ifrs 15. revenue recognition from contracts with customers

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.

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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

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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

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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

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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

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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

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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

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II Practical aspects of IFRS 15application - discussion

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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

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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

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Step 2

Step 1

Step 3

Step 4

Step 5

5 steps to Revenue recognition

Identification of separate performanceobligations

Identification ofseparate



Determinationof the

transactionprice

Allocation ofthe

transactionprice

Revenuerecognition

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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

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In case of multiplay offers:


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

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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

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10 of 30 respondents have not decided on material rights yet

9companies

5companies

2companies

5companies

1company

4companies

OtherRight to extendcontract with

more profitableconditions

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Step 3

Step 1

Step 2

Step 4

Step 5


Determination of the transaction price

Determinationof the

transactionprice




Allocation of thetransaction

price

Revenuerecognition

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Which period shall be considered on the need to estimate an amountof revenue at the signing time:

Step 2 Step 4 Step 5


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

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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

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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

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37% (10 of 27 companies)Reduction of the transaction price

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Step 4

Step 1

Step 2

Step 3

Step 5


Allocation of the transaction price

Allocation ofthe transaction

price




Determinationof the

transactionprice

Revenuerecognition

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Allocation of the transaction price to separate performanceobligations (equipment)

32


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?

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Allocation of the transaction price to separate performanceobligations (services)

33


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

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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

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Step 5

Step 1

Step 2

Step 3

Step 4


Revenue recognition

Revenuerecognition




Determinationof the

transactionprice

Allocation of thetransaction

price

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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

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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

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PwC

Contact us

39

GaborBalazs

Radomił Maślak

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 PwC’s 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. Radomił is alsothe author of newspaper articles devoted toIFRS.

[email protected]

+36 306 89 54 55

[email protected]

+48 502 18 42 23

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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, “PwC”refers to PricewaterhouseCoopers Ltd. firm, and may sometimes refer to the PwCnetwork. Each member firm is a separate legal entity.

ifrs 15. revenue recognition from contracts with customers

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