4

A contract modification is only accounted for as a separate contract if there is both:

• Change in scope: New/additional goods or services are ‘distinct’ (refer to Step #2)
• Change in price: The change in price is reflective of the standalone selling price of the new/additional goods or services

Question 5

What are the three approaches to accounting for contract modifications that do not result in a separate contract?

Answer 5

1. Termination: applied when there is a change in scope.
   Replace the original contract with a new contract
2. Continuation: applied when the scope remain the same and there is only a single performance obligation.
   Treat modification as part of the original contract. There will be an adjustment to revenue recognised to date
3. Mixed: applied when the scope remain the same and there is not only a single performance obligation.
   Approach will be a mixture of (1) and (2)