Contract Modifications under IFRS 15

Contract Modifications under IFRS 15 – Just two practical examples, to better understand all kind of things for IFRS 15.

On 1 January 20X1, Wireless Company enters into a two-year contract with a customer for a 2-gigabyte (GB) data plan with unlimited talk and text for CU60/month and a subsidised handset for which the customer pays CU200. Contract Modifications under IFRS 15

The handset has a stand-alone selling price of CU600. Contract Modifications under IFRS 15

For purposes of this illustration, the time value of money has not been considered, the stand-alone selling price of the wireless plan is assumed to be the same as the contractual price and the effect of the constraint on variable consideration is not considered. Wireless Company allocates the transaction price, as follows: Contract Modifications under IFRS 15

Amounts in CU

Consideration

Stand-alone selling price

Allocated transaction price

Handset

200

600

482

Wireless plan

1,440

1,440¹ ²

1,158¹

Total

1,640³

2,040² ³

1,640

¹ CU1,440 (SSP Wireless plan) -/- CU282² = CU1,158 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
² (CU400³ X CU1,440 / CU 2,040) = CU282 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
³ Discount CU2,040 -/- CU1,640 = CU400 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

The allocated transaction price for the handset (CU482) is recognised as revenue when the customer takes possession of the handset (at the time of sale). The CU1,158 service revenue is recognised over the two-year contract term (or CU48.25/month). A contract asset of CU282 is established at the time the handset revenue is recognised, representing the difference between the revenue recognised and the cash received. This asset is reduced each month by the portion of the monthly service fee that was allocated to the handset (CU11.75). Follow this for additional explanations on allocating the transaction price. Contract Modifications under IFRS 15

The following two scenarios address when a customer modifies the terms of their contract to decrease (Scenario 1) or increase (Scenario 2) their data service plan. Contract Modifications under IFRS 15

Scenario 1

On 1 July 20X1, the customer downgrades his wireless data plan from 2GB to the 1GB data plan for the remaining term of the contract (18 months). The 1GB plan is priced at CU50/month, which is the current price that is available to all customers. Contract Modifications under IFRS 15

Wireless Company determines that this modification does not create a separate contract because it does not add goods and services to the arrangement.

However, to determine the appropriate accounting for the modification, Wireless Company assesses whether the remaining goods and services (18 months of service) are distinct from the goods and services already provided to the customer (handset and six months of service). Contract Modifications under IFRS 15

At contract inception, the entity had determined that each month of wireless data service was distinct. Therefore, at the date of the modification, Wireless Company determines that the remaining monthly services are distinct from the handset and services already provided to the customer. Contract Modifications under IFRS 15

As a result, Wireless Company allocates the remaining consideration to be received to the remaining performance obligations (CU50 per month x 18 months remaining in contract), less the amount that has already been allocated to the delivered goods or services (i.e., the contract asset). Contract Modifications under IFRS 15

In this fact pattern, the contract asset was initially CU282, but is reduced to CU211.50 at the date of the modification. As a result, the entity has CU688.50 to allocate to the remaining monthly service, or CU38.25 per month. Contract Modifications under IFRS 15

Scenario 2

Assume the customer increases his data plan from 2GB to 3GB for the remaining term of the contract (18 months). The 3G plan is priced at CU70/month, which is the current price that is available to all customers. Contract Modifications under IFRS 15

This modification results in an additional 1GB of data for the remaining term of the contract and, therefore, represents the addition of goods and services.

In narrow circumstances, such as this scenario, where the modified service will be delivered monthly over the remaining term of the contract with no other performance obligations added that have a different delivery of service, the distinction of whether the modification is treated as a separate contract or as the termination of an old contract and creation of a new contract has no effect on the accounting result, as illustrated below. Contract Modifications under IFRS 15

If Wireless Company determines that the additional 1GB of data is distinct (Note – The customer can benefit from the 1GB of data on its own or together with other resources and the promise to provide that data is separately identifiable from the other services in the contract) and the price of the contract has increased by the additional good or service’s stand-alone selling price, the additional service would be treated as a separate contract. Wireless Company would recognise the CU10 each month over the remaining contract term in addition to the original amount of service revenue of CU48.25, resulting in a total amount of revenue of CU58.25 recognised each month. Contract Modifications under IFRS 15

Alternatively, Wireless Company may determine that the 1GB of data for CU10 is not at the wireless entity’s stand-alone selling price. In this case, the modification cannot be treated as a separate contract. Instead, it is accounted for as a termination of the existing contract and the creation of a new contract.Contract Modifications under IFRS 15

Wireless Company may also view the contract modification simply as a termination of the 2 GB data plan and the addition of a 3 GB data plan.

At contract inception, the entity had determined that each month of wireless data service was distinct. Contract Modifications under IFRS 15

Therefore, at the date of the modification, Wireless Company determines that the remaining monthly services are distinct from the handset and services already provided to the customer. As a result, Wireless Company allocates the consideration to be received to the new performance obligation (CU70 per month x 18 months remaining in contract), less the amount that has already been allocated to the delivered goods or services (i.e., the contract asset) (Note – The contract asset was initially CU282, but it has been reduced to CU211.50 at the date of the modification). As a result, the entity has CU1,048.50 to allocate to the remaining monthly service (CU58.25 per month). Contract Modifications under IFRS 15

IFRS 15 Telecom Family share plan (or Master service agreements)

A potential complexity for telecom entities, as it relates to accounting for contract modifications, pertains to family share plans. Under those plans, telecom entities frequently allow their customers to modify their contractual obligations (i.e., the goods and services signed up for under the plan) at will and many customers have a history of making frequent modifications. This practice will likely result in telecom entities needing systems to track and adjust their accounting for frequent modifications. Contract Modifications under IFRS 15

For example, a common modification to a family share plan involves adding an additional handset, offered at a subsidised price, to the existing data plan. An access fee is charged for the new line each month and the shared data plan is extended to two years from the date of the modification (i.e., if the new handset is added three months into an existing 24-month data plan, the data plan is extended from 21 remaining months to 24 months). Contract Modifications under IFRS 15

The following illustration highlights the complexity of accounting for a modification to a family share plan. Contract Modifications under IFRS 15

In January 20X1, two individuals (Family A) enter into a wireless share plan with a two-year contract with Wireless Company. Family A agrees to pay CU150/month for a 4GB shared data plan (that includes unlimited talk and text), the same amount as the stand-alone selling price. Both individuals select the same smartphone at the subsidised price of CU200 (with a stand-alone selling price of CU600). Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

For simplicity, assume that Wireless Company does not charge activation fees. Any data in excess of 4GB is rounded up to the next GB and priced at CU10 per extra GB. This is the standard pricing for all customers. There is a CU320 early termination penalty for cancelling the plan. This penalty decreases over the contract term.

For purposes of this example, there are no rebates, incentives or other discounts provided and the time value of money has not been considered. Furthermore, to simplify this example, there is no variable consideration, and we do not consider the effect of the constraint on variable consideration.  Contract Modifications under IFRS 15

The following table illustrates, at contract inception, the allocation of the transaction price and revenue recognised under the new standard:

Amounts in CU

Consideration

Stand-alone selling price

Allocated transaction price

Handset Contract Modifications under IFRS 15

400

1,200

1,000

Wireless plan Contract Modifications under IFRS 15

3,600

3,600¹ ²

3,000¹

Total

4,000³

4,800² ³

4,000

¹ CU3,600 (SSP Wireless plan) -/- CU600² = CU3,000 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
² (CU800³ X CU3,600 / CU 4,800) = CU600 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15
³ Discount CU4,800 -/- CU4,000 = CU800 Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

On day 1, the day the contract is signed and the handsets are activated and delivered to the individuals, Wireless Company will recognise the CU400 cash received from Family A; CU1,000 of revenue, which represents the allocated transaction price for the handset; and a contract asset of CU600, or the difference between the cash received and the revenue recognised.

The amounts allocated to the service plan will be recognised over the two-year service term (or CU125 per month), and contract asset will be reduced over the same period (or CU25 per month).

On 1 April 20X1, Family A contacts Wireless Company and adds another smartphone to share in their existing data plan. Family A purchases a phone for CU200 (stand-alone selling price of CU600) and signs up for a two-year agreement; the 4GB data is not changed. Contract Modifications under IFRS 15

The shared data plan will now be priced at CU190/month. Because the additional handset was sold at a subsidised price, the data plan is extended for three months to match the full 24-month period of the contract (required in order to receive a subsidised device). Cont ract Modifications under IFRS 15

In addition, while not common in practice, assume for simplicity that all three lines in the example are required to stay for the full two-year term starting from the date of the modification.

Wireless Company must now determine whether this modification represents a change in the previously promised goods or services under the arrangement, the addition of distinct goods or services or a combination of the two. The addition of the handset for the third individual and the three additional months of the data plan are additions of distinct goods and services.

However, the handset would not have been offered at a subsidised price without the previously contracted data plan. Therefore, the modification cannot be treated as a separate contract.

As a result, Wireless Company has to determine the remaining consideration associated with the contract and allocate it to the remaining performance obligations.

This amount is calculated as CU200 (handset consideration) + CU4,560 (CU190 x 24 for the monthly service) – CU525 (remaining contract asset allocated to the handsets already delivered) = CU4,235. The allocation after the modification in this scenario would be the following: Contract Modifications under IFRS 15

Amounts in CU

Stand-alone selling price

Allocated transaction price

Handset Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

600

492

Wireless plan Contract Modifications under IFRS 15 Contract Modifications under IFRS 15

4,560

3,743

Total

5,160

4,235

On 1 April 20X1 (the day the contract is modified and the handset for the third individual is activated and delivered to the customer), Wireless Company will record the CU200 cash received from Family A for the handset and CU492 in revenue, which represents the allocated transaction price for the handset. Contract Modifications under IFRS 15

A contract asset of CU292 is also recognised and represents the difference between the cash received and the revenue recorded. Construction contracts revenue - over time or at a point in time?

At the end of April and going forward, Family A will pay the CU190 bill at the end of each month and the Wireless Company will recognise CU155.96 as service revenue with the remaining CU34.04 (composed of CU21.87 reduction from original contract asset and CU12.17 from modification) applied against the remaining contract asset. Contract Modifications under IFRS 15

Since there has been a change in the estimated useful life for the initial contract asset (because the first two lines were required to extend three additional months, as noted above) the remaining amount for the initial contract asset will be amortised over the modified contract period of 24 months. Contract Modifications under IFRS 15

Therefore, the initial contract asset will be reduced by the same amount each month (CU21.87) through the end of the contract term, and the contract asset associated with the modification is reduced each month (CU12.17) over the contract term. Contract Modifications under IFRS 15

(Note: This illustration addressed a contract modification to a family share plan in which all of the lines are under a subsidised handset plan combined with a shared data service arrangement. Wireless entities that offer handset installment plans for handsets will reach different conclusions based on the facts and circumstances of their handset installment plans.)

Contract Modifications under IFRS 15

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