Solution

Under IFRS 15, when a contract is modified, the modification is accounted for either as a separate contract or as part of the original contract, depending on the nature of the modification.

If the modification is for additional distinct goods or services at their standalone selling prices, it is treated as a separate contract. If not, the modification is accounted for as an adjustment to the transaction price of the original contract.

In this case, KLC Limited and Mr. K modify their contract to reduce the monthly service fee from $55,000 to $45,000. The services are the same, so they are not additional distinct services. Therefore, this modification would be accounted for as a part of the original contract.

The effect of this modification would be a reduction in the transaction price of the contract. The reduction would be the difference between the original monthly fee and the modified monthly fee, multiplied by the number of months remaining in the service period from the modification date.

So, if we assume the service period is from 1 April 2018 to 31 March 2019, and the contract is modified on 1 October 2018, there would be 6 months remaining in the service period. Therefore, the transaction price would decrease by ($55,000 - $45,000) x 6 = $60,000. This change in the transaction price would be allocated to the remaining performance obligations in the contract, and the revenue recognized over the remaining service period would be adjusted accordingly.