Revenue for Telecoms

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70 | Revenue for Telecoms – Issues In-Depth | 4 Step 3: Determine the transaction price 4.1 Contractual minimum commitment or contracted service amount? Requirements of the new standard 606-10-25-2, 32-4 [IFRS 15.10, 49] A contract is an agreement between two or more parties that creates enforceable rights and obligations. The terms of the contract (including the period over which the contract is enforceable, see 2.1.1) and an entity’s customary business practices are considered in determining the transaction price. Furthermore, in determining the transaction price, the entity assumes that the goods or services will be transferred to the customer as promised in the existing contract and that the contract will not be cancelled, renewed or modified. Observations Careful analysis of enforceable rights and obligations and customary business practices Many contracts in the telecom industry require a customer to commit to a specified term (duration). In addition, these contracts often implicitly or explicitly require the customer to commit to a minimum level of service or a minimum monthly payment amount that cannot be decreased without terminating the contract and incurring termination penalties. In conjunction with this minimum commitment over the specified term, telecom entities may provide the customer with discounted goods or services (e.g. handsets or installation) that are typically delivered up front. However, at the outset of the contract, or during the term of the contract, customers sometimes select (and the contract specifies) a level of service or monthly payment amount that may be higher than the minimum amount. Such contractual terms raise a question about the enforceable rights and obligations of the telecom entity that have to be considered when determining the transaction price at contract inception. That is, the amount that a telecom entity “expects to be entitled in exchange for transferring the service” is either: – the minimum amount to which the customer has committed for the contract term (the ‘contractual minimum commitment’); or – the actual amount for which the customer has contracted at contract inception (the ‘contracted service amount’). Careful analysis of the facts and circumstances is required to determine the transaction price. 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 | 71 4.1 Contractual minimum commitment or contracted service amount? | Example 29 – Determining the transaction price: Contractual minimum commitment Telco T enters into a 24-month wireless voice and data services contract with Customer C. At contract inception, Telco T transfers a handset to Customer C, and Customer C pays 200 to Telco T, which is less than the stand-alone selling price of the handset. The 24-month contract includes 1,000 monthly minutes of voice and 1GB of data usage for a monthly fee of 80 (Service Package A). During the two-year term, Customer C may decrease the service package to 500 monthly minutes of voice and 500MB of data usage for a monthly fee of 60 (Service Package B). (In other contracts, Telco T also offers an ‘add-on’ package of 500 minutes of voice and 500MB of data usage that can be added or dropped monthly at the customer’s option.) Customer C cannot reduce the service package below 60 without terminating the contract and incurring substantive termination penalties. In addition, Customer C can only reduce the service package in the month following that in which he provides notice. Note that this example does not assess whether the contract includes a significant financing component. After analyzing the terms and conditions of the contract, Telco T concludes that using the contractual minimum commitment approach to determine the transaction price would be appropriate. Following this approach, the transaction price for the service is 1,460, calculated using one month at the contracted amount of 80 and 23 months at 60 per month for Service Package B, which is the minimum amount to which Customer C can reduce his service package without incurring penalties. Thus, following this approach, the total transaction price is 1,660 (200 promised consideration for the handset and 1,460 promised consideration for the services). See 5.2, Example 41 for allocating the transaction price. © 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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