Revenue for Telecoms

64 | Revenue for Telecoms – Issues In-Depth
| 3 Step 2: Identify the performance obligations in the contract
606-10-55-33
[IFRS 15.B31]
To assess whether a warranty provides a customer with an additional service, an
entity considers factors such as:
– whether the warranty is required by law: because such requirements typically exist
to protect customers from the risk of purchasing defective products;
– the length of the warranty coverage period: because the longer the coverage
period, the more likely it is that the entity is providing a service, rather than just
guaranteeing compliance with an agreed-upon specification; and
– the nature of the tasks that the entity promises to perform.
606-10-55-31
[IFRS 15.B29]
606-10-55-34
[IFRS 15.B32]
606-10-55-35, 450-20
[IFRS 15.B33, IAS 37]
If the warranty – or part of it – is considered to be a performance obligation, then
the entity allocates a portion of the transaction price to the service performance
obligation by applying the requirements in Step 4 of the model (see Section 5).
If an entity provides a warranty that includes both an assurance element and a
service element and the entity cannot reasonably account for them separately, then it
accounts for both of the warranties together as a single performance obligation.
A legal requirement to pay compensation or other damages if products cause damage
is not a performance obligation, and is accounted for under other relevant guidance.
Example 28 – Wireless handset extended warranty
Customer C purchases a wireless handset and a two-year service contract
from Telco B. Customer C has the option, and chooses to purchase, a one-year
extended warranty to cover the operation of the handset for the second year of
the two-year contract.
As Customer C has the option to purchase the extended one-year warranty,
Telco B identifies this warranty as a separate performance obligation.
Observations
Wireless handset warranties
Wireless customers can often purchase separate warranty coverage for their
wireless handset from their telecom provider. This coverage may guarantee that
the handset will continue to function properly after the manufacturer’s warranty
has expired. It may also provide additional coverage during the manufacturer’s
warranty period, such as the loan of a handset during the repair period, or
the replacement of a broken, lost or stolen handset. Whether the warranty
is separately priced is not determinative of whether a separate performance
obligation exists and these warranty plans will typically represent separate
performance obligations.
Additionally, if the warranty activities are performed by a third party, then the
entity considers the principal versus agent guidance (see 10.3 in Issues In-Depth,
Edition 2016). Under IFRS, the entity also considers any interaction with the
insurance guidance.
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