Revenue recognition

project preliminary
IFRSviews
Appendix N
telecommunications

This industry-specific appendix should be read together with the publication titled
Revenue recognition project preliminary IFRS views. The main body of the publication
provides a summary of the revenue recognition model proposed in the Discussion Paper,
highlights some issues for companies to consider in evaluating the merits of the
Discussion Paper and discusses some of the expected changes to current IFRS.
This appendix is provided as a means to highlight some of the more significant
implications that the proposed revenue recognition model may have on the
telecommunications industry. We encourage companies to read the topics carefully and
consider the potential effects that the proposed model could have on their existing
revenue recognition practices.
The issues discussed in this appendix are intended to provoke thought and assist
companies in analysing the potential implications, for their businesses, of the proposals
contained in the Discussion Paper. The discussions within this publication do not
represent final or formal views, as the elements of the Discussion Paper are subject to
change on further deliberation by the Boards.

The typical telecommunications (telecom) operators revenues are derived from the
ongoing provision of fixed line (traditional) telephone, mobile (wireless) and internet
services. The monthly fees charged for these services are generally fixed, although a
portion may be based on usage. Revenue is recognised as services are provided. Prepaid
mobile revenues are deferred and recognised in proportion to the number of minutes used.
The model proposed in the Discussion Paper may significantly affect the amount and timing
of revenue recognition for telecom operators, as discussed in further detail below.
It is important to analyse the Discussion Paper in the context of the typical telecom
business model, which is broadly founded on the fixed cost base of the network. Therefore,
the business model is reliant on connecting and retaining customers on the network to
generate contractual and non-contractual revenues through which the fixed cost base is
recovered. Whilst such services may be provided in the context of a contract, referred to
aspostpaid, it is also very common for customer relationships to be non-contractual and
pay-as-you-go, which is prepaid.
 Telecom operators may make further The financial information currently provided
customer acquisitions either directly by the operators separates the economic
orthrough third parties. As a result, activities of customer acquisition and
complexities may arise when attempting retention from revenues subsequent to
toapply the proposed model under the acquisition. This information is relied upon
Discussion Paper, in particular: by analysts and is the basis upon which the
business is managed. Given the number of
The connection of a customer on the
customers and volume of transactions, the
network comprises a range of activities,
systems that generate this information are
which may include the acquisition and
highly complex. Therefore, without practical
retention of a customer relationship,
guidance, it may prove to be difficult to
the provision of activation services,
apply the proposed model in the telecoms
the delivery of a handset and access to
sector and its application could give rise to
additional services. Moreover, telecoms
substantial costs. It appears that
operators contend that the activities on
transactions that the telecoms industry
the acquisition of a customer (inception
regards as economically identical could be
of the contract) arecomposed of net
reported differently, hence, changing
costs and revenues. For example,
financial information currently used in the
the proceeds from the handset may
industry. The discussion and the examples
be effectively offset against other
later in this appendix illustrate this.
acquisition costs such as commissions
and settled net with the distribution
channel. The Discussion Paper does
notappear to consider explicitly
addresssuch businessmodels.
A contract-based approach, and
measurement of the related revenues,
may be challenging to apply in an
industry where a significant part of
revenue is contingent and contracts are,
in substance, only a subset of the overall
economic relationship with the customer.
For example, telecoms operators expect
to receive contingent revenues during the
initial contract term and expect revenues
to continue subsequent to the expiry
of the contract. It is not clear how such
activities will be accommodated in the
model proposed in the Discussion Paper.

2 Revenue recognition project preliminary IFRS views Appendix N telecommunications

Mobile revenues
Mobile contracts typically include multiple It is unclear in the Discussion Paper which to view the handset as a good used to
deliverables, such as handsets, voice mobile contract components would be provide a service, a telecom operator will
services and data services. Handsets are considered performance obligations under not recognise revenue for the handset until
provided customarily at a subsidised price the proposed model. Performance its obligation to provide mobile services is
significantly below the cost of the handset, obligations are not the same as the satisfied. This may occur evenly over time,
or may even be provided at no cost to the identifiable components derived as per IAS as the mobile service obligation is satisfied
customer. Voice and data services are often 18 and there is likely to be more on a monthly basis, or when the mobile
bundled. For example, telecom operators performance obligations identified in an service is used, such as in a prepaid mobile
offer a set number of voice minutes or a set arrangement under the proposed model arrangement. Regardless of which of these
number of text messages for a flat monthly than under current IFRS. However, alternatives the Boards select, current
rate. In addition, telecom operators will consistent with current practice, a telecom revenue recognition practices for handsets
charge customers for voice and data services operator would only separately account for are likely to be affected.
in excess of the minimum amounts included individual performance obligations to the
in a bundle. Mobile contracts may also If the handset and ongoing service are
extent they were delivered at different
include add-on options, such as mobile considered separate performance
times (refer to the discussion on identifying
internet or broadband, which a customer obligations, the allocation of revenue to
performance obligations in the main body
may cancel at any time (and, thus, are not each may differ, as compared to the current
of this publication for further information).
bound to the term of the customer contract). accounting policy applied by most
In addition, adoption of the proposed model
operators. The contracts transaction price
Under current IFRS, telecom operators may require information systems
will be allocated based on the relative
account for mobile contracts in accordance modifications to accommodate and track
standalone selling price of the handset and
with IAS 18 and often refer to US GAAP separate performance obligations. These
other performance obligations. However, it
guidance (EITF 0021) according to IAS 8. modifications under the proposed model
is not clear what the standalone selling
They have typically concluded that the may be extensive if a significant number of
price of the handset is. For example, the
handset and the mobile services may be additional separate performance obligations
standalone selling price of a handset may
accounted for as separate identifiable are identified.
equal the amount for which the telecom
components. However, individual mobile Under the proposed model, the handset operator sells the handset when customers
services generally are treated as single may be considered a separate performance replace a lost or damaged handset.
deliverables and not separated because obligation as it is delivered at a different Alternatively, the price could be based on a
they are delivered at the same time. The time than the ongoing service. Handset non-entity specific amount (e.g. the amount
activation fee is not considered a separate revenue will be recognised when control has charged by another operator or distributor).
deliverable, as it does not have standalone transferred to the customer (possibly, when However, it is likely not to be the discounted
value, and is simply considered an the customer takes physical possession of price offered to a new or renewing
additional arrangement consideration to the handset). Alternatively, it may be more customer. Consequently, this may result in
beallocated between the handset and the appropriate for a telecom operator to view additional amounts being allocated to the
ongoing services. The handset (with a handset as a good used in the provision of handset and possibly earlier recognition of
activation) is delivered first, followed by the a service. As discussed in the main body of revenue than under current IFRS.
mobile service (which is provided over the this publication, the Boards propose a
contract period, generally one or two rebuttable presumption that an asset to
years). Because some amount of the beused in satisfying another performance
arrangement consideration that may be obligation within the contract is not
allocated to the handset generally is considered transferred to the customer
contingent on the telecom operator until that other performance obligation is
providing the mobile service, the amount completed. If it is proven more appropriate
that may be allocated to the handset is
limited to the cash received (i.e., the
amount paid for the handset or activation
fee, or combination of both) at the time of
the handset delivery.

Revenue recognition project preliminary IFRS views Appendix N telecommunications 3

 Furthermore, it appears that determining However, telecom operators may find it
the standalone selling price of handsets difficult to estimate contingent consideration
might have to be done on an individual on a contract-by-contract basis.
contract-by-contract basis due to the
The effects of changes in contract terms
variations in prices offered to customers
and conditions after contract inception also
based on customer type (new or renewing),
have not been considered under the
contract length, mobile plan and products
proposed model. For example, telecom
included in the transaction (e.g. type of
operators typically offer handset upgrades
handset selected). If so, this could prove to
at discounted prices to existing customers
be challenging, given the large volume of
at, or near the end of the contract period in
individual contracts entered into by
order to induce the customer to renew the
telecomoperators.
contract. Handset upgrades and contract
The proposed model may also result in renewals may occur before the end of the
inconsistencies in the amount of revenue existing contract period. Under current
recognised for what is essentially a similar IFRS, these upgrades generally are
mobile plan. For example, telecom regarded as a contract modification, and
operators offer a variety of handsets with a sometimes involve loyalty schemes that are
wide range of standalone selling prices. A accounted for in accordance with IFRIC 13.
telecom operator may recognise less mobile The proposed model does not yet address
service revenue for the same mobile plan how to account for contract renewals and
when a customer purchases a higher-cost modifications. However, if the telecom
handset (such as a smartphone) versus a operator is obligated to provide a
lower-cost handset (such as a basic handset discounted phone in the future, that may
without data and entertainment features). represent a performance obligation to
which some portion of the transaction
As mentioned previously, mobile contracts
pricemust be allocated under the
frequently include contingent amounts, such
proposedmodel.
as add-on options or voice or data services
in excess of the minimum amounts included
in a bundle. Additionally, telecom operators
expect many customers will extend their
contracts for secondary terms that are not
necessarily known at inception. The
Discussion Paper does not address the
measurement or timing of recognition of
contingent consideration, so it is not clear
how these situations will be addressed.

4 Revenue recognition project preliminary IFRS views Appendix N telecommunications

Performance obligations: definition and attributing value
toperformance obligations
In the following examples, we have assumed The only difference between the two offers
that all performance obligations, other than is the design of the handset. The rebate
the handset, transfer over the contract allowed by the operator on both offers is
period. In addition, contingent amounts are the same (120). The second handset is of
recognised only when the service is a newer and a better design but offers the
provided and reasonable amounts can be same functionalities. There would be a
determined for the standalone selling price similar fact pattern if the handset (Offer 2)
of both handset and airtime services. had become outdated, and had been
discounted more heavily than originally.
1) Same pay monthly 12-month airtime
contract with different handsets The model proposed in the Discussion
(similar functionalities) Paper would result in a different allocation
of revenue to the services (120 in Offer
A telecom operator is selling the following
1and 140 in Offer 2) although the rebate
mobile plans:
granted by the operator on the bundle is
Offer 1: 12-month airtime contract for thesame for both offers (120).
which the customer pays 20 per month
(240 over the contract period) with a
freehandset. Table 1

Offer 1 Base price Weighted average Allocated

The standalone price of the handset is
discount consideration
180
The standalone price of the airtime Handset 180 60 120
contract is 180 for the 12 month
Airtime 180 60 120
period (15 per month)
Total 360 120 240
Offer 2: 12-month airtime contract for
which the customer pays 20 per month
(240 during the contract period) with a Offer 2 Base price Weighted average Allocated
discount consideration
handset for which the customer pays
180at inception. Handset 360 80 280

The standalone price of the handset Airtime 180 40 140

is360
Total 540 120 420
The standalone price of the airtime
contract is 180 for the 12-month
period (15 per month)

Revenue recognition project preliminary IFRS views Appendix N telecommunications 5

 2) A
 12-month contract with different Offer 2: 12-month airtime contract for
handsets (a simple handset and a which the customer pays 20 per month
smartphone) (240 during the contract period) with a
A telecom operator is selling the following free smartphone.
offers: The standalone price of the handset
Offer 1: 12 month airtime contract for is360.
which the customer pays 20 per month The standalone price of the airtime
(240 over the contract period) with a contract is 180 for the 12-month
handset billed to the customer for 180 at period (15 per month). The operator
inception date. expect that the customer will use
smartphone functionalities that cost
The standalone price of the handset 360 in services for which there is no
is360.
contractual commitment to browse the
The standalone price of the airtime internet. The standalone price of those
contract is 180 for the 12 month services is also 360.
period (15 per month)

Table 2.1

Offer 1 Base price Weighted average Allocated

discount consideration
Handset 360 80 280

Airtime 180 40 140

Total 540 120 420

Offer 2 Base price Weighted average Allocated

discount consideration
Handset 360 200 160

Airtime 180 100 80

Total initial contract 540 300 240

revenue

Additional expected 360 360

services

Total expected revenue 900 300 600

6 Revenue recognition project preliminary IFRS views Appendix N telecommunications

The rebate allowed by the operator on both cannot be taken into consideration,
offers is different because the handsets do thewhole rebate granted is allocated to
not have the same characteristics. The thehandset and the airtime. Therefore,
operator is expecting more revenue from theairtime revenue is different from
Offer 2 through additional services. Those Offer1, for exactly the same service
additional services are listed in the contract, (140against 80).
as selected by the customer, but the
If we assume another potential scenario in
customer has the right to cancel the
which we include additional services in the
subscription for those additional services at
allocation, considering that they are part
any time during the contract.
ofthe contract and can be included in the
We see from the application that, on the estimated transaction price, the allocation
assumption that the additional revenues ismuch closer to Offer 1:

Table 2.2

Offer 2 Base price Weighted average Allocated

discount consideration
Handset 360 120 240

Airtime 180 60 120

Additional expected 360 120 240

services
1

Total 900 300 600

1These services are contingent and the Boards have yet to finalise how these revenues should be dealt with, i.e., should they be taken
into account on Day 1, or not? This example assumes that they will be estimated on entering into the contract. The alternative would
be to accounts for these services as additional contracts when requested by the user.

Activation fees and relatedcosts

Telecom operators often charge new expected term of the customer relationship
customers non-refundable up-front under the arrangement that generated the
activation fees. These fees are not connection.
considered as a separately identifiable
Up-front recognition of the non-refundable
component under IAS 18 and, therefore,
fee may be possible in some circumstances
are not accounted for as separate
deliverables. Under current IFRS, the where a clearly demonstrable separate
operator considers the specific facts and service exists, and this is provided at the
circumstances to determine the appropriate inception of the contract
accounting for non-refundable, up-front The Discussion Paper does not comment
connection fees. onwhether activation may or not be a
When the connection transaction is bundled separate performance obligation; or,
with the service arrangement in such a way whether activation fees received may or
that the commercial effect cannot be may notbe considered a portion of the
understood without reference to the two transaction price allocated to the mobile or
transactions as a whole, the connection fixed-line services underlying thecontract
feerevenue should be recognised over the performance obligations.

Revenue recognition project preliminary IFRS views Appendix N telecommunications 7

 Equipment installation revenues Topics not yet addressed
Telecom operators may provide businesses bytheBoards
voice or data equipment installation, which The proposed model does not address
involves installing cable and customer several areas. Examples of the more
premise equipment (CPE), such as phone significant areas applicable to the telecom
systems, modems and routers. industry include the following:
The proposed model may significantly Right
to use assets telecom operators
change the accounting for equipment may earn revenues from providing the
installation revenues in several ways. right to use an asset, such as set-top
Telecom operators will have to determine boxes or indefeasible rights of use of
whether equipment installation is a good or fibre optic cable. The proposed model
a service; that is, whether control of the does not address how revenue will be
asset (e.g., the CPE) is transferred at a point recognised for the right to use an asset
in time or continuously over a period. or whether lease accounting (from the
Telecom operators will have to carefully lessors perspective) will be excluded
consider the contract terms in order to from the scope of any final revenue
determine whether CPE is transferred at the recognition standard.
end of or throughout the construction
Sales
incentives sales incentives
period, factoring in the level of
are common in the telecoms industry.
customisation, payment terms and the
Telecom operators often offer free
customers rights to work in progress. If an
products (mobile handsets), promotional
equipment installation contract is
offers (e.g., gift cards, free gifts, rebates)
determined to be a good, then a telecom
or volume discounts to customers.
operator will not recognise revenue until the
While the Discussion Paper indicates
CPE is delivered and control has been
that sales incentives are likely to be
transferred (generally, at the end of the
accounted for as separate performance
construction period). On the other hand, if
obligations, it does not conclude on
an equipment installation contract is
how they will be measured. However,
determined to be a service, then a telecom
the Discussion Paper does suggest that
operator will recognise revenue as control of
determining whether a sales incentive is
the CPE is continuously transferred
a performance obligation may be subject
throughout the construction period.
to the facts and circumstances of the
However, even if an equipment installation contract.
contract is determined to be a service, the Breakage telecom operators may
revenue recognition pattern under the estimate breakage in determining revenue
proposed model may differ compared with recognition for certain transactions. For
the percentage-of-completion method under example, recognition of prepaid calling
IAS 11. Rather than recognising revenue card revenues typically incorporates
based on the estimated extent of completion breakage estimates. Revenues are
of the project, revenue will be recognised deferred until the prepaid calling card
when control of the CPE is transferred. For minutes are used and breakage is
example, if the CPE installation is completed recognised in income based on historical
in phases, then revenue may be recognised trends. The proposed model does not yet
as each phase is completed. Telecom address breakage and how it may factor
operators will have to consider all the facts into the measurement of obligations.
and circumstances to determine the
appropriate method to estimate the amount
of assets transferred and to recognise
revenue for equipment installation contracts
that are considered service transactions.

8 Revenue recognition project preliminary IFRS views Appendix N telecommunications

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typically delivered with a right of return, Financial Reporting Standards Group
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if certain criteria are met. As more reporting world, the impact of which
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Gross
versus net presentation
makes a difference.
evaluating revenues for gross or net
presentation is important in the telecom
industry, particularly in indirect channel
mobile arrangements (i.e., when mobile
handsets and services are sold through a
third party rather than directly through
the mobile operator or when content is
sold to the end customer by a content
provider through the telecom operator).
IFRS preparers often refer to EITF Issue
No. 9919, Reporting Revenue Gross
as a Principal versus Net as an Agent, in
www.ey.com/ifrs
accordance with IAS 8, and will now refer
to the improvement of IAS 18 which 2009 EYGM Limited.
includes guidance on gross versus net All Rights Reserved.
reporting. Theproposed model does not EYG No. AU0323
address presentation issues such as this.
Please refer to our discussion of these
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