1. Commercial Substance and Enforceability Criteria
A contract exists under the standard only if it is legally enforceable and satisfies all five criteria:
  • The parties have approved the contract and are committed to performing their obligations.
  • Each party’s rights regarding the goods or services to be transferred can be identified.
  • The payment terms for the goods or services can be identified.
  • The contract has commercial substance (the risk, timing, or amount of the entity’s future cash flows is expected to change).
  • It is probable that the entity will collect the consideration to which it is entitled.

For the collection criterion, under IFRS, “probable” means more likely than not (>50%), whereas under US GAAP, it is interpreted as a higher threshold (“likely to occur,” typically evaluated at ~75-80%).
2. Contract Modifications: Separate Contract vs. Prospective Adjustment
A contract modification is a change in the scope or price (or both) of a contract. The accounting treatment depends on the independence of the changes:
                           ┌───────────────────────────┐
                           │   Contract Modification   │
                           └─────────────┬─────────────┘
                                         │
                 ┌───────────────────────┴───────────────────────┐
                 ▼                                               ▼
    Are scope items DISTINCT                        Are scope items DISTINCT 
     AND priced at their standalone                  but NOT priced at standalone
     selling prices?                                 selling prices?
                 │                                               │
                 ▼                                               ▼
     ┌───────────────────────┐                       ┌───────────────────────┐
     │   Separate Contract   │                       │Prospective Adjustment │
     └───────────────────────┘                       └───────────────────────┘
       Treat modification as                           Terminate old contract;
       a completely independent                        allocate remaining price
       new engagement.                                 to remaining open items.

If the remaining goods/services are not distinct from those already transferred, the modification is treated as part of the original contract, causing a cumulative catch-up adjustment to revenue on the modification date.
 
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