Revenue for Telecoms

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78 | Revenue for Telecoms – Issues In-Depth | 4 Step 3: Determine the transaction price Minutes used Probability Less than 100,000 70% 100,000 to 150,000 20% Over 150,000 10% Telco A determines that the expected value method provides the better prediction of the amount of consideration to which it expects to be entitled. As a result, it estimates the transaction price to be 0.14 per minute (i.e. (0.15 × 70%) + (0.12 × 20%) + (0.10 × 10%)). Example 34 – Estimate of variable consideration: Most likely amount Telco B enters into a contract with a customer to build a call center. Depending on when the asset is completed, Telco B will receive either 110,000 or 130,000. Outcome Consideration Probability Call center is completed on time 130,000 90% Call center is delayed 110,000 10% Because there are only two possible outcomes under the contract, Telco B determines that using the most likely amount provides the better prediction of the amount of consideration to which it expects to be entitled. Telco B estimates the transaction price to be 130,000, which is the single most likely amount. Observations All facts and circumstances are considered when selecting estimation method ASU 2014-09.BC200 [IFRS 15.BC200] The use of a probability-weighted estimate, especially when there are binary outcomes, could result in revenue being recognized at an amount that is not a possible outcome under the contract. In such situations, using the most likely amount may be more appropriate. However, all facts and circumstances need to be considered when selecting the method that best predicts the amount of consideration to which a telecom entity will be entitled. 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 | 79 4.2 Variable consideration (and the constraint) | Historical experience may be a source of evidence 606-10-32-8, 32-11, 32-34a, ASU 2014-09.BC200 [IFRS 15.53, 56, 79(a), BC200] An entity may use a group of similar transactions as a source of evidence when estimating variable consideration, particularly under the expected value method. The estimates using the expected value method are generally made at the contract level, not at the portfolio level. Using a group as a source of evidence in this way is not itself an application of the portfolio approach (see 1.4). For example, an entity may enter into a large number of similar contracts whose terms include a performance bonus. Depending on the outcome of each contract, the entity will either receive a bonus of 100 or will not receive any bonus. Based on its historical experience, the entity expects to receive a bonus of 100 in 60 percent of such contracts. To estimate the transaction price for future individual contracts of this nature, the entity considers its historical experience and estimates that the expected value of the bonus is 60. This example illustrates that when an entity uses the expected value method, the transaction price may be an amount that is not a possible outcome of an individual contract. The entity needs to use judgment to determine whether the number of similar transactions is sufficient to develop an expected value that is the best estimate of the transaction price for the contract and whether the constraint (see 4.2.2) should be applied. 4.2.2 Determine the amount for which it is probable (highly probable for IFRS) that a significant reversal will not occur (‘the constraint’) Requirements of the new standard 606-10-32-11 [IFRS 15.56] 606-10-32-12 [IFRS 15.57] After estimating the variable consideration, an entity may include some or all of it in the transaction price – but only to the extent that it is probable (highly probable for IFRS) that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved. To assess whether – and to what extent – it should apply this constraint, an entity considers both the: – likelihood of a revenue reversal arising from an uncertain future event; and – potential magnitude of the revenue reversal when the uncertainty related to the variable consideration has been resolved. In making this assessment, the entity uses judgment, giving consideration to all facts and circumstances – including the following factors, which could increase the likelihood or magnitude of a revenue reversal. © 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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