Revenue for Telecoms

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22 | Revenue for Telecoms – Issues In-Depth | 2 Step 1: Identify the contract with a customer Example 8 – 24-month wireless bundle contract that the customer can terminate after Month 12 with penalty Telco E enters into a 24-month wireless contract with Customer F that includes voice and data services for 80 per month and a handset for 200. The services and handset are regularly sold separately for 60 per month and 600, respectively. Customer F cannot terminate the contract before Month 12. However, after Month 12, the customer can terminate the contract by paying an ETF of 10 per month of remaining service term. Telco E has separately concluded that the ETF is enforceable. Statistics show that the average contract duration for similar contracts is 18 months. Telco E observes that the ETF does not fully compensate Telco E for the goods and services already transferred. Specifically, the ETF of 10 per month (after Month 12) is less than the unpaid balance for the handset, calculated as [(600 - 200) - (20 x 12)]. Telco E also observes that the ETF is not significant when compared with the monthly service fee (i.e. 10 compared with 80) and potential offers in the market. Telco E assesses that the ETF in Months 12–24 is not substantive. Telco E therefore concludes that the contract term for the purpose of applying the new standard is 12 months. For the purpose of this assessment, the average contract duration is not relevant. Because the accounting assumes a contract term of 12 months and early termination by Customer F, Telco E assesses whether the ETF charged at the end of month 12 can be included in the transaction price at the commencement of the contract (see 4.2). Example 9 – Month-to-month wireless contract with device installment plan Telco A enters into a one-month wireless contract with Customer C that includes voice and data services and a handset. The monthly service fee is the same as the price charged to customers that bring their own device (i.e. the monthly service fee is the stand-alone selling price of the service). Customer C makes no up-front payment for the handset, but will pay the standalone selling price of the handset through monthly installments over a 24-month period. Although there is a finance arrangement for the handset, there is no additional interest charged to Customer C. (Telco A operates in a low-interest rate environment.) The remaining balance of installments for the handset becomes immediately due if Customer C fails to renew the monthly service contract. There is no other amount due if Customer C does not renew. 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 | 23 2.1 Criteria to determine whether a contract exists | In assessing the enforceability of the contract, Telco A considers the amounts due if Customer C decides not to renew at the end of Month 1. Telco A observes that the requirement to repay the remaining balance of installments for the handset when the service contract is not renewed is an economic incentive for Customer C to renew. That is because by renewing the service contract and extending the financing, Customer C benefits from the ability to ‘pay later’ and ultimately would pay less for the handset (i.e. because of the time value of money). However, in this circumstance, foregoing this economic incentive is not a substantive termination penalty, but instead is a repayment of a loan for goods already transferred. Because Telco A cannot enforce the service contract for a period longer than one month, Telco A concludes that the contract term is one month. Telco A then assesses if the installment plan on the handset conveys a significant financing component to Customer C (see 4.4). Observations Determining the term of a telecom contract is key for applying the new revenue model Determining the enforceable contract term is a fundamental step in applying the new standard for telecom entities. The contract term directly affects the calculation of the total transaction price for the contract, the allocation of the transaction price to the distinct goods or services, and the amount of revenue recognized. For example, in a wireless contract sold with a subsidized handset, a shorter contract term may result in a smaller amount being allocated to the handset (depending on the relationship between the stand-alone selling price and the transaction price – see Section 5). Additionally, the length of the contract term may affect the applicability of certain practical expedients, including those related to identifying significant financing components (see 4.4) and disclosure of the transaction price allocated to the remaining performance obligations (see 12.1.3 in Issues In-Depth, Edition 2016). The stated telecom contract term may not always be enforceable 606-10-25-3, ASU 2014-09.BC32 [IFRS 15.11, BC32] Under the new standard, assessing whether a contract exists, and for what duration, requires an entity to focus on the enforceability of rights and obligations. This assessment could result in a term shorter than what is stated in the contract. For example, a telecom contract with a stated term of 24 months could have a term of less than 24 months, if that 24-month term is determined not to be enforceable. This assessment also requires a telecom to consider relevant laws and regulations. Therefore, this assessment may be affected by customer protection or similar laws that have recently been passed in many jurisdictions. Often these laws allow customers to terminate their telecom contracts before the end of the stated contract term. © 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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