Revenue for Telecoms

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30 | Revenue for Telecoms – Issues In-Depth | 2 Step 1: Identify the contract with a customer 2.2 Consideration received before concluding that a contract exists Requirements of the new standard 606-10-25-7 – 25-8 [IFRS 15.15–16] The following flow chart outlines when consideration received from a contract that is not yet in the scope of the new standard can be recognized. Has the contract been terminated and is the consideration received nonrefundable? Yes No Are there no remaining performance obligations and has all, or substantially all, of the consideration been received and is nonrefundable? No Yes Recognize consideration received as revenue [US GAAP only] Has the entity stopped transferring goods or services and there is no obligation to transfer additional goods or services and all consideration received is nonrefundable? Yes No Recognize consideration received as a liability The entity is, however, required to reassess the arrangement and, if Step 1 of the model is subsequently met, begin applying the revenue model to the arrangement. Difference between IFRS and US GAAP 606-10-25-7(c), ASU 2016-12.BC24 [IFRS 15.BC45F–BC46H] The FASB included an additional step in the requirements to address concerns over potential diversity in the understanding of when a contract is considered terminated, which could have led in some cases to revenue not being recognized even though the entity had stopped delivering goods or services to the customer. The IASB decided not to add the clarification to IFRS 15. It concluded that the existing guidance in IFRS 15 is sufficient for an entity to conclude that a contract is terminated when it stops providing goods or services to the customer without further clarification. 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 | 31 2.2 Consideration received before concluding that a contract exists | Example 12 – Customer ceases payment in Month 7 in a 24-month landline voice contract Telco A enters into a 24-month contract with Customer C to provide landline voice services for a fixed, prepaid monthly fee. At inception, Telco A expects to collect all revenue, and the contract term is assessed as 24 months. Telco A also concludes that it does not provide price concessions on the service. The bill for Month 7 is unpaid. Routine recovery procedures escalate until Month 12 without further payment from Customer C. According to local regulations, Telco A can only disconnect service to a customer after six months of unpaid services and all legal recovery actions have been performed. At the end of Month 12, Telco A disconnects service to Customer C and has an unpaid account receivable for six months of service. Telco A has determined that a four-month unpaid service bill constitutes a significant change in circumstances for its prepaid customers. Therefore, at the end of Month 10, Telco A reassesses collectibility for its contract with Customer C. Telco A has historical evidence that only 40% of bills overdue by four months will be recovered and concludes that collectibility is no longer probable and that the contract with Customer C no longer meets the requirements for a contract to exist. Contract is signed Customer stops paying Collectibility is reassessed and is no longer probable Service is stopped Month 1 2 6 7 10 12 Cash Cash is collected No cash collected Revenue Revenue is recognized No revenue recognized Impairment Bad debt expense is recognized Although Telco A is required by law to continue to provide landline voice services to Customer C for Months 11 to 12 and will issue monthly bills for these services, no revenue (and no receivable) will be recognized beyond Month 10. This means that Telco A will recognize revenue for 10 months and an impairment charge (i.e. bad debt expense) for four months (Months 7 to 10). © 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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