IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms – Setting the stage – the services in the market and distributors

The communications industry comprises several sub-sectors, including wireless, fixed line, and cable/satellite television (TV). These companies generate revenue through many different service offerings that include access to, and usage of, network and facilities for the provision of voice, data, internet, and television services.

These services generate revenues through subscription fees or usage charges. Some communications companies also sell or lease equipment such as handsets, modems, dongles (a wIFRS 15 Best and improved revenue for Telecomsireless broadband service connector), customer premises equipment (CPE), and a variety of accessories.

Offerings in the communications industry have evolved as a result of consolidation, technology changes and innovation. Examples include installment sales of wireless devices; multi-line plans, in which customers attach more than one device to a service; and bundled plans, with core video service, including voice and internet services, combined with other offerings, such as home security services. Also, companies may provide services that expand beyond traditional core offerings, including cloud and machine-to-machine services.

The short version

IFRS 15 Revenue from Contracts with Customers) impacts each of these businesses. Certain changes having the potential for the greatest impact include:

  • Part of revenue needs to be allocated to discounted or free products provided at the beginning of a service period.
  • The accounting treatment of activation fees, customer acquisition costs, and certain contract fulfillment costs has changed.
  • In mind of the volume of sales by telecom providers IFRS 15 may also be applied to a portfolio of contracts or performance obligations in some circumstances.
  • Free goods or services previously considered to be marketing offers qualify under IFRS 15 as distinct goods or services.

The 5 Step mode

IFRS 15 Core Model

Accounting assessments

Step 1: Identify contract

(written/oral/implied)

Contract

Probable collection (> 50%)

Contract combinations ((Un)bundling)

Contract modifications

Master service agreements

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

Step 2: Identify performance obligations (‘PO’)

(goods/services/rights/warranty)

PO 1

PO 2

Distinct/non distinct – equipment, connections, services

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

Step 3: Determine contract transaction price (‘TP’)

(amount of expected revenue to recognise)

TP for the contract

Cash/revenue disconnect

Contract term

Significant financing component

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

Step 4: Allocate transaction price

(using standalone selling prices (‘SSP’))

TP allocation to PO 1

TP allocation to PO 2

Determination of SSP

Allocation of SSP Free/discounted products

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

Step 5: Recognise revenue

(as POs satisfied – as control is passed)

Revenue recognition PO 1

Revenue recognition PO 2

Point in time/over time, IFRS 15,

Contract

assets/liabilities, IFRS 9

Step 1: Identify contract

Before the model is applied to a contract, an entity must conclude that it is probable that it will collect the consideration to which it will be entitled. Assessing a customer’s credit risk is an important part of determining whether a contract, as defined by the standard, exists (due to too many fake revenue recognitions under IAS 18).

The amount of consideration to which an entity expects to be entitled (i.e., the transaction price) may differ from the stated contract price (e.g., if the entity intends to offer a concession and accept an amount less than the contractual amount). IFRS 15 Best and improved revenue for Telecoms

When performing the collectability assessment to determine whether a contract exists, an entity should consider only the customer’s ability and intention to pay the estimated transaction price and not the stated contract price. IFRS 15 Best and improved revenue for Telecoms

Month-to-month contracts are common in the telecom industry. A month-to-month contract represents a series of renewal options because the same services continue to be provided until the customer or telecom entity cancels them. IFRS 15 Best and improved revenue for Telecoms

Most telecom entities have sufficient historical data to estimate the average customer life and may question whether they should consider the average customer life when applying the standard to month-to-month contracts. IFRS 15 Best and improved revenue for Telecoms

IFRS 15 is clear that revenue recognition is tied to the term of the contract when the parties have present enforceable rights and obligations. Therefore, we anticipate that a telecom entity will account for each month, in a month-to-month contract, as a separate contract unless the renewal options provide the customer with a material right.

Some wireless entities are offering arrangements that allow the customer some alternatives as to the term of the arrangement. For example, plans that allow a customer to pay tFolding phonehe full retail price of the handset in monthly instalments as long as the customer is also purchasing monthly service. If the service is terminated, the remaining instalments on the handset become due.

However, if the monthly service remains intact, after a certain number of months the customer has the option to trade in the financed handset (and all remaining payments are forgiven) and upgrade to a newer handset. In these situations, the wireless entity will need to determine the period over which there are enforceable rights and obligations with the customer.

Contract modifications

Telecom customers frequently make changes to their services. Wireless customers may: increase or decrease data in a wireless plan; add or remove lines from a shared data plan; or add or remove services. Enterprise customers also modify the terms of their contracts by adding or removing services. IFRS 15 Best and improved revenue for Telecoms

IFRS 15 requires certain modified contracts to be treated as entirely new contracts and others to be considered as part of the original arrangement.

An entity must determine whether the modification creates a new contract or whether it will be accounted for as part of the existing contract. The determination of a new and separate contract is driven by whether the modification results in the addition of distinct goods or services and whether they are priced at their stand-alone selling prices. Contract modifications that meet these two criteria are treated as separate contracts. IFRS 15 Best and improved revenue for Telecoms

If these criteria are met, the accounting for the original contract is not affected by the modification and revenue recognition for the original contract is not adjusted. Contract modifications that may create separate new contracts include add-on services such as global voice and messaging plans. IFRS 15 Best and improved revenue for Telecoms

These plans will typically meet the standard’s definition of ‘distinct’ and be treated as separate contracts because the monthly price for those services typically reflects the entity’s stand-alone selling price. IFRS 15 Best and improved revenue for Telecoms

Changes in the scope or amount of promised goods or services that do not create separate contracts have to be considered modifications of the original contract. However, if the goods and services to be provided after the contract modification are distinct from the goods and services provided on, or before, the modification, the entity accounts for the contract modification as a termination of the old contract and creation of a new contract. IFRS 15 Best and improved revenue for Telecoms

For these modifications, the revenue recognised to date on the original contract (i.e., the amount associated with the completed performance obligations) is not adjusted.

Instead, the remaining portion of the original contract and the modification are accounted for together on a prospective basis, by allocating the remaining consideration to the remaining performance obligations. IFRS 15 Best and improved revenue for Telecoms

If a modification involves goods or services that are not distinct from the goods and services already provided, the entity will account for the contract modification as part of the original contract.

The entity will adjust the revenue previously recognised to reflect the effect that the contract modification has on the transaction price and measure of progress (i.e., the revenue adjustment is made on a cumulative catch-up basis). IFRS 15 Best and improved revenue for Telecoms

A change in a contract also may be treated as both a modification of an existing contract and the creation of a new contract. If that is the case, an entity would adjust revenue previously recognised to reflect the effect of the contract modification on the estimated transaction price allocated to the performance obligations that are not distinct from the modified portion of the contract and the measure of progress. IFRS 15 Best and improved revenue for Telecoms

Most modifications to telecom agreements will be accounted for prospectively, as either a new contract or a termination of the old and creation of a new contract. However, telecom entities should carefully analyse contract modifications to appropriately account for them.

See Example – Wireless contract modification IFRS 15 Best and improved revenue for Telecoms

Master service agreements or Family share plans

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.Satisfaction of performance obligations

See Example – Family share plans

Step 2: Identify performance obligations

Communications companies regularly bundle the sale of services and equipment (e.g., handsets, modems, accessories) and might also charge for activation or set up. Wireless companies give free or discounted equipment or promotional rates to customers as incentives to enter into contracts. IFRS 15 Best and improved revenue for Telecoms

Equipment (including handsets) transferred to customers is a separate performance obligation in most cases if the company separately sells equipment or the customer can benefit from the handset together with other resources (for example, the handset could operate on another communications company’s network).

This is true regardless of whether the equipment is given at no cost or at a significantly discounted price. Other obligations, such as promises of future discounted services or other material rights, will also need to be evaluated to determine if they qualify as separate performance obligations. IFRS 15 Best and improved revenue for Telecoms

Key impact performance obligations

Mobile IFRS 15 Best and improved revenue for Telecoms

Delivery of mobile phone is a separate performance obligation. Revenue is based on the standalone selling price of the handset and is recognised up front

Connection revenue and costs

Connection fees are not separated and are spread over the period of rental

Commission costs IFRS 15 Best and improved revenue for Telecoms

All directly attributable contract costs are deferred and spread over the contract IFRS 15 Best and improved revenue for Telecoms

Bundles IFRS 15 Best and improved revenue for Telecoms

Each element of a bundle is accounted for as a separate performance obligation with revenue allocated to each performance obligation

IFRS 15 Best and improved revenue for Telecoms

Questions and answers

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

IFRS 15 Best and improved revenue for Telecoms

Smart phone and mobile connection service:

  • €100 upfront fee,

  • €40 monthly fee, 24 months

Wholesale price (SSP) of the smart phone is €400

Is each of it of benefit on its own??

YES

Can it be used with other services in the market?

YES

Step 3 & 4 Determination and Allocation Transaction price

The contract

IFRS 15 Revenue accounting

Smart phone and mobile connection service:

  • €100 upfront fee,

  • €40 monthly fee, 24 months

Wholesale price (SSP) of the smart phone is €400

Transaction price €1,060 (=100 + 40 x 24)

Mobile connection SSP €720 (40 x 24)

Mobile SSP €500 (=100 + 400)

Total SSP €1,220

Total discount €160 (or 15%) (= 1,220 – 1,060)

IFRS15 Mobile revenue €435 (=500 – (160*500/1,220))

IFRS 15 Mobile connection service revenue €626 (=720 – (160*720/1,220))

Step 5: Recognise revenue

The contract

IFRS 15 Revenue overtime / at point in time

Smart phone and mobile connection service:

  • €100 upfront fee,

  • €40 monthly fee, 24 months

Wholesale price (SSP) of the smart phone is €400

IFRS15 Mobile revenue €435

Revenue recognition at point in time on the date of delivery to the customer

IFRS 15 Mobile connection service revenue €626

Revenue recognition overtime the 24 month period of delivery to the customer (most likely €26 revenue per month)

In summary

2 distinct performance obligations

  • IFRS15 Handset revenue €435 at T0

Cash IFRS 15 Best and improved revenue for Telecoms

€435

Revenue IFRS 15 Best and improved revenue for Telecoms

€435

Cost of sales IFRS 15 Best and improved revenue for Telecoms

€400

Inventory mobile phones IFRS 15 Best and improved revenue for Telecoms

€400

  • IFRS 15 Service revenue €26 per month

Monthly cash receipt IFRS 15 Best and improved revenue for Telecoms

€26

Monthly revenue IFRS 15 Best and improved revenue for Telecoms

€26

Cost of sales – Monthly depreciation IFRS 15 Best and improved revenue for Telecoms

€10

Telecommunications infrastructure equipment IFRS 15 Best and improved revenue for Telecoms

€10

IFRS 15 Best and improved revenue for Telecoms

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