Revenue for Telecoms

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32 | Revenue for Telecoms – Issues In-Depth | 2 Step 1: Identify the contract with a customer Example 13 – Consideration received after a contract ceases to exist Continuing Example 12, Telco A determines that its contract with Customer C ceases to exist at the end of Month 10. At the end of Month 11, however, Telco A receives payment from Customer C for one month of service. In these circumstances, Telco A is still entitled to terminate the contract at the end of Month 12. Although some payment has been received, Telco A does not revise its assessment of collectibility and the contract with Customer C still does not exist. Additionally, Telco A has not received substantially all of the consideration promised by the customer and continues to transfer services to Customer C. Therefore, consideration received in Month 11 is not recognized as revenue. Example 14 – Recognition of a deferred activation fee once a contract ceases to exist Continuing Example 12, Telco A charged Customer C an up-front nonrefundable activation fee of 60 at contract inception. Telco A determined that activation activities are not a separate performance obligation. It also determined that the activation fee conveys no material right and should be included in the transaction price and recognized over the 24-month contract term. At the end of Month 10, the amount of the activation fee not yet recognized as revenue is 35. The activation fee is nonrefundable. However, it is consideration received in advance of services to be provided. At the end of Month 10, the contract with Customer C no longer meets the requirements in Step 1 of the new standard for a contract to exist (see Example 12). Therefore, the unrecognized amount of 35 can only be recognized as revenue when the contract is terminated or Telco A has no further service obligation. Telco A still has a legal obligation to continue to provide services for two months after the contract has ceased to exist for accounting purposes. The remaining 35 activation fee will only be recognized as revenue at the end of Month 12. 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 | 33 2.2 Consideration received before concluding that a contract exists | Observations Collectibility needs to be monitored throughout the contract term 606-10-25-5 [IFRS 15.13] If a contract meets the collectibility criterion at contract inception, then the telecom entity does not reassess that criterion unless there is a significant change in facts and circumstances that results in a significant deterioration of the customer’s creditworthiness. When the customer’s ability to pay deteriorates progressively, judgment is required to determine at what point the collectibility criterion needs to be reassessed and revenue should stop being recognized. It may not be appropriate to wait until service is disconnected to stop recognizing revenue. For example, a significant and repetitive delay in payment may constitute a significant change in the facts and circumstances and require the telecom entity to reassess the collectibility criterion. Cash basis accounting is not appropriate when consideration is received after a contract ceases to exist 606-10-25-7 – 25-8 [IFRS 15.15–16] There may be situations where a telecom entity is contractually or legally required to continue providing network services even though collectibility is no longer considered probable. As explained above, if the telecom entity has reassessed the contract and determined that collectibility is no longer probable, then revenue should not be recognized when these services are billed to the customer. The customer may eventually pay for the services rendered during that period after the contract ceases to exist from an accounting perspective. In this case, the telecom entity needs to assess if collectibility is once again probable. Alternatively, the telecom entity would consider whether one of the following events has occurred in order to recognize revenue: – the contract has been terminated and the consideration is nonrefundable; – the entity has no remaining obligation to transfer goods or services or refund the consideration received and all or substantially all of the consideration has been received; or – (US GAAP only) the entity has stopped providing goods or services and there are no remaining obligations to transfer additional goods or services or refund the consideration received. Because the legal contract is not terminated, or because the telecom entity is still pursuing collection or is entitled to payment, it may not be clear at what point the above criteria would be met. This is why the FASB added the above third event. As a consequence, under US GAAP, the entity may be able to recognize revenue when it ceases to provide additional goods and services. © 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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