Revenue for Telecoms

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58 | Revenue for Telecoms – Issues In-Depth | 3 Step 2: Identify the performance obligations in the contract Observations Installation and activation fees do not necessarily mean that the underlying activities are distinct Whether an activity is referred to as an ‘activation’ or ‘installation’, and whether a fee is charged to a customer are not determinative factors in assessing whether the activity is a separate performance obligation. A telecom entity needs to consider the specific facts of the arrangement to understand the nature of the activation or installation activities performed and whether they transfer control of a distinct good or service to the customer. Any up-front fee would be included in the transaction price and allocated to the performance obligations identified in the contract (see Section 9). Activities that improve the telecom’s network do not transfer a good or service to the customer Telecom entities may incur up-front costs for improvements to their networks to set up, install or hookup a customer’s services. The fact that these costs may be significant is not sufficient to conclude that the related activities transfer a good or service to the customer, even if the telecom entity is able to recover those costs from the customer. When assessing if installation activities are distinct, a telecom entity first needs to determine whether these activities are an improvement to or extension of its network, rather than a transfer of a service or good to the customer. Technologies change rapidly in the telecom industry and, therefore, appropriately identifying all of the activities related to an installation will require careful consideration. If installation and other related activities do not transfer a good or service to the customer, then the costs should be analyzed to determine if they qualify to be capitalized as property, plant and equipment or as a cost of fulfilling the contract (see Section 7). Assessing whether installation activities are distinct requires judgment For those installation activities that transfer a good or service to a customer – e.g. those that are not improving or extending its network – the telecom entity needs to assess if the installation services are capable of being distinct (Criterion 1) and are distinct in the context of the contract (Criterion 2). Determining whether installation activities are a performance obligation will require judgment. For example, the customer may have the option to self-install its equipment and wiring, or to select another provider to do so, rather than purchasing the installation from the entity. This would generally evidence both that the customer can benefit from the installation on its own and that the network services and the installation are not highly interdependent. However, if the installation is performed by a third party, then this in itself may not be sufficient to conclude that the installation brings benefit to the customer on its own – e.g. if the telecom entity has simply subcontracted the installation activity to a third party. The entity also considers whether the installation would need to be reperformed if the customer changes service providers or renews or upgrades its service 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 | 59 3.6 Other telecom services, fees and administrative tasks | Comparison with current US GAAP Hookup revenue guidance for cable/satellite entities is superseded 922-430-25-1, 35-1, 922-605-25-3 Under current guidance for cable television providers, hookup revenue (i.e. fees that customers pay for the installation/set-up of their cable/satellite television services) is recognized up front to the extent of direct selling costs, with the remainder deferred over the expected customer relationship period. This guidance will be withdrawn when the new standard becomes effective. However, some of the guidance on costs for cable companies has not been withdrawn (see Section 7). There is no industry-specific revenue recognition guidance under the new standard. Therefore, whether a portion of any up-front fee for an installation will be recognized at contract inception under the new standard depends on the specific facts and whether the installation activities meet the definition of a performance obligation. 3.6 Other telecom services, fees and administrative tasks Requirements of the new standard 606-10-25-16 – 25-17 [IFRS 15.24–25] Promises to transfer a good or service can be explicitly stated in the contract, or be implicit based on established business practices or published policies that create a valid (‘reasonable’ under US GAAP) expectation that the entity will transfer the good or service to the customer. Conversely, administrative tasks do not transfer a good or service to the customer and are not performance obligations – e.g. administrative tasks to set up a contract. Example 25 – Activation fee in a wireless contract Telco A charges a one-time activation fee of 25 to Customer C when Customer C enters into a wireless contract for a voice and data plan. The activation of a new wireless customer to the network requires various administrative tasks, including setting up the wireless service, processing a new customer in the billing system, and credit checks. Telco A determines that activation activities are administrative in nature and therefore do not constitute a separate promise to the customer to be assessed as a separate performance obligation. Because the activation fee is charged at contract inception and is not refundable, Telco A applies the guidance on nonrefundable up-front fees (see Section 9). © 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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