1. Introduction
Modern revenue management applications often provide functionality to discard customer contracts at various stages of processing. Discarding typically involves changing the contract and all associated performance obligations (POBs) to a discarded status, setting the transaction price to zero, reversing any previously created accounting entries, reopening source transaction lines, and allowing the system to re-identify contracts using updated source data or identification rules.
This section clarifies whether such functionality is supported by ASC 606 and IFRS 15 and explains how contract discarding can be aligned with accounting standards in a compliant and auditable manner.
2. Absence of “Discarding” Guidance in ASC 606 and IFRS 15
ASC 606 and IFRS 15 do not define or recognize a concept of “discarding” a customer contract. Once a contract meets the criteria for identification under ASC 606-10-25-1 / IFRS 15.9, the standards require the entity to account for the contract using prescribed mechanisms only.
Specifically, the standards do not permit:
- Nullifying an identified contract
- Resetting a contract’s transaction price to zero retroactively
- Eliminating performance obligations without a defined accounting basis
As a result, discarding is not an accounting-standard concept and must be carefully evaluated when used in revenue systems.
3. Permitted Accounting Treatments Under the Standards
While discarding itself is not recognized, ASC 606 and IFRS 15 provide specific mechanisms to address changes or issues related to customer contracts:
3.1 Contract Termination
If both parties are released from remaining obligations, the contract is terminated prospectively. Revenue recognized to date is not reversed, and remaining performance obligations are extinguished.
3.2 Contract Modification
When scope and/or price change, the modification is accounted for either prospectively or through cumulative catch-up accounting depending on whether remaining goods or services are distinct.
3.3 Estimate Correction
Changes in estimates related to transaction price, variable consideration, or progress measurement are accounted for through cumulative catch-up adjustments in the current period.
3.4 Error Correction (ASC 250 / IAS 8)
When a contract was incorrectly identified due to system configuration errors, incorrect source data, or flawed identification rules, the correction falls under error correction guidance rather than revenue recognition guidance.
4. Interpreting “Discarding” as an Error Correction Mechanism
In practice, contract discarding functionality can be aligned with accounting standards only when it represents correction of an error, such as:
- Incorrect customer or legal entity assignment
- Improper grouping or splitting of source transactions
- Misapplied contract identification rules
- Invalid contracts that never met enforceability criteria
In these scenarios, discarding serves as a system-level recovery mechanism to undo invalid contract identification and allow reprocessing based on corrected data or configuration.
When properly documented, this treatment aligns with ASC 250 / IAS 8 error correction, not ASC 606 contract modification guidance.
5. Scenarios Where Discarding Is Not Permitted
Discarding must not be used to:
- Avoid cumulative catch-up accounting
- Restructure revenue outcomes
- Circumvent contract modification rules
- Reverse valid revenue recognition solely due to unfavorable results
Using discarding in such cases would be considered non-compliant and could be challenged as revenue manipulation.
6. Accounting Implications of Zeroing Transaction Price
Setting the transaction price to zero and reversing accounting entries may resemble contract cancellation; however, ASC 606 and IFRS 15 do not permit retroactive cancellation of valid contracts. Revenue already recognized can only be reversed if:
- It was recognized in error, or
- The contract explicitly includes refund or return rights
Therefore, zeroing transaction price must be justified strictly within an error correction framework.
7. Relationship Between System Actions and Accounting Interpretation
| System Action | Accounting Interpretation |
| Discard contract | Correction of invalid contract identification |
| Discard POBs | POBs never validly existed |
| Reverse accounting | Reversal of erroneous recognition |
| Reopen source lines | Data or configuration correction |
| Re-identify contract | Proper application of ASC 606 identification criteria |
8. Governance and Control Expectations
To ensure compliance and audit defensibility, organizations enabling contract discarding should establish:
- A formal policy restricting discarding to identification errors
- Defined approval workflows involving revenue accounting and finance leadership
- Complete audit trails documenting original contracts, discard reasons, reversals, and re-identified contracts
- Role-based access controls and segregation of duties
9. Conclusion
ASC 606 and IFRS 15 do not recognize discarding as an accounting treatment. However, when implemented as a controlled system mechanism to correct contract identification errors, discarding can be aligned with accounting standards through error correction guidance under ASC 250 and IAS 8. Proper documentation, governance, and restriction of use are essential to ensure compliance and withstand audit scrutiny.
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