Revenue for Telecoms

20 | Revenue for Telecoms – Issues In-Depth
| 2 Step 1: Identify the contract with a customer
606-10-25-1
[IFRS 15.9]
A contract with a customer is in the scope of the new standard when it is legally
enforceable and it meets all of the following criteria.
... collection of
consideration is
probable*
... it has commercial
substance
A contract
exists if...
... rights to goods or
services and
payment terms can
be identified
... it is approved
and the parties are
committed to
their obligations
* The threshold differs under IFRS and US GAAP due to different meanings of the term ‘ probable ’.
606-10-25-1e
[IFRS 15.9(e)]
606-10-25-6
[IFRS 15.14]
606-10-25-5
[IFRS 15.13]
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[IFRS 15.15]
In making the collectibility assessment, an entity considers the customer’s ability
and intention (which includes assessing its creditworthiness) to pay the amount of
consideration when it is due. This assessment is made after taking into account any
price concessions that the entity may offer to the customer (see 2.1.2).
If the criteria are not initially met, then an entity continually reassesses the contract
against them and applies the requirements of the new standard to the contract from
the date on which the criteria are met. Any consideration received for a contract that
does not meet the criteria is accounted for under the requirements set out in 2.2.
If a contract meets all of the above criteria at contract inception, then an entity does
not reassess the criteria unless there is an indication of a significant change in the
facts and circumstances.
If on reassessment an entity determines that the criteria are no longer met, then it
ceases to apply the new standard to the contract from that date, but does not reverse
any revenue previously recognized.
Observations
Most telecom contracts will not be ‘wholly unperformed’
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ASU 2014-09.BC36, BC50
[IFRS 15.12, BC36, BC50]
A contract does not exist if each contracting party has the unilateral right to
terminate a wholly unperformed contract without compensating the other
party (or parties). However, this guidance will not apply to most typical telecom
contracts in which at contract inception (or very shortly thereafter) either the
customer performs by paying or the entity performs by transferring a good
or service.
Telecom entities will, however, need to consider the remaining criteria when
determining whether a contract exists, including the collectibility criterion
(see 2.1.2 and 2.2). Entities will also need to determine the contract term
(see 2.1.1).
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