Issue link: https://construction.trimble.com/en/resources/i/1520032
Page | 8 A general contractor was awarded a contract to build a new hospital for $250 Million. After construction has started, the hospital approves a modifi cation for an additional pediatric wing to be built on the hospital property. Both the contractor and the hospital agree to modify the contract to include the construction of the pediatric wing for a total price of $270 Million, to be completed within nine months. Based on similar contracts, the general contractor would normally charge $21 Million to build the pediatric wing; however, the contractor expects to take advantage of various effi ciencies at the job site, given that most of the equipment and labor resources necessary for the additional build-out are already on site. Accordingly, the $20 Million refl ects the standalone selling price of the additional service to be provided at the date of the modifi cation. How should this situation be accounted for? Answer The contracts are closely interrelated and the contracts are required to be combined. The change order may qualify as a separate performance obligation. EXAMPLE: CONTRACT MODIFICATION ACCOUNTING RESULTING IN A NEW AND SEPARATE CONTRACT (I.E. PROSPECTIVELY) Identifying Contracts with Customers (continued) > entity should account for the modifi cation as if it were a part of the existing contract. The eff ect that the modifi cation has on the transaction price, and on the entity's measure of progress towards satisfaction of the performance obligation, is recognized as an adjustment to revenue either as an increase in or a reduction of revenue at the date of the modifi cation. The adjustment to revenue is made on a cumulative catch-up basis. 3. If the remaining goods or services are a combination of the above two items, the entity should account for the eff ect of the modifi cation on the unsatisfi ed (which includes items that are partially unsatisfi ed) performance obligations in the modifi ed contract in a manner that is consistent with the objectives of the modifi cations guidance discussed above.