Revenue for Telecoms

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.
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