hotel grande bretagne, athens, 8-9 june workshop 1 ... · betacom offers its customers catv...

Hotel Grande Bretagne, Athens, 8-9 June

Workshop 1 – Revenue recognition workshop

2015 Global Communications GAAP Summit

June 2015PwC

Where are you with IFRS 15?

2Global Communications GAAP Summit

1 2

25% are consideringchanging tariff

structures to simplifyIFRS 15 accounting

40% are still at theimpact assessment

stage

57% think currentsystems are unable toprovide the datarequired by IFRS 15

38% expect tohave differencesin internal and

external reporting

57% thinkcurrent systemswill be unable to

provide all thedata required by

IFRS 15

75% are thinkingabout their

externalcommunication

….. 13% have haddiscussions with

externalstakeholders

June 2015PwC

Hot topics

Global Communications GAAP Summit

3

1 240% are at the ImpactAssessment stage

57% think currentsystems are unable toprovide the datarequired by IFRS 15

Identifyingperformanceobligations

Determiningthe SSP of

POs

Variableconsideration

Externalversus

internalreporting

Principalversusagent

Treatmentof costs

Indirectversus direct

saleschannels

Financingcomponent

Contractduration

June 2015PwC

What impact will the deferral have on your preparation for IFRS15?

1. No impact – we will be ready to adopt in 2017

2. The deferral gives us confidence we will be ready for 2018

3. We will now adopt the standard on a full retrospective basis

4. We have put our IFRS 15 project on hold

4Global Communications GAAP Summit June 2015PwC

June 2015PwC

TRG – topics referred to the Boards - February 2015

Performanceobligations

Licenceimplementation

guidance

Shipping andhandling

(US GAAP only)

• Meaning of ‘significantly affect’: Which attributes to consider

- Articulation A (IASB): activities that significantly affect utility of IP

- Articulation B (FASB): focuses on the type of IP

• ‘Royalty’ exception: Royalties should not be split; exception only appliesto POs that are ‘predominantly’ licences

• Additional amendments (FASB only)

• ‘Perfunctory or inconsequential’ obligations

- IASB: no standard setting

- FASB: propose factors to determine if promise is immaterial

• Indicator of ‘distinct in the context of the contract’

- IASB: develop examples only

- FASB: also clarify principle and align indicators

• IASB: no discussion

• FASB: policy choice about whether separate performance obligation orfulfilment costGlobal Communications GAAP Summit

PwC 5

June 2015PwC

TRG – topics referred to the Boards - March 2015

Noncashconsideration

Transition

Principal versusagent

• Still under discussion by both boards; IASB to discuss at MayBoard meeting; FASB to discuss at future meeting.

Sales tax(US GAAP only)

Collectibility

• Expedient for modifications before earliest period presented

• IASB only: no requirement to restate completed contracts underthe full retrospective approach

• IASB: no discussion

• FASB: policy choice to present net or perform analysis

• IASB: no standard setting

• FASB: propose to clarify measurement date is at contract inception

• IASB: future discussion

• FASB: propose to clarify

Global Communications GAAP Summit6

June 2015PwC 7Global Communications GAAP Summit

June 2015PwC

A recap of the 5 step approach


1

Identificationof a contractwith acustomer

2

Identificationof separateperformanceobligations

3

Determinationof thetransactionprice

4

Allocationof thetransactionprice to theseparateperformanceobligations

5

Revenuerecognitionwhen (or as)the entitysatisfies aperformanceobligation


9June 2015

PwC

Customer contracts and variable consideration

Performance obligations and standalone selling price

Segmental reporting versus performance obligations

Costs of acquiring and fulfilling customer contracts

Significant financing components

Customer contracts andvariable consideration


Customer contracts


A contract is

“an agreement between two ormore parties that creates

present enforceable rights andobligations (not necessarily

written)”

Contractcombination

Contractmodification

Contract duration

Contract duration may depend on:

• Local regulation

• Local consumer protection laws

• Customary business practices may give customers legally enforceablerights and obligations


Identifying the contract duration is important but not always easy!

The devil can be in the detail

BetaCom offers its customers CATV service. The contracts do not have a statedduration and both BetaCom and the customer can terminate at anytime withoutpenalty.

BetaCom has a special offer this month that guarantees a set price per month for thenext 12 months. The STB provided by BetaCom is actively recovered when thecustomer churns.

No amount is billed to the customer for the STB.

1. 1 month


What is the contract duration?

2. 12 months 3. Indefinite 4. Not sure

Proposed solution

• The contract duration is monthly. Both parties can terminate at any point withoutpenalty

• BetaCom and the customer’s enforceable rights and obligations do not extendbeyond the goods and services already obtained/provided

• The offer of a guaranteed price for 12 months does not create a present enforceableright and obligation to either BetaCom or the customer. The customer would needto opt into this right each month

• If BetaCom concluded the STB was a separate performance obligation, then onemonth of service revenue would be allocated between the STB and service


In Denmark local regulation states customer contracts cannot exceed 6 months.

BetaCom’s customer signs a service contract with no stated end date. The contract hasa non cancellable period of 6 months and can then be cancelled by the customer at 1months notice.

BetaCom provides a subsidised device to the customer. The average customer life is 22months.


1. 1 month

What is the contract duration?

2. 6 months 3. 22 months 4. Other

Proposed solution

• The present enforceable rights and obligations of BetaCom and the customer arefor 6 months

• The consideration for 6 months of service would be used to determine thetransactions price for allocation between the subsidised device and service

NB: This scenario exists in certain markets where telecom regulation and/orconsumer protection legislation limits the duration of contracts and limits theability to renew or extend customer contracts unilaterally


At contract inception of a 24 month contract the customer has the ability toupgrade/renew their contract at any time after month 12. Should they exercise theirright and upgrade/renew after 12 months they are not charged a termination penalty.

How should this early upgrade right be accounted for?


June 2015PwC

1. Variable consideration as BetaCom is entitled to anything between 12 – 24 monthsof cash flows

2. There is a contract modification at the point in time the customer chooses toupgrade

3. The early upgrade/renewal right is a separate performance obligation (materialright)

Variable consideration

Included in the transaction price only if it is highly probable that there will not bea significant revenue reversal

Key effect: must recognise ‘minimum amount’ that is highly probably of notreversing


Uncertaintyover a long

period of time

Limitedexperience

with similarcontracts

Susceptible tofactorsoutsidecontrol

Broad rangeof outcomes

Contract modifications


What types ofcontract

modificationshave you

identified?

Have youidentifiedcontract

modificationsthat would

require you toretrospectively

remeasurerevenue?

“Modification is achange in the scope orprice (or both) of acontract that isapproved by the partiesto the contract.”

Performance obligations andstandalone selling price


June 2015PwC

What is a performance obligation?

21Global Communications GAAP Summit

Contract

Performanceobligations

Promises totransfer goods and

services to thecustomer (explicit

or implicit)

Performanceobligation is

distinct if:

• it is of benefit tothe customerseparately; AND

• it is distinct inthe context ofthe contract

Are there any circumstances where a mobile handset is not distinct fromservice?

1. Yes

2. No

3. Not sure


23

BetaCom sells a complex mobile tariff on a 24 month contract. The tariff includes1,000 minutes of voice, 5,000 SMS, 2GB of data and 50 tracks on Spotify.

How many separate performance obligations are there?

1. 1

2. 4

3. Not sure

Global Communications GAAP SummitPwC

June 2015

Proposed solution


1. Can the customer benefit from each service in the bundle separately?

2. Are the services distinct in the context of the contract?

• The performance obligations (“PO”) identified should give you a meaningful“unit of accounting” for the purposes of the revenue recognition allocation

• One view is the tariff is a single PO; the customer is buying access to networkservices

• An alternative view is that each service could be defined as a separate PO

• Judgement is required. It is likely that in markets where bundled tariffs arecommon, the complex tariff will be defined as a single PO

June 2015PwC

Would your answer be different if the tariff was “AYCE” with unlimitedvoice, data, SMS and music tracks every month?

1. Yes

2. No

3. It depends


June 201525

BetaCom offers triple play which includes fixed line calls, broadband and TV services.BetaCom also sells calls, broadband and TV as standalone services.

How many separate POs are there?


June 201526

1. 1

2. 2

3. 3

4. Not sure

Proposed solution


1. Can the customer benefit from the services in the bundle separately?

2. Are the services distinct in the context of the contracts?

• The performance obligations (“PO”) identified should give you a meaningful“unit of accounting” for the purposes of the revenue recognition allocation

• In many markets convergence is in its early stages and customers typicallypurchase more fixed line products and services separately compared with mobile

• It is possible that the maturity of the market (i.e. the extent of bundling) willimpact the judgement on defining performance obligations. As business modelsand markets develop the judgement needs to be kept under review

June 2015PwC

BetaCom also provides a modem and set top box (STB) with its triple play offering.The modem is provided at no charge and cannot technically function on anothernetwork.

The STB is multi platform compatible and provided free of charge. BetaCom activelyrecovers, refurbishes and redeploys the STBs. In the event of fault or the STBbreaking, BetaCom will replace the STB.Is the modem a separate performance obligation?


June 201528

1. Yes

2. No

Proposed solution


1. Can the customer benefit from the modem on its own?

2. Are the services distinct in the context of the contract?

• The modem is not capable of operating independently of BetaCom’s network.The modem is not simply locked; its technical configuration is not compatiblewith any other network

• The material marketing the service highlights the modem made available withthe broadband service, hence it could be viewed as separate in the context of thecontract

• However both criteria must be met to meet the definition of “distinct”

June 2015PwC

Is the set top box a PO?

1. Yes

2. No

3. It depends


June 2015PwC

Proposed solution


• Paragraph 22 defines a PO (at inception) as each promise to transfer either a goodor service that is distinct or a series of distinct goods or services that are

substantially the same and have the same pattern of transfer

• The STB is compatible with other platforms and the customer could benefit fromthe STB on its own

• The question to consider is whether there has been a transfer to the customer

• It may be necessary to assess this in the context of the new leasing standard

• In the context of the contract the STB must be returned to BetaCom at the end ofthe contract and BetaCom actively enforces this

• In BetaCom’s view the STB is an extension of BetaCom’s network through which itprovides cable TV services and not a good sold to the customer

June 2015PwC

BetaCom offers its customers cinema tickets on a Tuesday if they spend more than€50 per month.

Are the cinema tickets a separate PO?

1. No, they are a marketing activity

2. BetaCom is acting as an agent for the supply of the cinema tickets

3. BetaCom is acting as principal for the supply of the cinema tickets


June 2015PwC

Standalone selling price of performance obligations


“…an entity shall determinethe stand-alone selling priceat contract inception of thedistinct good or serviceunderlying eachperformance obligation inthe contract and allocate thetransaction price inproportion to those stand-alone selling prices.”

Is ‘list price’good evidence

of the standalone selling

price ofequipment?

What otherchallenges

are youfacing in

establishingSSPs for

your POs?

Do you haveexampleswhere youthink theresidual

approach todetermining

the SSP couldapply?

June 2015PwC 33

Segmental disclosures versus POs


The table below sets out BetaCom’s segmental disclosures:

Europe Africa Asia Eliminations Total

Consumer 328 447 558 - 1,333

Enterprise 459 127 924 (87) 1,423

Wholesale 332 211 473 (127) 889

Other 19 59 5 - 83

Total revenue 1,138 844 1,960 (214) 3,728

Voice 457 612 1024 (161) 1,932

Data 413 220 756 (53) 1,336

TV and content 268 12 180 - 460

Total revenue 1,138 844 1,960 (214) 3,728

June 2015PwC 34

Segmental disclosures versus POs

• BetaCom concluded its mobile tariff was a single PO and that its fixed line multi-play offering represented three POs

• The disclosure by product/service

• Voice includes fixed and mobile and wholesale revenues

• Data includes broadband, mobile data, SMS, MMS etc

• TV and content

How do you reconcile your assessment of PO under IFRS 15 with IFRS 8disclosure requirements?


Costs of acquiring and fulfillingcustomer contracts


June 2015PwC

Contract costs – Capitalisation


Recognise costs of obtaining acontract as an asset, if entity

expects to recover those costs.

“The incremental costs ofobtaining a contract arethose costs that an entity

incurs to obtain a contractwith a customer that it

would not have incurred ifthe contract had not beenobtained (for example, a

sales commission).”

BetaCom pays its local distributor a commission of €100 for each customer contractacquired. The distributor is paid an additional €500 volume bonus if it connects up to250 customers in a month.

What amount should BetaCom capitalise as the cost of acquiring thecustomer?


June 2015PwC

1. €100 per customer on acquisition

2. €102 per customer on acquisition

3. €100 per customer on acquisition and €500 as a lump sum if the volume is achieved

4. €100 per customer on acquisition and expense the volume bonus

June 2015PwC

Proposed solution

• The €100 would not have been incurred if the distributor had not acquired acustomer on behalf of BetaCom. This amount should be recorded as an asset.

• The bonus commission would also not have been incurred if the distributor hasnot acquired a specific number of customers. As the volume bonus is paid on amonthly basis BetaCom should be able to reliably assess each month end whatthe actual cost of acquiring the customer was.

• In arrangements where the commission structures are more complex (i.e. notjust paid up-front on a per customer basis) the terms of the arrangements andthe commercial substance of the arrangements will need to be carefully reviewedto determine if the acquisition costs should be recorded as an asset.


Should credit and churn risk be assessed as part of the measurement ofthe initial asset recorded?

1. Yes

2. No, it forms part of the impairment assessment

3. It depends


June 2015PwC

Are you planning to take the practical expedient for contracts of lessthan 12 months?

1. Yes

2. No

3. Not sure

4. Not sure we can - our average customer life exceeds 12 months


June 2015PwC

What types of costs of fulfilment have you identified?

1. Installation costs

2. Parallel run costs

3. Fleet depreciation

4. Other


June 2015PwC

Significant financing component


Is there is a significant financing component in a bundled contract forequipment and service?

1. Yes

2. No

3. It depends


June 2015PwC

How would you assess “significant” under IFRS 15?

1. The absolute impact on the reported revenue number

2. Determine a company specific materiality

3. Assessing at a customer contract level

4. Other


June 2015PwC

Please make your way to the Grand Ballroom forthe next session - OTE market update

Thank you

This publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopersInternational Limited, each member firm of which is a separate legal entity.

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