ifrs 15. revenue recognition from contracts with customers

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  • IFRS 15Revenue recognition fromContracts with CustomersWorkshops for Telecommunication companies

    www.pwc.com

    6 June 2016

  • 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 givenissue. 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 notconstitute professional advice. You should not act upon the information contained in this publicationwithout obtaining specific professional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness of the information contained in this publication.

  • 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

  • PwC 4

    I

    Where the industry isin terms of IFRS 15?

  • PwC

    Most of the companies would not use the optionto 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

  • PwC

    2 years after the standard issuance only 1/3of companies feel well prepared

    6

    To what extent is your company prepared to implementchanges 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

  • PwC

    Significant part of the market is still at the verybeginning of the route

    7

    At what stage of implementation process is your companyat the moment?

    Preliminary work Implementation

    Not started yetNot started yet AccountinganalysisAccountinganalysis

    Preliminaryanalysis of ITsystems

    Preliminaryanalysis of ITsystems

    IT systemsrequirementsIT systemsrequirements

    ImplementingIT solutionsImplementingIT solutions

    78

    4 5

    Testing ITsolutionsTesting ITsolutions

    7

    3

  • PwC

    Once initial stages are ready it should be mucheasier to complete the implementation

    8

    How difficult do you believe the specific stages of IFRS 15implementation 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

  • PwC

    How is the process of IFRS 15implementation organized?

  • PwC

    Unlike other new standards, IFRS 15 requires notonly accounting attention

    10

    How many people are involved inthe process of IFRS 15implementation?

    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 externaladvisors/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

  • PwC 11

    Which departments are involved in implementation?

    * IFRS Metodology, BI, Accounting and Revenue Controlling, IFRSMethodology

    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 departmentsin IFRS 15

  • PwC

    Would an IT implementationbe a big issue?

  • PwC

    Complexity of IT architecture cause thatoff-the-shelf solutions are not attractive for typicaltelco

    13

    How the company will develop IT solutions that supportrevenue 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 / supplierthat support revenue accounting according to IFRS 15 standard

  • PwC

    Quality of data sources would be the biggest issuein IT implementation

    14

    How do you assess the following challenges facing ITsolutions regarding IFRS 15?

    5,23

    5,35

    5,92

    5,37

    6,44

    5,46

    Maintenance of information and data of performanceobligations 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)

  • PwC

    Calculating revenue on individual contract basiswould be more common, although tougher

    15

    Which approach will you chose for revenue adjustmentsin contracts?

    Nu

    mb

    er

    of

    re

    sp

    on

    de

    nts

    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?

  • PwC

    How would IFRS 15 impactoperations?

  • PwC

    There is still a lot of uncertainty with regardto impact on business models

    17

    Do companies plan to perform changes in their businessmodels?

    19

    4

    2

    5

    0 5 10 15 20

    Not decided yet

    We don't want to disclose this information

    Yes

    No

    PwC

  • PwC

    The industry did not yet worked out the approachto typical performance measures

    18

    What approach does your company intend to apply in relationsto 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)

  • PwC

    In most cases, management accounts wouldprobably follow IFRS 15 rules

    19

    Do companies intend to carry out the managerial/internalreporting according to IFRS 15 after implementationof 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 currentaccounting rules

    Yes, but with some adjustments (corrections)

    Yes, without any exceptions

    No,we will not perform allocations using IFRS 15

  • PwC 20

    II Practical aspects of IFRS 15application - discussion

  • PwCPwC 21

    Step 2

    Step 3

    Step 4

    Step 5

    Revenue recognition according to IFRS 15standards requires application of 5 steps approach

    Identificationof separate

    performanceobligations

    Determinationof the

    transactionprice

    Allocation ofthe transaction

    price

    Revenuerecognition

    Step 1

    Identificationof contract

  • PwC 22

    In case of framework contracts with B2B Customers thecompany 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 constitutesa 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

  • PwCPwC 23

    Step 2

    Step 1

    Step 3

    Step 4

    Step 5

    5 steps to Revenue recognition

    Identification of separate performanceobligations

    Identification ofseparate

    performanceobligations

    Identificationof contract

    Determinationof the

    transactionprice

    Allocation ofthe

    transactionprice

    Revenuerecognition

  • PwC 24

    How the company will recognise additional services, that willbe provided free of charge for first months and will be chargedin 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 onthe type of company (agent versus principal)

    Material right considered as an additionalperformance obligation

    A component that reduce transaction price

  • PwC 25

    In case of multiplay offers:

    Krok 2 Step 3 Step 4 Step 5

    For simplicity reasons, multiplay offers cansometimes be accounted for as a one performanceobligation

    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 performanceobligation

    Each service is a separate performance obligation

  • PwC 26

    Krok 2 Step 3 Step 4 Step 5

    Majority of companies would recognize at leastone type of material rights

    Step 2Step 1

    Right to usea budget to buy

    equipmentaccording

    to frameworkcontract

    Rights toreduce service

    price

    Right to extendcontract withmore profitableconditions

    Points grantedas part of loyalty

    program

    Not applicable

    Material rights identified as a distinct performanceobligations

    PwC

    10 of 30 respondents have not decided on material rights yet

    9companies

    5companies

    2companies

    5companies

    1company

    4companies

    OtherRight to extendcontract with

    more profitableconditions

  • PwCPwC 27

    Step 3

    Step 1

    Step 2

    Step 4

    Step 5

    5 steps to Revenue recognition

    Determination of the transaction price

    Determinationof the

    transactionprice

    Identificationof contract

    Identification ofseparate

    performanceobligations

    Allocation of thetransaction

    price

    Revenuerecognition

  • PwC 28

    Which period shall be considered on the need to estimate an amountof 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 untilcontact with Customer to extend thecontractcontract duration and the mostprobable time of extension

    other

  • 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 withsubsidised equipment

    Instalment payment contracts(equipment plus services)

    Which type of contracts the significant financingcomponent was identified in?

    32% of surveyed companies would recognizea significant financing component in theircontracts, 43% have not decided yet

  • PwC 30

    Recognition of budgets granted for Customers:

    Step 2 Step 4 Step 5

    There is no consistency on how to approachthe 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

  • PwCPwC 31

    Step 4

    Step 1

    Step 2

    Step 3

    Step 5

    5 steps to Revenue recognition

    Allocation of the transaction price

    Allocation ofthe transaction

    price

    Identificationof contract

    Identification ofseparate

    performanceobligations

    Determinationof the

    transactionprice

    Revenuerecognition

  • PwC

    Allocation of the transaction price to separate performanceobligations (equipment)

    32

    Step 1 Step 2 Step 3 Step 4 Step 5

    The price in separate own offer would be the bestindicator of SSP for equipment

    14

    2

    78

    14

    2

    9 9

    0

    2

    4

    6

    8

    10

    12

    14

    16

    Based on standaloneoffer

    Price in electronicequipment 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?

  • PwC

    Allocation of the transaction price to separate performanceobligations (services)

    33

    Step 1 Step 2 Step 3 Step 4 Step 5

    14

    3 34

    7

    14

    23

    5

    8

    0

    2

    4

    6

    8

    10

    12

    14

    16

    The price of servicein 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

  • PwC 34

    Step 1 Step 2 Step 3 Step 4 Step 5

    There is no clear response on what level the SSPwould be determined in multiplay offers

    With regard to multiplay offers, at whatlevel is the standalone selling pricedetermined?

    26%

    30%11%

    33%

    On the level of a single serviceincluded in the package

    On the level of service package(e.g. fixed and mobile voice, data,broadband)

    Other (service and equipmentseparately; mixed model)

    No decision made yet

  • PwC 35

    Step 5

    Step 1

    Step 2

    Step 3

    Step 4

    5 steps to Revenue recognition

    Revenue recognition

    Revenuerecognition

    Identificationof contract

    Identification ofseparate

    performanceobligations

    Determinationof the

    transactionprice

    Allocation of thetransaction

    price

    PwC

  • PwC 36

    Step 1 Step 2 Step 3 Step 4 Step 5

    Most of telcos would not change their principalvs. agent accounting

    a) Revenue recognition in agentversus principal transactions:

    b) In the case of selling throughan agent (dealer) at which pointdoes your company planto recognize revenue:

    3

    16

    9

    0

    2

    4

    6

    8

    10

    12

    14

    16

    We will applychanges

    We will notapply changes

    We have notdecided yet

    10

    1

    5

    2

    9

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10

    At the timeof sale bydealer

    At the timeof deliveryto a dealer

    Both casesarepossible

    Other We havenot makethedecisionyet

  • PwC

    Majority of telcos would capitalizeonly material costs

    37

    What kind of costs of obtaining and fulfilling contract is the companygoing 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 toacquisition/retention of a customer

    Dealers' commissions

  • PwC

    Analyzing EBITDA would require cautios readingof 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

  • PwC

    Contact us

    39

    GaborBalazs

    Radomi Malak

    Partner, member of the regional globalAccounting Consulting Services (ACS) team.He is constantly providing IFRS advice toseveral large IFRS clients in the region. As partof his regional responsibilities, Gabor is alsothe reviewer of the PwC IFRS Manual ofAccounting and the representative of the CEEregion in PwCs Telecommunication IndustryAccounting Group (TIAG).

    Director in Audit and Assurance Services.Expert in IFRS with 19 years of experiencein accounting and financial reporting advisory.He has held training on IFRS for numerousentities and employees of PwC. Radomi is alsothe author of newspaper articles devoted toIFRS.

    [email protected]

    +36 306 89 54 55

    [email protected]

    +48 502 18 42 23

  • PwC 40

    Thank you!

    This publication has been prepared for general guidance on matters of interest only, anddoes not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. Norepresentation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers LLP, its members, employees and agents donot accept or assume any liability, responsibility or duty of care for any consequences ofyou or anyone else acting, or refraining to act, in reliance on the information contained inthis publication or for any decision based on it.

    2016 PricewaterhouseCoopers Ltd.. All rights reserved. In this document, PwCrefers to PricewaterhouseCoopers Ltd. firm, and may sometimes refer to the PwCnetwork. Each member firm is a separate legal entity.