Revenue for Telecoms

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40 | Revenue for Telecoms – Issues In-Depth | 3 Step 2: Identify the performance obligations in the contract Differences between IFRS and US GAAP Promised goods or services that are immaterial in the context of the contract 606-10-25-16A, ASU 2016-10.BC12–BC14 [IFRS 15.BC116A–BC116E] The FASB decided to permit an entity not to identify promised goods or services that are immaterial in the context of the contract as performance obligations. It reached this decision because it could be unduly burdensome in some circumstances to require an entity to aggregate and determine the effect on its financial statements of those items or activities determined to be immaterial at the contract level. In contrast, the IASB decided not to include the exception in the IFRS version of the standard, but noted that it did not intend to require an entity to identify every possible promised good or service in the contract individually. The IASB therefore expects that this difference between the IFRS and US GAAP versions of the standard will not give rise to significant differences in practice. However, it remains to be seen whether this really is the case, because the US GAAP version of the standard permits the evaluation at the contract level whereas the IFRS version continues to rely on general materiality guidance, which is viewed from the financial statement level. Shipping and handling activities 606-10-25-18A – 25-18B ASU 2016-10.BC20–BC22 [IFRS 15.BC116R–BC116U] The IFRS version of the standard does not include an accounting policy election to treat shipping and handling activities undertaken by the entity after the customer has obtained control of the related good as a fulfillment activity. The IASB rejected this election because it considered that the election would result in an exception to the revenue model and would make it more difficult for users to compare entities’ financial statements. A difference now exists between IFRS and US GAAP on this point. This will affect the comparability of the financial statements of entities reporting under IFRS and US GAAP that have a significant number of transactions – e.g. telecom equipment sales – in which shipping and handling activities are performed after control of the goods transfers to the customer, and the entity elects to treat the shipping and handling activity as a fulfillment cost under US GAAP. Comparison with current US GAAP Approach to determining the accounting is different Although some of the concepts are similar under the new standard and current US GAAP, an entity’s approach to the accounting may be slightly different. Generally, under current US GAAP, an entity determines its accounting by starting at the contract level. An entity determines if the contract can be separated into multiple units of accounting based on whether separation criteria are met or other specific guidance applies. Under the new standard, an entity determines its accounting by beginning at the promise level. An entity identifies all of its promises and then begins combining them if they are determined not to be distinct or are immaterial in the context of the contract. 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 | 41 3.1 Criteria to identify performance obligations | Perfunctory or inconsequential SEC SAB Topic 13, ASU 2014-09.BC89–BC90 The FASB emphasized that ‘immaterial’ in the context of the contract is a qualitative and quantitative assessment based on what may be important to the customer. This concept is expected to be similar to the current US GAAP guidance on inconsequential or perfunctory deliverables. The current US GAAP guidance states that a performance obligation is inconsequential or perfunctory if it is not essential to the functionality of the delivered products or services. Activities are not inconsequential or perfunctory if failure to complete the activities would result in a full or partial refund or the customer’s right to reject the delivered goods or services. The FASB also specifically noted that customer options to acquire additional goods or services that represent a material right to the customer will need to be identified as a performance obligation even if they might have been considered immaterial in the context of the contract (see Section 8). Shipping and handling activities Under the new standard, shipping and handling activities can be accounted for as follows. If they are performed: – before the customer obtains control of the goods, then they are fulfillment activities; and – after the customer obtains control of the goods, then: - an entity electing to account for shipping and handling as a fulfillment activity accrues the costs of these activities and recognizes all revenue at the point in time at which control of the goods transfers to the customer; or - an entity not choosing the policy election is likely to conclude that shipping and handling activities that occur after control of the goods transfers to the customer are a performance obligation, and therefore it allocates a portion of the transaction price to the shipping and handling and recognizes revenue as the shipping and handling performance obligation is satisfied. The accounting policy choice included in the FASB’s version of the new standard will allow entities to accrue shipping and handling costs as an expense at the time when revenue is recognized for the delivery of a good, thereby achieving a ‘matching’ of the revenue and related fulfillment cost. However, because this is a policy election, entities will not be required to do so, which could result in potential diversity in practice arising both from different: – economic arrangements (e.g. shipping and handling occur before control of the goods transfers versus occurring after control transfers); and – policy elections (when control of goods transfers before shipping and handling activities occur). If the policy election is used under US GAAP, then this could create a difference with IFRS. © 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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