This is an example in a small series for illustrating the concepts in What is a good or service that is distinct?
A telecoms company enters into a contract for the sale of a mobile device and connection to its mobile network. The contract, which lasts for two years, gives the customer:
- X minutes of calls per month; Identify Telecom industry performance obligations
- Y gigabytes of data per month; and Identify Telecom industry performance obligations
- Z texts per month.
The telecoms company frequently sells mobile devices without connecting them to the network. Although different combinations of minute, data and texts are available, it is not possible to buy only minutes, only data or only texts.
The telecoms company concludes that although the customer can benefit from the minutes, data and texts independently from one another (i.e. they are capable of being distinct), they are interrelated with each other because the risks associated with the promise to transfer of minutes, texts and data are not separable as part of the network connection.
Therefore, two performance obligations are identified:
- The sale of a mobile phone; and
- Network services. Identify Telecom industry performance obligations
Another telecoms company sells a smartphone and network services for:
- € 100 in advance when entering into the contract, and
- a monthly payment of € 40 for a period of 24 months.
The wholesale cost of the smartphone is € 400.
The first question is: is it a benefit on its own? YES
And the second: can it be used with other services in the market? YES
This means the sale of the mobile phone and the network services are two separate performance obligations. The transaction price has to be allocated to these two performance obligations.
The transaction price for the complete transaction is € 100 plus ¤ 40 * 24 = € 1,060. The stand-alone selling price for the network services is determined on the basis of other sales propositions by the company and other competitors in the telecom industry as € 30 per month and for the smartphone is € 500. As a result is becomes clear that a discount of € 160 (or almost 15%) is applied by the telecoms company [The stand-alone selling prices, € 30 * 24 = € 720 plus € 500 = €1,220, actual transaction price is € 1,060].
As a result the smartphone revenue is € 435 (= € 500 minus 15% (€ 75)) at the moment of the sale and network service of € 625 over 24 months (= € 1,060 minus € 435 or € 26.04 per month).