Revenue for Telecoms

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158 | Revenue for Telecoms – Issues In-Depth | 9 Nonrefundable up-front fees Consideration of whether a nonrefundable up-front fee gives rise to a significant financing component 606-10-32-15 [IFRS 15.60] A telecom entity will need to consider whether the receipt of an up-front payment gives rise to a significant financing component within the contract. An up-front fee may not result in a significant financing component when, for example, the fee is small or the contract term is month-to-month. This may commonly occur in consumer contracts. However, assessing whether a nonrefundable up-front fee gives rise to a significant financing component may be relevant for certain enterprise and network capacity contracts. All relevant facts and circumstances need to be evaluated, and a telecom entity may need to apply significant judgment in determining whether a significant financing component exists (see 4.4). 9.1 Assessing if nonrefundable up-front fees convey a material right Example 64 – Nonrefundable up-front fees: Annual contract Cable A enters into a one-year contract to provide cable television to Customer C. In addition to a monthly service fee of 100, Cable A charges a one-time up-front fee of 50. Cable A has determined that the up-front activity does not transfer a promised good or service to Customer C, but is instead an administrative task. At the end of the year, Customer C can renew the contract on a month-to-month basis at the then-current monthly rate, or can commit to another one-year contract at the then-current annual rate. In either case, Customer C will not be charged another fee on renewal. The average customer life for customers entering into similar contracts is three years. Cable A considers both quantitative and qualitative factors to determine whether the up-front fee provides an incentive for Customer C to renew the contract beyond the stated contract term to avoid the up-front fee. If the incentive is important to Customer C’s decision to enter into the contract, then there is a material right. First, Cable A compares the up-front fee of 50 with the total transaction price of 1,250 (the up-front fee plus the service fee of 1,200 (12 x 100)). It concludes that the nonrefundable up-front fee is not quantitatively material. Second, Cable A considers the qualitative reasons Customer C might renew. These include, but are not limited to, the overall quality of the service provided, the services and related pricing provided by competitors, and the inconvenience to Customer C of changing service providers (e.g. returning equipment to Cable A, scheduling installation by the new provider). 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 | 159 9.1 Assessing if nonrefundable up-front fees convey a material right | Cable A concludes that, although the avoidance of the up-front fee on renewal is a consideration to Customer C, this factor alone does not influence Customer C’s decision whether to renew the service. Cable A concludes based on its customer satisfaction research data that the quality of service provided and its competitive pricing are the key factors underpinning the average customer life of three years. Overall, Cable A concludes that the up-front fee of 50 does not convey a material right to Customer C. As a result, the up-front fee is treated as an advance payment on the contracted one-year cable services and is recognized as revenue over the one-year contract term. This results in monthly revenue of 104 (1,250 ÷ 12) for the one-year contract. Conversely, if Cable A determined that the up-front fee results in a contract that includes a customer option that is a material right, then it would allocate the total transaction price including the up-front fee between the one-year cable service and the material right to renew the contract. The consideration allocated to the material right would be recognized as revenue when that right is exercised or expires (see 8.2). Example 65 – Activation fee in a month-to-month wireless contract Telco B charges a one-time activation fee of 25 when Customer D enters into a month-to-month contract for a voice and data plan that costs 50 per month. Customer D has no obligation to renew the contract in the subsequent month. If Customer D does renew, then no activation fee will be charged in the second or subsequent months. Telco B’s average customer life for month-to-month contracts is two years. 606-10-55-51 [IFRS 15.B49] Telco B concludes that there are no goods or services transferred to Customer D on activation. Therefore, the up-front fee does not relate to a good or service and the only performance obligation in the arrangement is the voice and data plan. The activation is merely an administrative activity that Telco B must perform to allow Customer D to access its network. The activation fee is considered an advance payment for future goods or services and included in the transaction price in Month 1. © 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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