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Globe 2012 annual reportfinancial report2.7 Significant Accounting Policies2.7.1 Revenue RecognitionThe Globe Group provides mobile and wireline voice, data communication and broadband internet serviceswhich are both provided under postpaid and prepaid arrangements.The Globe Group assesses its revenue arrangements against specific criteria in order to determine if it isacting as principal or agent (see Note 3.1.5).Revenue is recognized when the delivery of the products or services has occurred and collectability isreasonably assured.Revenue is stated at amounts invoiced and accrued to customers, taking into consideration the bill cyclecut-off (for postpaid subscribers), the amount charged against preloaded airtime value (for prepaidsubscribers), switch-monitored traffic (for carriers and content providers) and excludes value-added tax(VAT) and overseas communication tax. Inbound traffic charges, net of discounts and outbound trafficcharges, are accrued based on actual volume of traffic monitored by Globe Group’s network and in thetraffic settlement system.2.7.1.1 Service Revenues2.7.1.1.1 SubscribersRevenues from subscribers principally consist of: (1) fixed monthly service fees for postpaidwireless, wireline voice, broadband internet, data subscribers and wireless prepaid subscriptionfees for promotional offers; (2) usage of airtime and toll fees for local, domestic and internationallong distance calls in excess of consumable fixed monthly service fees, less (a) bonus airtime andshort messaging services (SMS) on free Subscribers’ Identification Module (SIM), and (b) prepaidreload discounts, (3) revenues from value-added services (VAS) such as SMS in excess ofconsumable fixed monthly service fees (for postpaid) and free SMS allocations (for prepaid),multimedia messaging services (MMS), content and infotext services, net of payout to contentproviders; (4) mobile data services, (5) inbound revenues from other carriers which terminate theircalls to the Globe Group’s network less discounts; (6) revenues from international roamingservices; (7) usage of broadband and internet services in excess of fixed monthly service fees;and (8) one-time service connection fees (for wireline voice and data subscribers).Postpaid service arrangements include fixed monthly service fees, which are recognized over thesubscription period on a pro-rata basis. Monthly service fees billed in advance are initiallydeferred and recognized as revenues during the period when earned. Telecommunicationsservices provided to postpaid subscribers are billed throughout the month according to the billcycles of subscribers. As a result of bill cycle cut-off, monthly service revenues earned but not yetbilled at the end of the month are estimated and accrued. These estimates are based on actualusage less estimated consumable usage using historical ratio of consumable usage over billableusage.Proceeds from over-the-air reloading channels and the sale of prepaid cards are deferred andshown as “Unearned revenues” in the consolidated statements of financial position. Revenue isrecognized upon actual usage of airtime value net of discounts on promotional calls and net of freeairtime value or SMS and bonus reloads. Unused load value is recognized as revenue uponexpiration.The Globe Group offers loyalty programs which allow its subscribers to accumulate points whenthey purchase services from the Globe Group. The points can then be redeemed for free services,discounts and raffle coupons, subject to a minimum number of points being obtained. Theconsideration received or receivable is allocated between the sale of services and award credits.The portion of the consideration allocated to the award credits is accounted for as unearnedrevenues. This will be recognized as revenue upon the award redemption.2.7.1.1.2 TrafficInbound revenues refer to traffic originating from other telecommunications providers terminatingto the Globe Group’s network, while outbound charges represent traffic sent out or mobile contentdelivered using agreed termination rates and/or revenue sharing with other foreign and localcarriers and content providers. Adjustments are made to the accrued amount for discrepanciesbetween the traffic volume per Globe Group’s records and per records of the other carriers asthese are determined and/or mutually agreed upon by the parties. Outstanding inbound revenuesare shown as traffic settlements receivable under the “Receivables” account, while unpaidoutbound charges are shown as traffic settlements payable under the “Accounts payable andaccrued expenses” account in the consolidated statements of financial position unless a legal rightof offset exists in which case the net amount is shown either under “Receivables” or “Accountspayable and accrued expenses” account.2.7.1.1.3 GCashService revenues of GXI consist of SMS revenue arising from GCash transactions passing throughthe telecom networks of Globe Telecom. Service revenue also includes transaction fees anddiscounts earned from arrangements with partners and from remittances made through GCashpartners using the Globe Group’s facilities. The Globe Group earns service revenue from one-timeconnection fee received from new partners. Depending on the arrangement with partners andwhen the fee is nonconsumable, outright service revenue is recognized upon cash receipt.2.7.1.2 Nonservice RevenuesProceeds from sale of handsets, devices and accessories, tattoo prepaid kits, SIM packs, modems andaccessories, spare parts and supplies, callcards and others are recognized as revenue upon deliveryof the items and the related cost or net realizable value are presented as “Cost of sales” in theconsolidated statements of comprehensive income.2.7.1.3 OthersInterest income is recognized as it accrues using the effective interest rate method.Lease income from operating lease is recognized on a straight-line basis over the lease term.Dividend income is recognized when the Globe Group’s right to receive payment is established.2.7.2 Subscriber Acquisition and Retention CostsThe related costs incurred in connection with the acquisition of wireless and wireline voice subscribers arecharged against current operations, while the related acquisition costs of data communication andbroadband internet subscribers are capitalized. Subscriber acquisition costs primarily include commissions,handset, phonekit, modems, mobile internet kit subsidies, device subsidies and selling expenses.Subsidies represent the difference between the cost of handsets, devices and accessories, tattoo prepaidkits, SIM packs, modems and accessories, spare parts and supplies, callcards and others (included in the“Cost of sales” and “Impairment losses and others” account), and the price offered to the subscribers(included in the “Nonservice revenues” account). The data communication and broadband internet costsrepresent the acquisition cost of modems (included in the “Property and Equipment” account) which aredepreciated over a period of two years (included in the “depreciation and amortization” account). Retentioncosts for existing postpaid subscribers are in the form of free handsets, devices and bill credits. Retentioncosts are charged against current operations and included under the “General, selling and administrativeexpenses” account in the consolidated statements of comprehensive income upon delivery or when there isa contractual obligation to deliver. Bill credits are deducted from service revenues upon application againstqualifying subscriber bills.2.7.3 Cash and Cash EquivalentsCash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments thatare readily convertible to known amounts of cash with original maturities of three months or less from dateof placement and that are subject to an insignificant risk of change in value.2.7.4 Financial Instruments2.7.4.1 General2.7.4.1.1 Initial recognition and fair value measurementFinancial instruments are recognized in the Globe Group’s consolidated statements of financialposition when the Globe Group becomes a party to the contractual provisions of the instrument.Purchases or sales of financial assets that require delivery of assets within the time frameestablished by regulation or convention in the marketplace are recognized (regular way trades) onthe trade date, i.e., the date that the Globe Group commits to purchase or sell the asset.Financial instruments are recognized initially at fair value. Except for financial instruments at fairvalue through profit or loss (FVPL), the initial measurement of financial assets includes directlyattributable transaction costs.148 149