Revenue for Telecoms

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132 | Revenue for Telecoms – Issues In-Depth | 7 Contract costs Capitalizing commission when associated liability is accrued In some cases, an additional commission may be payable, or the original commission amount adjusted, at a future date. Examples include commissions: – paid for renewal of the contract; – earned on contract modifications; – contingent on future events; – subject to clawback; and – that are tiered, subject to a threshold. In these cases, a telecom entity considers the enforceable rights and obligations created by the arrangement to determine when the liability is accrued and whether to capitalize a commission, and in what amount. In more complex scenarios, a telecom entity focuses on whether its obligation to pay a commission meets the definition of a liability. This is particularly important when considering commission structures that include thresholds – e.g. a commission amount is payable only if cumulative sales within a given period exceed a specified amount, or the commission rate varies with cumulative sales. In general, if a telecom entity recognizes a liability to pay commission that qualifies for recognition as the cost of obtaining a contract, then the entity recognizes an asset at the same time. 270-10-45 [IAS 34.29, IFRIC 21.12, 13(a)] This focus on whether the obligation to pay commission meets the definition of a liability may result in differences between IFRS and US GAAP, due to underlying differences in liability accounting in the two frameworks. Differences may also occur in interim financial statements because IFRS generally takes a discrete approach to interim reporting (with some exceptions). However, US GAAP views the interim period as a portion of the annual period. This can potentially result in different liability recognition and measurement at interim reporting dates. For example, a commission payable on reaching a specified threshold for which the threshold is expected to be met only in the third quarter is not recognized at the end of the first quarter under IFRS, because the entity does not have a present obligation at that date. Conversely, under US GAAP a portion of the expected commission is recognized as an expense in the first quarter to reflect the portion of the expense that relates to that period. Judgment required for multiple-tier commissions Some telecom entities pay sales commissions on a multiple-tier system, whereby the salespersons receive commission on all contracts executed with customers, and their direct supervisor receives commission based on the sales of the employees that report to them. Alternatively, commission structures may have thresholds, where the commission increases depending on the number or dollar value of contracts signed. Telecom entities should use judgment when determining whether the supervisor’s commission is incremental to obtaining a specific contract or contracts. The incremental cost is the amount of acquisition cost that can be directly attributable to an identified contract or contracts. Home © 2016 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Revenue for Telecoms – Issues In-Depth | 133 7.1 Costs of obtaining a contract | Many sales commission models are based on multiple criteria, not just the acquisition of an individual contract – e.g. overall contract performance. It will require careful analysis to determine what portion of the supervisor’s commission is an acquisition cost that is directly related to a specific contract or contracts. Benefits paid on employee commissions require analysis To the extent that commissions generate fringe benefits, such as pension benefits or other bonuses, telecom entities need to determine if these costs should be capitalized as part of the commission cost. Some fringe benefits cannot be capitalized because they are not incremental – e.g. car allowances – because they are incurred regardless of the contracts obtained. However, to the extent that fringe benefits are incremental – e.g. employer pension contributions or payroll taxes calculated on the employee’s commission – that amount is included in the capitalized cost. Portfolio approach may be useful in accounting for contract acquisition costs Many telecom entities have a high volume of low-value commission costs that may be difficult to account for on an individual basis. In those situations, it may be helpful to adopt a portfolio approach for those costs if the criteria for the portfolio approach are met (see 1.4). A telecom entity needs to consider the guidance on amortization of those costs when defining the portfolios. Comparison with current IFRS Capitalizing costs to obtain a contract [IAS 38, IU 05-09] [IAS 11.21] [IAS 38] There is no specific guidance on the accounting for the costs to obtain a contract with a customer in current IFRS. The IFRS Interpretations Committee discussed the treatment of selling costs and noted that only in limited circumstances will direct and incremental recoverable costs to obtain a specifically identifiable contract with a customer qualify for recognition as an intangible asset in the scope of IAS 38. In addition, when a contract is in the scope of IAS 11, costs that relate directly to the contract and are incurred in securing it are included as part of the contract costs if they can be separately identified and reliably measured, and it is probable that the contract will be obtained. The new standard therefore brings clarity to this topic. It also introduces a new cost category – an asset arising from the capitalization of the incremental costs to obtain a contract – which is in the scope of the new standard and not in the scope of IAS 38. © 2016 KPMG LLP, a Delaware limited liability partnership and the US member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. © 2016 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Home
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Revenue for Telecoms

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