Revenue for Telecoms

140 | Revenue for Telecoms – Issues In-Depth
| 7 Contract costs
Example 57 – Commission paid on renewals after the initial contract
is obtained
Continuing Example 54 (see 7.1). Fact pattern is repeated here for convenience.
Telco A pays its sales employees a commission of 30 for each new two-year
wireless contract entered into with a customer. Telco A also pays 10 to sales
employees each time a customer renews a contract for an additional two years.
Telco A previously concluded that both commissions qualify as a cost to obtain a
contract and are capitalized when they are incurred.
Based on historical experience and customer analysis, Telco A expects the
customer to renew for an additional two years for a total of four years. Telco A
further observes that the 10 renewal commission is not commensurate with the
30 paid at the inception of the contract.
Telco A concludes that the first commission relates to a longer period than the
initial two-year contract term. The commission should therefore be amortized over
four years – i.e. on a systematic basis consistent with the pattern of satisfaction
of the performance obligation, and including the specifically anticipated renewal
period. The renewal commission, however, is amortized over two years, being
the period to which the commission relates. In this fact pattern, the amortization
expense would therefore be higher during the renewal period than during the
initial contract period.
Observations
Amortization period may need to include anticipated contracts
Under the new standard, a capitalized contract cost asset is amortized based on the
transfer of goods or services to which the asset relates. In making this determination,
the new standard notes that those goods or services could be provided under an
anticipated contract that the telecom entity can specifically identify.
The new standard does not prescribe how a telecom entity should determine
whether one or more anticipated contracts are specifically identifiable, so practice
is likely to develop over time. Relevant factors to consider may include the
telecom entity’s history with that customer class, and predictive evidence derived
from substantially similar contracts. In addition, a telecom entity may consider
the available information about the market for its goods or services beyond the
initial contract term – e.g. whether it expects the service still to be in demand
when renewal would otherwise be anticipated. Judgment will be involved in
determining the amortization period of contract cost assets, but telecom entities
should apply consistent estimates and judgments across similar contracts, based
on relevant experience and other objective evidence.
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