IFRS 15. Revenue recognition from contracts with customers
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The document summarizes key discussion points from a workshop for telecommunication companies on implementing IFRS 15 Revenue from Contracts with Customers. Survey results showed that most companies would not apply IFRS 15 early and felt only somewhat prepared for implementation. IT solutions and data quality were identified as major challenges. There was uncertainty around impacts to business models and key performance metrics. Areas lacking consistency included accounting for free services, multiplay offers, and allocation of transaction prices.
IFRS 15. Revenue recognition from contracts with customers
- 1. IFRS 15 Revenue recognition from Contracts with Customers Workshops for Telecommunication companies www.pwc.com 6 June 2016
- 2. PwC Agenda I. Where the industry is in terms of IFRS 15? How is the process of IFRS 15 implementation organized? Would an IT implementation be a big issue? How would IFRS 15 impact operations? II. Practical aspects of IFRS 15 application - discussion 2 Examples enclosed in this publication do not represent the official opinion of PwC regarding given issue. We are aware of the fact that other solutions than shown below exist. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication.
- 3. PwC 3 Where are the responses coming from? 2 2 2 1 4 4 2 6 1 3 1 1 1 0 1 2 3 4 5 6 7 Total responses Total answers: 30
- 4. PwC 4 I Where the industry is in terms of IFRS 15?
- 5. PwC Most of the companies would not use the option to apply the standard earlier 5 When does the company intend to start applying IFRS 15? (first day of the financial year when the standard will be applied) • from 1st January 2018 • from 1st January 2017 17 of 30 respondents 7 of 30 respondents PwC
- 6. PwC 2 years after the standard issuance only 1/3 of companies feel well prepared… 6 To what extent is your company prepared to implement changes in revenue accounting? 0 7 12 4 7 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 I cannot estimate at this point Not very good Somewhat Well Very well Number of respondents
- 7. PwC Significant part of the market is still at the very beginning of the route 7 At what stage of implementation process is your company at the moment? Preliminary work Implementation Not started yetNot started yet Accounting analysis Accounting analysis Preliminary analysis of IT systems Preliminary analysis of IT systems IT systems requirements IT systems requirements Implementing IT solutions Implementing IT solutions 7 8 4 5 Testing IT solutions Testing IT solutions 7 3
- 8. PwC Once initial stages are ready it should be much easier to complete the implementation 8 How difficult do you believe the specific stages of IFRS 15 implementation to be? (1=very easy, 10=very difficult) 4,5 6,23 6,64 6,3 6,85 6,97 6,31 0 2 4 6 8 Other (please specify) Explanations to investors Preparing estimates Process of procedures reorganisation Implementation of IT system Data sources & gathering Accounting solutions and models Other: Opening balance sheet accounts
- 9. PwC How is the process of IFRS 15 implementation organized?
- 10. PwC Unlike other new standards, IFRS 15 requires not only accounting attention 10 How many people are involved in the process of IFRS 15 implementation? 17% 10% 40% 13% 3% 17% 1-2 employees 3-4 employees 5-9 employees 10-14 employees 15-19 employees We have not appointed a dedicated implementation team yet Are there any external advisors/specialists involved? • accounting advisors: 15 companies • information systems specialists: 9 companies • project management specialists: 2 companies • no external specialist involved: 4 companies • no decision made: 8 companies
- 11. PwC 11 Which departments are involved in implementation? * IFRS Metodology, BI, Accounting and Revenue Controlling, IFRS Methodology Financial Reporting IT Controlling Sales and marketing Billing Others* 27 companies 17 companies 13 companies 6 comp. 17 companies 21 companies Companies involve many different departments in IFRS 15…
- 12. PwC Would an IT implementation be a big issue?
- 13. PwC Complexity of IT architecture cause that off-the-shelf solutions are not attractive for typical telco 13 How the company will develop IT solutions that support revenue accounting according to IFRS 15 standards? 7 1 12 12 0 5 10 15 No decision made The purchase of existing applications and systems Mix model Internal solutions development Number of companies 14 of 30 respondents have already chosen IT solutions / supplier that support revenue accounting according to IFRS 15 standard
- 14. PwC Quality of data sources would be the biggest issue in IT implementation 14 How do you assess the following challenges facing IT solutions regarding IFRS 15? 5,23 5,35 5,92 5,37 6,44 5,46 Maintenance of information and data of performance obligations for contracts Data volume to be processed Link between different data sources Auditability of data Process quality of data sources Finding a solution to calculate/allocate revenue 0 2 4 6 8 (1=easy to be solved, 10=very difficult to be solved)
- 15. PwC Calculating revenue on individual contract basis would be more common, although tougher 15 Which approach will you chose for revenue adjustments in contracts? Numberofrespondents 9 7 4 10 7 5 7 11 0 1 2 3 4 5 6 7 8 9 10 11 12 Contract-by-contract Portfolio Mixed model No decision made How the company will apply adjustments to B2C contracts? How the company will apply adjustments to B2B contracts?
- 16. PwC How would IFRS 15 impact operations?
- 17. PwC There is still a lot of uncertainty with regard to impact on business models 17 Do companies plan to perform changes in their business models? 19 4 2 5 0 5 10 15 20 Not decided yet We don't want to disclose this information Yes No PwC
- 18. PwC The industry did not yet worked out the approach to typical performance measures 18 What approach does your company intend to apply in relations to the calculation of ARPU upon the implementation of IFRS 15? 26 0 0 1 2 3 0 10 20 30 We haven't yet decided Based on service + hardware revenue (IFRS 15) We intend to stop using ARPU Other method Based on billing Based on service revenue (IFRS 15)
- 19. PwC In most cases, management accounts would probably follow IFRS 15 rules 19 Do companies intend to carry out the managerial/internal reporting according to IFRS 15 after implementation of standard? 16 0 2 4 10 0 0 5 10 15 We have not made the decision yet Other approach (please specify) Yes, but we will additionally carry it out using the current accounting rules Yes, but with some adjustments (corrections) Yes, without any exceptions No,we will not perform allocations using IFRS 15
- 20. PwC 20 II Practical aspects of IFRS 15 application - discussion
- 21. PwCPwC 21 Step 2 Step 3 Step 4 Step 5 Revenue recognition according to IFRS 15 standards requires application of 5 steps approach Identification of separate performance obligations Determination of the transaction price Allocation of the transaction price Revenue recognition Step 1 Identification of contract
- 22. PwC 22 In case of framework contracts with B2B Customers the company plans to consider a contract according to IFRS 15 as: Step 1 Step 2 Step 3 Step 4 Step 5 There is no obvious answer on what constitutes a contract in B2B framework agreements 9 3 14 2 2 0 2 4 6 8 10 12 14 16 We have not decided yet We do not have such contracts Depends on contract requirements Individual contract, on each SIM Framework contract
- 23. PwCPwC 23 Step 2 Step 1 Step 3 Step 4 Step 5 5 steps to Revenue recognition Identification of separate performance obligations Identification of separate performance obligations Identification of contract Determination of the transaction price Allocation of the transaction price Revenue recognition
- 24. PwC 24 How the company will recognise additional services, that will be provided free of charge for first months and will be charged in following months (if a customer does not resign)? Krok 2 Step 3 Step 4 Step 5 Accounting for freebies would not be consistent Step 2Step 1 15 5 2 1 5 0 2 4 6 8 10 12 14 16 No decision made Other approach (What approach?) Both solutions will be applied - depending on the type of company (agent versus principal) Material right considered as an additional performance obligation A component that reduce transaction price
- 25. PwC 25 In case of multiplay offers: Krok 2 Step 3 Step 4 Step 5 For simplicity reasons, multiplay offers can sometimes be accounted for as a one performance obligation Step 2Step 1 12 1 4 3 4 4 0 2 4 6 8 10 12 No decision made yet We don't have such offers Depends on the offer All services are one performance obligation Similar services are grouped into one performance obligation Each service is a separate performance obligation
- 26. PwC 26 Krok 2 Step 3 Step 4 Step 5 Majority of companies would recognize at least one type of material rights Step 2Step 1 Right to use a budget to buy equipment according to framework contract Rights to reduce service price Right to extend contract with more profitable conditions Points granted as part of loyalty program Not applicable Material rights identified as a distinct performance obligations PwC 10 of 30 respondents have not decided on material rights yet 9 companies 5 companies 2 companies 5 companies 1 company 4 companies OtherRight to extend contract with more profitable conditions
- 27. PwCPwC 27 Step 3 Step 1 Step 2 Step 4 Step 5 5 steps to Revenue recognition Determination of the transaction price Determination of the transaction price Identification of contract Identification of separate performance obligations Allocation of the transaction price Revenue recognition
- 28. PwC 28 Which period shall be considered on the need to estimate an amount of revenue at the signing time: Step 2 Step 4 Step 5 5 steps to Revenue recognition Step 1 Step 3 15 5 5 2 original contract duration contract duration shortened – until contact with Customer to extend the contract contract duration and the most probable time of extension other
- 29. PwC 29 Step 2 Step 4 Step 5Step 1 Step 3 1 6 11 0 2 4 6 8 10 12 Other Contracts for the services with subsidised equipment Instalment payment contracts (equipment plus services) Which type of contracts the significant financing component was identified in? 32% of surveyed companies would recognize a significant financing component in their contracts, 43% have not decided yet
- 30. PwC 30 Recognition of budgets granted for Customers: Step 2 Step 4 Step 5 There is no consistency on how to approach the quota budgets for B2B customers Step 1 Step 3 Separate performance obligation 44% (12 of 27 companies) 19% (5 of 27 companies)Not applicable PwC 37% (10 of 27 companies)Reduction of the transaction price
- 31. PwCPwC 31 Step 4 Step 1 Step 2 Step 3 Step 5 5 steps to Revenue recognition Allocation of the transaction price Allocation of the transaction price Identification of contract Identification of separate performance obligations Determination of the transaction price Revenue recognition
- 32. PwC Allocation of the transaction price to separate performance obligations (equipment) 32 Step 1 Step 2 Step 3 Step 4 Step 5 The price in separate own offer would be the best indicator of SSP for equipment… 14 2 7 8 14 2 9 9 0 2 4 6 8 10 12 14 16 Based on standalone offer Price in electronic equipment stores Cost plus a margin No decision made How does the company plan to determine SSP regarding equipment in B2C contracts? How does the company plan to determine SSP regarding equipment in B2B contracts?
- 33. PwC Allocation of the transaction price to separate performance obligations (services) 33 Step 1 Step 2 Step 3 Step 4 Step 5 14 3 3 4 7 14 2 3 5 8 0 2 4 6 8 10 12 14 16 The price of service in SIM only offer Cost plus margin Residual value Other No decision made How does the company plan to determine SSP regarding equipment in B2C contracts? How does the company plan to determine SSP regarding equipment in B2B contracts? …and for the service
- 34. PwC 34 Step 1 Step 2 Step 3 Step 4 Step 5 There is no clear response on what level the SSP would be determined in multiplay offers With regard to multiplay offers, at what level is the standalone selling price determined? 26% 30%11% 33% On the level of a single service included in the package On the level of service package (e.g. fixed and mobile voice, data, broadband) Other (service and equipment separately; mixed model) No decision made yet
- 35. PwC 35 Step 5 Step 1 Step 2 Step 3 Step 4 5 steps to Revenue recognition Revenue recognition Revenue recognition Identification of contract Identification of separate performance obligations Determination of the transaction price Allocation of the transaction price PwC
- 36. PwC 36 Step 1 Step 2 Step 3 Step 4 Step 5 Most of telcos would not change their principal vs. agent accounting a) Revenue recognition in agent versus principal transactions: b) In the case of selling through an agent (dealer) at which point does your company plan to recognize revenue: 3 16 9 0 2 4 6 8 10 12 14 16 We will apply changes We will not apply changes We have not decided yet 10 1 5 2 9 0 1 2 3 4 5 6 7 8 9 10 At the time of sale by dealer At the time of delivery to a dealer Both cases are possible Other We have not make the decision yet
- 37. PwC Majority of telcos would capitalize only material costs 37 What kind of costs of obtaining and fulfilling contract is the company going to capitalise? 6 3 2 7 4 1 1 15 20 0 5 10 15 20 25 We haven't decided yet None Other Cost of installation Costs of subsiding equipment Couriers costs SIM card costs Employees' bonuses directly related to acquisition/retention of a customer Dealers' commissions
- 38. PwC Analyzing EBITDA would require cautios reading of accounting policies How EBITDA will be calculated? 14 7 8 1 0 2 4 6 8 10 12 14 16 No decision made SAC depreciation below EBITDA SAC depreciation above EBITDA We would not capitalise SAC PwC 38
- 39. PwC Contact us 39 Gabor Balazs Radomił Maślak Partner, member of the regional global Accounting Consulting Services (ACS) team. He is constantly providing IFRS advice to several large IFRS clients in the region. As part of his regional responsibilities, Gabor is also the reviewer of the PwC IFRS Manual of Accounting and the representative of the CEE region in PwC’s Telecommunication Industry Accounting Group (TIAG). Director in Audit and Assurance Services. Expert in IFRS with 19 years of experience in accounting and financial reporting advisory. He has held training on IFRS for numerous entities and employees of PwC. Radomił is also the author of newspaper articles devoted to IFRS. gabor.balazs@hu.pwc.com +36 306 89 54 55 radomil.maslak@pl.pwc.com +48 502 18 42 23
- 40. PwC 40 Thank you! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2016 PricewaterhouseCoopers Ltd.. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Ltd. firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity.