Revenue for Telecoms

Revenue for Telecoms – Issues In-Depth | 149
8.1 Determining if a material right is created by contract options |
Telco D concludes that because the option to purchase the global rate plan is
priced at its stand-alone selling price, it is not a material right. Therefore, the
option is not identified as a performance obligation at contract inception. Telco D
will recognize revenue for the global rate plan when it provides the services.
Observations
Determining whether a material right exists requires an evaluation of both
quantitative and qualitative factors
A telecom entity considers whether a customer option for additional goods or
services is a material right at contract inception based on both quantitative and
qualitative factors. Although that evaluation is judgmental and no specific criteria
exist for an evaluation, the telecom entity considers whether it would likely
impact the customer’s decision on whether to exercise the option to continue
buying the telecom entity’s product or service. This is consistent with the notion
that an entity considers valid expectations of the customer when identifying
promised goods or services. For example, an arrangement that allows the
customer to renew services at a significant discount that is incremental to other
discounts typically provided and in which the telecom entity expects customers
to renew primarily as a result of the discount itself would generally be considered
a material right.
A telecom entity will need to carefully evaluate the specifics of its contracts to
determine whether the terms convey rights that are significant to the customer.
Material rights are separate performance obligations to which a portion of the
contract’s transaction price is allocated at contract inception (see 8.2).
Options available only because a contract was previously entered into are
not always material rights
606-10-55-43
[IFRS 15.B41]
A customer may be able to exercise an option in a contract solely as a result of
having entered into a contract. An option exercisable at its stand-alone selling
price does not convey a material right, but rather is a marketing offer that does
not constitute a separate performance obligation. Commonly, additional services
or features offered by a telecom entity will not be material rights because the
additional services or features are priced at their stand-alone selling prices.
Upgrade rights require careful evaluation
A telecom entity often sells a handset for less than the stand-alone selling price
when it is bundled with a term (e.g. 24 months) service plan. Some telecom
entities also include in the contract, or have a customary business practice of
providing, a promise that after a certain period of time the customer can upgrade
its handset by entering into another term plan at the current stand-alone selling
price. In these cases, rights to the remaining consideration under the initial
contract, including any early termination penalties, are waived.
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