Revenue for Telecoms

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26 | Revenue for Telecoms – Issues In-Depth | 2 Step 1: Identify the contract with a customer Evergreen contracts may have an implicit term For the purpose of assessing contract term, an evergreen contract (i.e. a contract that automatically renews) that is cancellable by either party each period (e.g. on a month-to-month basis) without penalty is no different from a similar contract structured to require the parties to actively elect to renew the contract each period (e.g. place a new order, sign a new contract). In these situations, an entity should not automatically assume a contract period that extends beyond the current period (e.g. the current month). Therefore, only on the commencement of the next optional service period, when the telecom entity has begun to perform (i.e. provide cable, internet or phone service) and the customer’s action of not cancelling the contract provides the entity with legal recourse relative to fees owed for those services, does a contract exist for that period under the new standard. Contract term assessed considering all promised goods or services The contract term is assessed for the contract as a whole, considering all goods or services promised in the contract. However, some goods or services can be transferred over a shorter period than the contract term. Renewal and upgrade rights rarely affect the enforceability of the contract Telecom contracts often provide customers with the ability to renew contracts at a discount. Other contracts may provide customers with the ability to upgrade to a new handset early (i.e. without paying any termination fees on the current contract) if the customer enters into a new service contract with a specified term (e.g. 24 months). Although these renewal and upgrade rights may affect the duration of the customer relationship, they usually do not affect the enforceability of the termination penalties in the contract if the customer chooses not to renew or upgrade early. Renewal and upgrade rights, however, require additional accounting considerations (see Sections 8 and 9). Only the customer has a right to terminate the contract If only the customer has the right to terminate the contract without penalty and the entity is otherwise obligated to continue to perform until the end of a specified period, then the contract is evaluated to determine whether the option gives the customer a material right (see Section 8 for discussion of customer options for additional goods or services). 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 | 27 2.1 Criteria to determine whether a contract exists | Comparison with current IFRS Determining the contract term is not critical under current accounting [IAS 11, IAS 18] Current revenue guidance has no explicit contract existence test, though an entity recognizes revenue only if it is probable that it will receive the economic benefits under the contract. Also, determining the contract term has a less significant impact on the accounting outcome for wireless sales under current accounting because most telecom entities do not allocate revenue to the handset (when it is subsidized) beyond the cash payment received at contract inception. Comparison with current US GAAP Determining the contract term is not critical under current accounting Topic 605 Similar to current IFRS, determining the contract term has a less significant effect on the accounting outcome for wireless sales under current accounting. This is because most telecom entities do not generally recognize revenue in advance of cash received under the contingent revenue cap guidance. 2.1.2 Collectibility Example 10 – Assessing collectibility for individual telecom customers 606-10-25-1e [IFRS 15.9(e)] Telco A enters into a 24-month wireless contract with Customer C that includes voice and data services. Before accepting Customer C, Telco A runs a routine credit check and concludes that Customer C meets the expected credit history requirements to be enrolled. Furthermore, Telco A’s historical evidence shows that 98% of the amounts billed will be received. In addition, Telco A observes that it can cancel the service to Customer C at any point if Customer C defaults. As a result of the evidence received through the credit check, Telco A concludes that it is probable that Customer C will pay the amounts owed for the goods and services to be transferred. Therefore, the contract meets the collectibility threshold. However, any receivable or contract asset should be tested for impairment under relevant guidance. © 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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