Revenue for Telecoms

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142 | Revenue for Telecoms – Issues In-Depth | 7 Contract costs Presentation of amortization costs If a telecom entity chooses to present its expenses by nature, then judgment will be required to determine the nature of the expenses arising from the amortization of capitalized contract costs. In all cases, a telecom entity is subject to the general requirement to ensure that its presentation is not misleading and is relevant to an understanding of its financial statements. Comparison with current US GAAP No correlation with the accounting for nonrefundable up-front fees SEC SAB Topic 13 Current SEC guidance on revenue recognition indicates that registrants are required to defer nonrefundable up-front fees if they are not in exchange for goods delivered or services performed that represent the culmination of a separate earnings process. These fees are deferred and recognized as revenue over the expected period of performance, which may include expected renewal periods if the expected life of the contract extends beyond the initial period. Similarly, the guidance states that a telecom entity may elect an accounting policy of deferring certain set-up costs or customer acquisition costs. If the amount of deferred up-front fees exceeds the deferred costs, then these two amounts are recognized over the same period and in the same manner. However, if the amount of deferred costs exceeds the deferred revenue from any up-front fees, then current practice is somewhat mixed and some telecom entities may amortize the net deferred costs over the shorter of the estimated customer life and the stated contract period. The new standard effectively decouples the amortization of contract fulfillment costs from that for any nonrefundable up-front fees in the contract (see 9.1). The capitalization of qualifying fulfillment costs is not a policy election (see 7.2). The amortization period for contract cost assets is determined in a manner substantially similar to that under current guidance when up-front fees result in an equal or greater amount of deferred revenue – i.e. the existing contract plus any anticipated renewals that the telecom entity can specifically identify. However, contract costs that were previously deferred without any corresponding deferred revenue may be amortized over a longer period under the new standard than under current US GAAP. 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 | 143 7.4 Impairment | Presentation of costs similar to current SEC guidance S-X Rule 5-03(b) SEC guidance on income statement classification requires costs and expenses applicable to sales and revenues to be separately stated from selling, general and administrative expenses. The new standard does not change this guidance. A telecom entity may have costs that are required to be capitalized under the new standard that are expensed as they are incurred under current US GAAP. The classification of the amortization cost will be treated the same as the current classification of the expense. Amortization of costs to obtain a contract will generally be classified as selling, general and administrative expenses. A telecom entity will determine the appropriate costs of sales category in which to classify amortization of its costs to fulfill a contract. 7.4 Impairment Requirements of the new standard 340-40-35-3 [IFRS 15.101] An entity recognizes an impairment loss to the extent that the carrying amount of the asset exceeds the recoverable amount. The ‘recoverable amount’ is defined as: – the remaining expected amount of consideration to be received in exchange for the goods or services to which the asset relates; less – the costs that relate directly to providing those goods or services and that have not been recognized as expenses. 340-40-35-4 [IFRS 15.102] When assessing an asset for impairment, the amount of consideration included in the impairment test is based on an estimate of the amounts that the entity expects to receive. To estimate this amount, the entity uses the principles for determining the transaction price, with two key differences: – it does not constrain its estimate of variable consideration – i.e. it includes its estimate of variable consideration, regardless of whether the inclusion of this amount could result in a significant revenue reversal if it is adjusted; and – it adjusts the amount to reflect the effects of the customer’s credit risk. Observations New impairment model for capitalized contract costs Topics 330, 360 [IAS 2, IAS 36] The new standard introduces a new impairment model that applies specifically to assets that are recognized for the costs to obtain and/or fulfill a contract. The Boards chose not to apply the existing impairment models in US GAAP or IFRS, in order to have an impairment model that focuses on contracts with customers. A telecom entity applies this model in addition to the existing impairment models. © 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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