Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
Exhibit 4.7: Deutsche Telekom revenue recognition
Accounting policies
Net revenues contain all revenues from the ordinary business activities of
Deutsche Telekom. For example, these include revenues from the
rendering of services and the sale of goods and products that are typical for
Deutsche Telekom. Net revenues are recorded net of value-added tax
(VAT) and sales related reductions. They are recognised in the accounting
period concerned in accordance with the realisation principle. The T-Com
division, which accounts for the major proportion of Deutsche Telekom
AG’s sales, recognises its revenues as follows:
T-Com provides customers with narrow and broadband access to its fixedline
network. It also sells, leases, and services telecommunications
equipment for its customers and provides other ancillary
telecommunications services. T-Com recognises service revenues when
the services are provided in accordance with contract terms. The
revenue and related expenses associated with the sale of
telecommunications equipment and accessories are recognised when the
products are delivered, provided there are no unfulfilled company
obligations that affect the customer’s final acceptance of the arrangement.
Revenue from rentals and lease payments is recognised monthly as the
fees accrue.
Source: Deutsche Telekom AG Financial statements as of December 31, 2003
1.6 Building valuation models: What to do
Whether the model is constructed in the form of a DCF or an economic profit
model, the relevant figure is clearly the accrued revenue, not cash receipts. For
companies in which there is a significant difference in any one period between
these two items, extrapolating cash receipts is likely to be highly misleading. This
implies two conclusions for valuation models. The first is that it is necessary to
assess what is an appropriate accrual, which will be dependent on the accounting
rules discussed above. The second is that when running DCF valuations we shall
actually be valuing a stream of notional ‘cash flow’ which will include accruals.
Otherwise only one side of a coin is being taken into account. If a contractor has
fulfilled a significant part of a contract, but has only received expenses as
payments on account, it is clear that his cash flows may be significantly
understating his value creation. If a publisher sells a large number of subscriptions
over a period considerably longer than that of the accounting period just reported,
he has received cash that creates liabilities against which supply of product will
be made in subsequent period. Ignoring this fact overstates value creation.
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