May 2015

ASSESMENT OF THE IMPACT OF IND AS (IFRS) ON TELECOM SECTOR

CA Harit Jagdip Mankad

MEMBER OF ICAI

M.NO. 154850

SUMMARY From Paragraph

Section1 Introduction IN 1 Section 2 Overview of Telecom Industry 2.1 Section 3 Overview of Ind As 101 3.1 Section 4 Accounting for Revenue 4.1 Section 5 Accounting for Spectrum 5.1 Section 6 Accounting for Indefeasible Right to Use (IRU) 6.1 Section 7 Accounting for Property Plant & Equipment 7.1 Section 8 Accounting for Deferred Tax Asset & Liability 8.1 Section 9 Accounting for Revenue of Free Messenger App (Whats App) 9.1 Section 10 Conclusion 10.1 Appendix 1 References

Section 1 Introduction IN 1 The main objectives of the discussion paper are

1) To highlight the areas of financial reporting which will have a major impact on first IFRS Financial Statement of the Telecom Companies.

2) To help clients understand the impact of IFRS on the financial reporting process. 3) To help the KPMG Teams to have an overview of the specific accounting issues in Telecom Sector.

IN 2 Based on the experience in the Telecom Sector, I have outlined the list of the significant accounting areas to be consider by Telecom sector while moving to IFRS.

Section 2 Overview of Telecom Industry1 2.1 The Indian telecommunication industry is one of the fastest growing in the world. Government policies and regulatory framework implemented by Telecom Regulatory Authority of India (TRAI) have provided a conducive environment for service providers. This has made sector more competitive, while enhancing the accessibility of telecommunication service at affordable tariffs to the consumers. 2.2 As per survey conducted as on October 31, 2014, the private service providers held 90.55% market share of the total wireless subscribers in India. The below figure describes the market players and their respective market share in telecommunication sector.

2.3 The telecom sector in India is regulated by Department of Telecommunications (DOT) & Telecom Regulatory Authority of India (TRAI). 2.4 The Department of Telecom (DOT) has been formulating developmental policies for the accelerated growth of the telecommunication services. 2.5 The DOT is also responsible for grant of licenses for various telecom services like Unified Access Service Internet and VSAT service. The DOT is also responsible for frequency management in the field of radio communication in close coordination with the international bodies. It also enforces wireless regulatory measures by monitoring wireless transmission of all users in the country 2.6 The Telecom Regulatory Authority of India (TRAI) was established to regulate telecom services and tariffs, which were previously vested in the Central Government

2.7 TRAI has issued from time to time a large number of regulations, orders, and directives to deal with issues coming before it. It provided the required direction for the evolution of the Indian telecom market from a

1 The data has been compiled from the publically available information.

government owned monopoly to a multi-operator, multi-service, open competitive market. The directions, orders, and regulations that were issued covered a wide range of subjects including tariff, interconnection and quality of service, as well as governance of TRAI. 2.8 The below mentioned figure describes the process of the spectrum auction

No

Yes

No

Start

(GOI)

Does the

Bidder holds

the UAS

License?

Eligible to Bidding in

Spectrum Auction Whether

Bidder fulfills

the eligible

criteria for

obtaining

UAS License?

Obtain an

undertaking from to

obtain UAS License

before starting the

Telcom operations

END

Auction Process

START

Step 1 DOT will issue a Notice for Inviting Applications (NIA) in which the details of

the Auction Process & Rules are laid down.

Step 2 Bidders will put their Bid Price for the spectrum

Step 3 Bidders will deposit the Earnest Money Deposit (EMD) before the auction

begins. EMD is generally 25% of Reserve Price

Step 4 Bidders shall submit to application form & including necessary undertakings &

Application Processing Fees

Step 5 DOT will put up the list of the prequalified Bidders on its website

Step 6 Successful Bidders shall deposit the successful Bid Amount with in 10 calendar

days at the close of the Auction

A

Step 7 Upon the receipt of the successful Bid amount, the DOT (WPC) shall issue a

Letter of Intent (LOI) allocating the frequency to the successful Bidder.

Step 8 After receiving the LOI , if the company has obtained Unified License, then as

per the scope of the License, it has to set up the Telecommunications Infrastructure.

END

A

Section 3 Overview of Ind As 101 3.1 The below figure describes the major points which are relevant for preparing the first Ind As balance sheet.

Explicit & Unreserved Statement on compliance with Ind As

Impact: High

3.2 An entity’s first Ind AS financial statements are the first annual financial statements in which the entity adopts Ind ASs, in accordance with Ind Ass notified under the Companies Act, 2013 and makes an explicit and unreserved statement in those financial statements of compliance with Ind ASs. (Para 3 of Ind As 101) Accounting Policies Impact: High 3.3 An entity shall use the same accounting policies in its opening Ind AS Balance Sheet and throughout all periods presented in its first Ind AS financial statements. Those accounting policies shall comply with each Ind AS effective at the end of its first Ind AS reporting period, except for which an entity has selected the exception from applying Ind As from retrospective application. (Para 7 of Ind As 101) 3.4 An entity shall not apply different versions of Ind ASs that were effective at earlier dates. An entity may apply a new Ind AS that is not yet mandatory if that Ind AS permits early application. (Para 8 of Ind As 101) 3.5 An entity shall, in its opening Ind AS Balance Sheet: (a) Recognize all assets and liabilities whose recognition is required by Ind ASs; (b) Not recognize items as assets or liabilities if Ind ASs do not permit such recognition; (c) Reclassify items that it recognized in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and (d) Apply Ind ASs in measuring all recognized assets and liabilities. (Para 10 of Ind As 101) 3.6 The accounting policies that an entity uses in its opening Ind AS Balance Sheet may differ from those that it used for the same date using its previous GAAP. The resulting adjustments arise from events and transactions

Overview of

Ind As 101

Explicit Unreserved

Statement on

compliance with Ind

As

Accounting

Policies

Opening IFRS

Balance sheet

Comparative

Information &

Reconciliations

Exemption

Exceptions from

retrospective

application

before the date of transition to Ind ASs. Therefore, an entity shall recognize those adjustments directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to Ind ASs. (Para 11 of Ind As 101) Opening IFRS Balance sheet Impact: High 3.7 The MCA through notification dated 16 February 2015 has issued the Companies (Indian Accounting Standards) Rules, 2015 (Rules) which lay down a roadmap for companies other than insurance companies, banking companies and non-banking finance companies (NBFC) for implementation of Ind AS converged with IFRS. The Rules will come into force from the date of its publication in the Official Gazette. 3.8 The Ind As is applicable to companies as follows:

Particulars Phase 1 Phase 2 Voluntary Adoption

Year of adoption FY 2016-17 FY 2017-18 FY 2015-16

Comparative year FY 2015-16 FY 2016-17 FY 2014-15

Transition Date (Opening IFRS Balance sheet)

01.04.2015 01.04.2016 01.04.2014

Adoption Date (Comparative Financial Statement)

FY 2015-16 FY 2016-17 FY 2014-15

First Reporting Period

FY 2016-17 FY 2017-18 FY 2015-16

Comparative Information & Reconciliations Impact: High 3.8 An entity’s first Ind AS financial a shall include 1) At least three Balance Sheet, 2) Two Statements of profit and loss, 3) Two Statements of cash flows and 4) Two Statements of changes in equity 5) Related notes, including comparative information for all statements presented. 3.9 An entity first Ind AS financial a shall include 1. Reconciliations of its equity reported in accordance with previous GAAP to its equity in accordance with Ind ASs for both of the following dates:

(A) the date of transition to Ind ASs; and (B) the end of the latest period presented in the entity’s most recent annual financial statements in

accordance with previous GAAP.

2. A reconciliation to its total comprehensive income in accordance with Ind ASs for the latest period in the entity’s most recent annual financial statements. The starting point for that reconciliation shall be total comprehensive income in accordance with previous GAAP for the same period or, if an entity did not report such a total, profit or loss under previous GAAP.

Carve Out Ind AS 101, requires an entity to provide comparatives as per the existing notified Accounting Standards. It is provided that, in addition to aforesaid comparatives, an entity may also provide comparatives as per Ind As on a memorandum basis. Entities that provide comparatives would have to provide reconciliations which have to provide reconciliations which are similar to IFRS

Exemption from Ind As Impact: High 2.10 The telecom companies can opt for following exemption while preparing the first Ind As balance sheet. (Note: There are 23 exemptions as per Ind As 101, the below mentioned are the relevant exemptions for Telcom sector) (A) Deemed cost

Exemption 1. Measurement of item of property, plant and equipment at the date of transition to Ind As at its fair value

and use that fair value as its deemed cost at that date. 2. A first-time adopter may elect to use a previous GAAP revaluation of an item of property, plant and

equipment at, or before, the date of transition to Ind ASs as deemed cost at the date of the revaluation, if the revaluation was, at the date of the revaluation, broadly comparable to:

(a) fair value; or (b) cost or depreciated cost in accordance with Ind ASs, adjusted to reflect, for example, changes in a general or specific price index.

3. As per carve outs Ind AS 101 provides an entity an option to use carrying values of all assets as on the date of transition in accordance with previous GAAP as an acceptable starting point under Ind AS.

Applicability of the Exemption

1. investment property, accounted for in accordance with the cost model in Ind AS 40, Investment Property; and

2. intangible assets that meet: (i) the recognition criteria in Ind AS 38 (including reliable measurement of original cost); and (ii) the criteria in Ind AS 38 for revaluation (including the existence of an active market).

An entity shall not use these elections for other assets or for liabilities. (B) Cumulative translation differences

Exemption A first-time adopter need not comply with these requirements for cumulative translation differences that existed at the date of transition to Ind As. If a first-time adopter uses this exemption:

(a) the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind ASs; and (b) the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind ASs and shall include later translation differences. (C) Compound financial instruments Exemption Ind AS 32 Financial Instruments: Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components. If the liability component is no longer outstanding, retrospective application of Ind AS 32 involves separating two portions of equity. The first portion is in retained earnings and represents the cumulative interest accreted

on the liability component. The other portion represents the original equity component. However, in accordance with this Ind AS, a first-time adopter need not separate these two portions if the liability component is no longer outstanding at the date of transition to Ind ASs. (D) Designation of previously recognized financial instruments Exemption An entity can designate the financial instruments in the first Ind As balance sheet if the recognition criteria laid down in Ind As 109 are met: 1. Any Financial Liability through profit or loss 2. Financial Asset through profit or loss 3. An investment in Equity Instrument at Fair Value through OCI

(E) Revenue from contracts with customers Exemption 1. A first-time adopter may use one or more of the following practical expedients when applying Ind AS 115

retrospectively:

(a) for completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period;

(b) for completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods; and

(c) for all reporting periods presented before the beginning of the first Ind AS reporting period, an entity need not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue.

2. A first-time adopter is not required to restate contracts that were completed before the earliest period presented. A completed contract is a contract for which the entity has transferred all of the goods or services identified in accordance with previous GAAP

(F) Business Combination Exemption

1. A first-time adopter may elect not to apply Ind AS 103 retrospectively to past business combinations (business combinations that occurred before the date of transition to Ind ASs).

2. However, if a first-time adopter restates any business combination to comply with Ind AS 103, it shall restate all later business combinations and shall also apply Ind AS 110 from that same date.

Exception from Retrospective Application of Ind As 101 Impact: High 3.10 The exception from the retrospective application is applicable from the transition date. The exceptions which

are to be applied prospectively from the date of transition.

3.11 Suppose an entity which is covered in the Phase 1 of the roadmap then the date of transition would be

01.04.2015 (Refer Para 2.8), these exceptions will be applicable from 01.04.2015 & therefore, these standards will not be effective for the period prior to 01.04.2015.

(A) Derecognition of financial asset and financial liabilities

Requirement as per Standard

As required by Ind As 109, at the date of transition to Ind As an entity shall apply derecognition criteria laid down Ind As 109 retrospectively, if the information needed to apply Ind AS 109 to financial assets and financial liabilities derecognized as a result of past transactions was obtained at the time of initially accounting for those transactions. Exceptions If the information needed to apply Ind AS 109 to financial assets and financial liabilities derecognized as a result of past transactions is not obtained at the time of initially accounting for those transactions, then the derecognition criteria will apply prospectively.

(B) Hedge Accounting

Requirement as per Standard

As required by Ind As 109, at the date of transition to Ind AS an entity shall: (a) Measure all derivatives at fair value; and (b) Eliminate all deferred losses and gains arising on derivatives that were reported in accordance with previous GAAP as if they were assets or liabilities.

Exceptions from

Retrospective Application

Derecognition of

financial asset

and financial

liabilities

Hedge

Accounting

Non-

Controlling

Interest

Classificatio

n &

Measureme

nt of

financial

asset

Impairment of

financial asset

Embedded

Derivative

Government

Loans

Exceptions

1. An entity shall not reflect in its opening Ind AS Balance Sheet a hedging relationship of a type that does not qualify for hedge accounting in accordance with Ind AS 109.

2. Transactions entered into before the date of transition to Ind ASs shall not be retrospectively designated as hedges.

(C) Non- Controlling Interest

Requirement as per Standard

1. Disclosure of the total comprehensive income is attributable to the owners of the parent and to the

non-controlling interest even if this results in the non-controlling interest having a deficit balance.\

2. Accounting for changes in the parent’s ownership interest in a subsidiary that do not result in a loss

of control;

3. Accounting for a loss of control over a subsidiary, and the related requirements of paragraph 8A of

Ind AS 105, Non-current Assets Held for Sale and Discontinued Operations.

Exceptions 1. A first-time adopter has an option to apply these requirement prospectively from the date of

transition. 2. if a first-time adopter elects to apply Ind AS 103 retrospectively to past business combinations, it shall

also apply Ind AS 110 retrospectively.

(D) Classification and Measurement of financial asset

Requirement of Standard

1. An entity shall classify financial assets as subsequently measured at amortized cost, fair value through other comprehensive income or fair value through profit or loss on the basis of both:

(a) The entity’s business model for managing the financial assets and (b) The contractual cash flow characteristics of the financial asset.

Exceptions

1. An entity shall assess whether a financial asset meets the conditions of measuring a financial asset at amortized cost, fair value through other comprehensive income or fair value through profit or loss as per Ind AS 109 on the basis of the facts and circumstances that exist at the date of transition to Ind AS.

(E) Impairment of financial asset

Requirement of Standard

An entity shall recognize a loss allowance for expected credit losses on

1. a financial asset ,

2. a lease receivable,

3. a contract asset or

4. a loan commitment and a financial guarantee contract to which the impairment requirements apply.

Exceptions

1. As on the date of the transition to Ind As, an entity shall use reasonable and supportable information that is available without undue cost or effort to determine the credit risk at the date that financial instruments were initially recognized and compare that to the credit risk at the date of transition to Ind As.

2. In order to determine the loss allowance on financial instruments initially recognized (or loan commitments or financial guarantee contracts to which the entity became a party to the contract) prior to the date of initial application, both on transition and until the derecognition of those items, an entity shall consider information that is relevant in determining or approximating the credit risk at initial recognition.

(F) Embedded Derivatives

Requirement of Standard

If a hybrid contract contains a host that is not an asset within the scope of this Standard, an embedded derivative shall be separated from the host and accounted for as a derivative under this Standard if, and only if:

(i) the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host

(ii) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

(iii) the hybrid contract is not measured at fair value with changes in fair value recognised in profit or loss (ie a derivative that is embedded in a financial liability at fair value through profit or loss is not separated).

Exception

1. A first-time adopter shall assess whether an embedded derivative is required to be separated from

the host contract and accounted for as a derivative on the basis of the conditions that existed later of

(i) the date it first became a party to the contract and (ii) date a reassessment required as per Ind As 109

(G) Government Loans

Requirement of Standard

An entity has obtained the loan from the Government below market interest rate, then as per IAS 20,

1. The loan shall be recognized and measured accordance with Ind As 109.

2. The benefit of the below market rate of interest shall be

Initial Carrying Value as per Ind As 109 (A) Rs XXXX

Less: Proceeds received (B) (Rs XXXX)

Benefit/ Government Assistance (A-B) Rs XXXX

3. The benefit shall be recognized in profit or loss on a systematic basis over a periods which the entity

recognizes as expense the related cost for which the grants are intended to compensate.

Exception

1. If the an entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any government loan originated before the date of transition to Ind ASs, provided that the information needed to do so had been obtained at the time of initially accounting for that loan.

2. If the entity does not have information that is needed at the time of initially accounting for that loan, then the company shall classify the all government loans received as a financial liability or an equity instrument in accordance with Ind As 32.

Section 4 Accounting for Revenue 4.1 The core principle of the Standard is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 4.2 The below figure summarizes the impact of Ind As 115 on Telecom Companies.

4.3 The Telecom operators provide the following services to their customers

(A) Call/ Voice Service (B) SMS Service (C) Data Services (D) Value Added Services (VAS)

4.4 The customers of the telecom company can be bifurcated in three types:

Impact of Ind As

115

Unbundling of

the Revenue

Performance

Obligation Satisfied at

a point or over a point

in time.

Impairment of

Goodwill Disclosure

Requirement

Refund

Liabilities Modification of

the Contract

Types of

Customers

Retail

Customers

Telecom

Operators

Inter Circle with in

the same group

The customers are

individuals to whom

service is rendered

Each Telecom Operators have an agreement

with other telecom operators that in case of

roaming a particular telecom operator will

render the service to the customer of a

other telecom operator & will bill the same

to the Telecom Operator.

In case of Roaming, the same

telecom operator can provide

services to the customers through

the different circle & the circle

which has rendered service will

bill to the other circle with in the

same group.

4.5 The below figure summarizes the types of revenue that is earned by rendering the service to the customers.

Revenue from

Operations

Sale of

Handsets

Rendering

Service

Prepaid Service

Revenue

Post Paid Service

Revenue

Roaming

Revenue Local Revenue

Interconnect

Charges

National

Roaming

International

Roaming

Retail

Customers

Inter circle

Revenue

Revenue from

rendering services

to the customers

of other telecom

operator

The billing currency is

either USD or Group

Functional Currency

Value Added

Services (VAS)

Subscription to

ringtones and

caller tunes

Unbundling of Revenue

Impact: High

4.6 As discussed in the above figure telecom companies generate the revenue from the sale of handsets and

rendering the service.

4.7 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have the same pattern of

transfer to the customer (Para 22 of Ind As 115)

4.8 A good or service that is promised to a customer is distinct if both of the following criteria are met: (a) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e. the good or service is capable of being distinct); and (b) The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the good or service is distinct within the context of the contract). (Para 27 of Ind As 115) 4.9 The cell phone which the telecom company is selling is a distinct goods as it satisfies the both the above criteria laid down in Para 27 of Ind As 115. Let’s take the following example to understand the concept of distinct goods: Vodafone sells an iPhone 6 from its Vodafone store to the customers with the sim card lock in period of 18 months. The iPhone is distinct from the sim card as it has a value to the customer. The customer can sell the iPhone 6 in the market & benefit from it directly. Therefore, the cell phone is a distinct from the simcard. 4.10 Therefore, the revenue pertaining to sell of cell phone & sim card needs to unbundle as per Ind As 115. This will lead to higher recognition of the revenue upfront. Satisfaction of the Performance Obligation Impact: High

4.11 As discussed in Para 4.3 the telecom companies generally renders the following services to their customers: (A) Call/ Voice Service (B) SMS Service (C) Data Services (D) Value Added Services (VAS) 4.12 The below figure summarizes the performance obligation satisfied.

Performance

Obligation

Sale of

Handsets

Sale of SIM

Cards

Sale of

Services

Performance

Satisfied at a point

in time

Performance

Satisfied at a point

in time

Pre Paid

Customers

Post Paid

Customers

Inter connect

Revenue

The Revenue shall be

recognized on the actual

usage by the customer

Therefore, Revenue shall be

recognized over a point in

time.

Fixed Rental Variable

Charges

The Revenue shall

be recognized at a

point in time

Free Minutes

& Data

Chargeable

Minutes & Data

The Revenue shall be

recognized over a

point in time

The postpaid plan is priced in such a

manner that the cost of the free

minutes is factored in the fixed rental

for the plan therefore, the revenue for

the same is recognized at a point in

time.

The Revenue shall

be recognized at a

point in time

VAS Revenue

The Revenue shall be recognized

at a point in time when the

service has been rendered

Prepaid Revenue Impact: High 4.15 The below mentioned figure summarizes the accounting for revenue for prepaid customers

1. The Telecom Company will transfer the top up vouchers to the dealers as a part of distribution channel to supply the vouchers to the end customers.

2. The Dealer will ultimately sell the vouchers to the end customers of the telecom company. 3. The end customer will recharge the voucher & avail the services from the telecom company.

4.16 The telecom company recognizes the liability for the amount received from the dealer on account of the transfer of the vouchers for the talk time & sms service to be rendered to the end customers. 4.17 The telecom company will recognize the revenue over a period of time on the basis of the actual usage by the customers as it satisfies the following condition laid down in Para 35 of Ind As 115 Condition 1 The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. 4.18 If the company is charging the recharge fees on recharge vouchers, the recharge fees can be recognized upfront when the recharge voucher is activated by the customer. Postpaid Revenue Impact: High 4.19 In case of postpaid revenue, the telecom companies generally have a postpaid scheme which itself is a contract with a customer. 4.20 Let’s take an example of Vodafone Red Postpaid Plan2 in which a customer gets

(A) Voice (B) Data @ Single Monthly Rental (C) SMS

The customer can avail the following services in Vodafone Red 499 Plan

(A) Free Internet Quota : 512 MB (B) Free Local & STD Minutes : 1000 Min (C) Free Local & National SMS : 500 SMS

2 The details have been taken from Vodafone website

Telecom

Company Dealer End Customer

1 2

3

If the customer exceeds the above limits then, the customer will be charged as under:

(A) Data : 50 paisa/MB (B) Minutes: 50 paisa/Minutes (C) SMS: 50 paisa/SMS

4.21 In case of postpaid revenue, the telecom company generally charges the customer with

1. Fixed rental of the plan 2. Fixed rental of data plan (In addition to postpaid plan) 3. Variable charges as per plans depending on actual usage.

4.22 The pricing of the plan is such that, the fixed rentals will cover the free minutes & sms to be utilized by the customers. 4.23 The fixed rental of the plan is charged irrespective of the actual usage by the customer. Therefore, the revenue shall be recognized at a point in time, as per the billing cycle of the telecom company. 4.24 The Variable charges depends upon the actual usage by the customer, therefore the same shall be recognized over a point in time. Value Added Services Impact: High 4.25 The telecom companies generally provide Value Added Services (VAS) to the customer. It is an ancillary service provided by the telecom company to its customers. The most common VAS are as under:

1. Ring Tone Downloads 2. Cricket Updates 3. Stock Market Updates

4.26 The VAS service is provided for a specified period i.e. for 30 days & the same is renewed after the period of 30 days. The telecom company charges the customer on monthly basis for VAS Revenue. 4.27 The VAS Revenue shall be recognized at a point in time when the service has been rendered to the customer at the end of the specified period. Interconnect Charges Impact: High 4.28 The Interconnect charges are the charges recoverable from the other telecom operator for the service rendered to its customers. 4.29 The Interconnect charges can be receivable either with in a group (inter circle) or other telecom operators. 4.30 The revenue from inter connect charges shall be recognized on the basis of the contract with each telecom operator. Therefore, the revenue shall be recognized at a point in time as per the company billing cycle.

Accounting for Refund Liabilities – VAS Impact: High 4.31 In case of Value Added Services (VAS) e.g. Caller Tunes provided by telecom companies, the customer has an option to deactivate the services subscribed at its discretion & Telecom Company is liable to refund the amount to the customer. 4.32 An entity shall recognize a refund liability if the entity receives consideration from a customer and expects to refund some or all of that consideration to the customer. A refund liability is measured at the amount of consideration received (or receivable) for which the entity does not expect to be entitled (ie amounts not included in the transaction price). The refund liability (and corresponding change in the transaction price and, therefore, the contract liability) shall be updated at the end of each reporting period for changes in circumstances. (Para 55 of Ind As 115) 4.33 Therefore, telecom companies shall have to recognize the Refund liabilities against the revenue recognized for Value Added Services (VAS) in the particular period.

Impairment of Goodwill Impact: High 4.34 The ARPU is measure of the revenue earned from each customer by Telecom Company. The ARPU can defined in formula as under: ARPU = Total Revenue/ Total Number of Subscribers 4.35 The ARPU is an external indicator of an impairment of the intangible asset. If the ARPU of a telecom company is reducing on year on year basis then the company is not able to generate the revenue as expected, then it is a primafacie case of applicability of impairment. 4.36 In applying the principles of Ind As 115, there can be an impact on computation of the revenue of telecom companies, there can be chances that the ARPU computation will also be impacted & which will lead to the change in the judgments relating to impairment significantly. Modification of the Contract Impact: High 4.37 Let’s understand the impact of the modification of contract on telecom company with the help of the following scenarios:

Scenarios

A customer purchases

the additional data plan

in addition to the

existing post paid plan

A customer changes the

post paid plan from the

existing post paid plan

A customer switches

from the prepaid to

post paid or vice

versa

Scenario 1 Customer purchases the additional data plan in addition to the existing postpaid plan 4.38 An entity shall account for a contract modification as a separate contract if both of the following conditions are present:

(a) the scope of the contract increases because of the addition of promised goods or services that are distinct and

(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract. (Para 20 of Ind As 115)

4.39 In this scenario, the customer is purchasing an additional data plan which is distinct from the postpaid plan. Therefore, the data plan shall be accounted separately as a separate contract as it satisfies both the above condition & it is a modification to the existing contract. 4.40 The telecom company can account for additional data plan as a separate contract with the customer as per Ind As 115. Scenario 2 Customer changes the existing postpaid plan with a new postpaid plan 4.41 In this scenario, the condition mentioned in the para 4.38 is satisfied as the each plan has a separate performance obligations and services are distinct in nature. 4.42 The telecom company can account for new postpaid plan as a separate contract with the customer as per Ind As 115 & it is a modification to the existing contract. Scenario 3 Customer switches from postpaid to prepaid or vice versa 4.43 An entity shall account for the contract modification as if it were a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. The amount of consideration to be allocated to the remaining performance obligations is the sum of:

(i) The consideration promised by the customer (including amounts already received from the customer) that was included in the estimate of the transaction price and that had not been recognized as revenue; and

(ii) The consideration promised as part of the contract modification. (Para 21 of Ind As 115) 4.44 When the customer switches from prepaid to postpaid or vice versa, then it is a termination of the existing contract and entering into a new contract as the both the contract are distinct in nature. The telecom company needs to apply the Para 21 of Ind As 115 for allocation of the consideration to the remaining performance obligation under existing contract.

Disclosures Impact: High 4.45 The following table summarizes the important disclosure requirements under Ind As 115

Sr No.

Particulars Disclosure Requirement

1 Disaggregation of revenue

An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. In addition, an entity shall disclose sufficient information to enable users of financial statements to understand the relationship between the disclosure of disaggregated revenue and revenue information that is disclosed for each reportable segment, if the entity applies Ind AS 108, Operating Segments.

2 Performance obligations

An entity shall disclose information about its performance obligations in contracts with customers, including a description of all of the following: (a) when the entity typically satisfies its performance obligations (b) the significant payment terms (c) the nature of the goods or services that the entity has promised to transfer, highlighting any performance obligations to arrange for another party to transfer goods or services (d) obligations for returns, refunds and other similar obligations; and (e) Types of warranties and related obligations.

3 Significant judgments in the application of this Standard

An entity shall disclose the judgments, and changes in the judgments, made in applying this Standard that significantly affect the determination of the amount and timing of revenue from contracts with customers. In particular, an entity shall explain the judgments, and changes in the judgments, used in determining both of the following: (a) the timing of satisfaction of performance obligations and (b) the transaction price and the amounts allocated to performance obligations

4 Determining the timing of satisfaction of performance obligations

For performance obligations that an entity satisfies over time, an entity shall disclose both of the following: (a) The methods used to recognize revenue and (b) An explanation of why the methods used provide a faithful depiction of the transfer of goods or services. For performance obligations satisfied at a point in time, an entity shall disclose the significant judgments made in evaluating when a customer obtains control of promised goods or services.

5 Determining the transaction price and the amounts allocated to performance Obligations

An entity shall disclose information about the methods, inputs and assumptions used for all of the following: (a) Determining the transaction price, which includes, but is not limited to, estimating variable consideration, adjusting the consideration for the effects of the time value of money and measuring non-cash consideration; (b) Assessing whether an estimate of variable consideration is constrained; (c) Allocating the transaction price, including estimating stand-alone selling prices of promised goods or services and allocating discounts and variable consideration to a specific part of the contract (if applicable); and (d) Measuring obligations for returns, refunds and other similar obligations.

Section 5 Accounting for Spectrum Impact: Low

5.1 The accounting principles under Indian gaap & Ind As 38 for accounting for spectrum are in same lines. Hence there would be no major impact on accounting for spectrum. 5.2 Please refer the PPT for the detailed accounting for spectrum under IFRS for your reference.

Section 6 Accounting for Indefeasible Right to Use (IRU) Impact: Low 6.1 The IRU shall mean the exclusive, unrestricted, and indefeasible right to use the relevant capacity (including equipment, fibers or capacity). 6.2 The accounting for IRU is very complex as it requires a judgment to be made regarding the arrangement contains the lease as per IFRIC 4 or it is a service contract for the use of facility. 6.3 The accounting for IRU varies based on the facts and circumstances of individual agreements. 6.4 As per Appendix C (IFRIC 4) of Ind As 17 Determining whether an arrangement is, or contains, a lease shall be based on the substance of the arrangement and requires an assessment of whether: (a) Fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) The arrangement conveys a right to use the asset.

Condition 1 Fulfilment of the arrangement is dependent on the use of a specific asset or assets 6.5 The specific asset is identified in the agreement. The IRU agreement will specify the location & distance of the optical fiber covered with in the agreement. Therefore, the identification of specified asset is straightforward. Condition 2 The arrangement conveys a right to use the asset 6.6 An arrangement conveys the right to use the asset if the arrangement conveys to the purchaser (lessee) the right to control the use of the underlying asset. The right to control the use of the underlying asset is conveyed if any one of the following conditions is met:

(a) The purchaser has the ability or right to operate the asset or direct others to operate the asset in a manner it determines while obtaining or controlling more than an insignificant amount of the output or other utility of the asset.

(b) The purchaser has the ability or right to control physical access to the underlying asset while obtaining or controlling more than an insignificant amount of the output or other utility of the asset.

(c) Facts and circumstances indicate that it is remote that one or more parties other than the purchaser will take more than an insignificant amount of the output or other utility that will be produced or generated by the asset during the term of the arrangement, and the price that the purchaser will pay for the output is neither contractually fixed per unit of output nor equal to the current market price per unit of output as of the time of delivery of the output.

6.7 The above mentioned conditions shall be analyzed with respect to actual terms and conditions in the agreement. 6.8 The below figure is a snapshot of the accounting treatment of IRU. Since the telecom companies can be either be a lessee or a lessor, the below figure describes the accounting treatment for both the parties.

Accounting for IRU (PP&E

or Intangible Asset)

Lease

Agreement

Service

Agreement OR

Operating

Lease

Finance

Lease

Lessee Lessor

Lease payments shall be recognized as

an expense on straight line basis over a

lease term.

Recognize the

asset given under

operating lease as

a PP&E.

Lessee

Lessor

Lessee shall recognize finance lease as an asset

and liability at an amount equal to the fair value

of leased property or MLP whichever is lower.

Lessor shall derecognize the asset from PP&E

and recognize the amount equal to the net

investment in lease as a receivable.

The treatment is similar to

operating lease.

Accounting for IRU

(Revenue)

Lease Contract Service Contract

Revenue shall be recognized

as per Ind As 17

Revenue shall be recognized

as per Ind As 115

Revenue Recognition under Finance Lease as per Ind As 17 6.9 A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income: (a) Profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts; and (b) Finance income over the lease term. 6.10 The sales revenue recognized at the commencement of the lease term by a manufacturer or dealer lessor is the fair value of the asset, or, if lower, the present value of the minimum lease payments accruing to the lessor, computed at a market rate of interest. 6.11 The cost of sale recognized at the commencement of the lease term is the cost, or carrying amount if different, of the leased property less the present value of the unguaranteed residual value. 6.12 The difference between the sales revenue and the cost of sale is the selling profit, which is recognized in accordance with the entity’s policy for outright sales. 6.13 The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease. Revenue Recognition under Operating Lease as per Ind As 17 6.14 Lease income from operating leases (excluding amounts for services such as insurance and maintenance) shall be recognized in income on a straight-line basis over the lease term, unless either: (a) Another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished, even if the payments to the lessors are not on that basis; or (b) The payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then this condition is not met. Revenue Recognition under Service Contract as per Ind As 115 6.15 In case of service contracts, the revenue recognition principles of Ind As 115 shall analyzed with respect to the terms and conditions of the agreement. 6.16 The revenue recognition shall vary from agreement to agreement as cash flows generated from each agreement will be unique. 6.17 Therefore, the telecom companies shall recognize revenue from IRU on the basis of the principles laid down in Ind As 115.

Section 7 Accounting for Property Plant and Equipment 10.01 The below mentioned figure lays down the impact areas of Ind AS 16

Asset Retirement Obligations (ARO)

Impact: Low

7.1 The cost of PP&E shall include the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. (Para 16 of Ind As 16) 7.2 In telecom industry, the telecom operator generally take on lease cell sites and build a base station on the site.

At the end of the lease term, the operator has an obligation to reinstate the land on which the cell site and base

station is constructed.

7.3 Therefore, telecom companies should capitalize the initial estimate of the asset retirement obligation into the

cost of property, plant & equipment.

Componentization of Fixed Asset

Impact: High

7.4 As per Ind As 16, The cost of an item of property, plant and equipment shall be recognized as an asset if, and only if: (a) It is probable that future economic benefits associated with the item will flow to the entity; and (b) The cost of the item can be measured reliably. (Para 7 of Ind As 16) 7.5 The Standard does not prescribe the unit of measure for recognition, i.e. what constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition criteria to entity specific circumstances. It may be appropriate to aggregate individually insignificant items, such as moulds, tools and dies, to apply the criteria to the aggregate value. (Componentization) (Para 9 of Ind As 16) 7.6 Therefore, Ind As 16, the principle of componentization is applicable which was not permitted as per AS 10.

Impact Areas

Asset Retirement

Obligations

Foreign Exchange

Differences Componentization

of the fixed asset

Impact of Deferred

Payment

arrangements

7.7 The Telecom companies needs to exercise the judgment in the case of the componentization of the fixed asset is applicable & determine the useful life of that component of fixed asset & depreciate it separately from the main asset. Impact of Deferred Payment Terms Impact: Low 7.8 The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest over the period of credit unless such interest is capitalized in accordance with Ind AS 23. (Para 23 of Ind As 16) 7.9 As per AS 10, the principle of measuring the cost is not cash price equivalent, therefore, the difference between the cash price equivalent and the total payment is capitalized in the cost of fixed asset. Foreign Exchange Differences Impact: High 7.10 As per Para 46A of AS 11, at the option of the entity, the exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘‘Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods. 7.11 As per Para 28 of Ind As 21, exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognized in profit or loss in the period in which they arise. 7.12 When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each period up to the date of settlement is determined by the change in exchange rates during each period. 7.13 The A first-time adopter may continue the policy adopted for accounting for exchange differences arising from translation of long-term foreign currency monetary items recognized in the financial statements for the period ending immediately before the beginning of the first Ind AS financial reporting period as per the previous GAAP. (Para D13AA of Ind As 21)

7.14 The company has a choice to continue with the existing policy as per Para 46A of AS 11 as on transition date, but company shall comply with the Ind As 21, after the transition date.

Note:

The company has an option to avail an exemption of the deemed cost under Ind As 101 for Tangible

Asset as on transition date.

As per Carve outs to Ind As the deemed cost is the “carrying value” of the tangible assets as on the

date of transition.

The Company has an option to apply for an exemption by applying an accounting policy as per Para

46A of AS 11 on transition date.

Section 8 Accounting for Deferred Tax Asset & Liability

Impact: High

Accounting under IGAAP

8.1 Tax expense comprises current and deferred taxes. 8.2 Current tax is the amount of tax payable on the taxable income for the year as determined in accordance with the provisions of the Income Tax Act, 1961. Current tax is net of credit for entitlement for Minimum Alternative Tax (MAT). 8.3 Deferred tax is recognized, on timing differences, being the difference between taxable income and accounting income that originate in one period and are capable of reversal in one or more subsequent periods. Deferred tax assets in respect of unabsorbed depreciation and carry forward of losses are recognized if there is virtual certainty that there will be sufficient future taxable income available to realize such losses. Other deferred tax assets are recognized if there is reasonable certainty that there will be sufficient future taxable income to realize such assets. 8.4 Deferred tax assets and liabilities are measured based on the tax rates that are expected to apply in the period when asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date. 8.5 In respect of the deferred tax asset/liability arising due to tax holidays availed by the entity, AS 22 provides the guidance of the accounting relating to deferred tax asset/liability.

Accounting as per Ind As 12 & Income Computation and Disclosure Standards (ICDS)

8.6 The recognition of the deferred tax asset/liability under Ind As 12 would be a temporary difference rather than

timing difference.

8.7 Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:

(a) Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or

Major Impact

Areas

Applicability of

ICDS Standards

Balance sheet

approach instead of

Income approach

No Guidance for

tax holiday units

Tax Base in

Consolidation

financial Statement

(b) Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. (Para 5 of IAS 12)

8.8 The taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). (Para 5 of IAS 12) 8.9 The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. 8.10 The CBDT has recently issued Income Computation and Disclosure Standards (ICDS) which comprises of 12 standards & it would be applicable from AY 2016-17 (i.e. PY 2015-16). The taxable profit would be computed with respect to ICDS Standards. 8.11 The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount. (Para 7 of Ind As 12) 8.12 The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.(Para 8 of Ind As 12) 8.13 The tax base of the asset would be determined as per ICDS Standards issued by CBDT. Recognition of Deferred Tax Asset & Liability Impact: High 8.14 A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) The initial recognition of goodwill; or (b) The initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit

8.15 A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

(a) is not a business combination; and

(b) at the time of the transaction, affects neither accounting profit nor taxable profit Measurement of Deferred Tax Asset & Liability Impact: Low 8.16 Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. (Para 47 of Ind As 12) 8.17 The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. (Para 51 of Ind As 12)

8.18 Deferred tax assets and liabilities shall not be discounted. (Para 53 of Ind As 12) Reassessment of Deferred Tax Asset Impact: High 8.19 As per AS 22, Where an enterprise has unabsorbed depreciation or carry forward of losses under tax laws, deferred tax assets should be recognized only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be

realized. (Para 17 of AS 22)

8.20 The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available. (Para 56 of Ind As 12) 8.21 Virtual certainty refers to the extent of certainty, which, for all practical purposes, can be considered certain. Virtual certainty cannot be based merely on forecasts of performance such as business plans. Virtual certainty is not a matter of perception and is to be supported by convincing evidence.

8.22 The probable refers to the lesser extent of certainty then required in AS 22 which, for all practical purposes, can be considered certain. Recognition of the deferred tax asset & liability outside profit or loss account Impact: High 8.23 Deferred tax shall be recognized outside profit or loss if the tax relates to items that are recognized, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognized, in the same or a different period: (a) In other comprehensive income, shall be recognized in other comprehensive income. (b) Directly in equity, shall be recognized directly in equity 8.24 There is no option available in AS 22. Tax Base in Consolidated Financial Statement Impact: Low 8.25 In the Consolidated Financial Statement, the parent company consolidates the financials line to line basis. AS22 does not have any guidance on the recognition of the deferred tax asset and liability in the consolidated financial asset & liability. 8.26 The tax base is determined by reference to the tax returns of each entity in the group. In some jurisdictions, in consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. (Para 11 of Ind As 12) 8.27 The Telecom companies in India, which are parent companies are not required to file consolidated financial statements with Income Tax Department. Therefore, the Telecom companies can follow the line by line method of consolidation of deferred tax asset or liability. 8.28 The offsetting requirement under Ind As 12 is in same lines with AS 22.

Section 9 Accounting for Revenue for Free Messenger App (What’s App)

9.1 The revenue recognition in case of the entity which develops a mobile application for free messaging for an

initial years & charging a subscription fees for the usage from the customers subsequently is very complicated.

9.2 The free messenger application developer earns its revenue from the following sources:

Accounting Policy of Whats App Inc3 9.3 Term Subscription Fee Revenue Recognition: Under Term Subscription Fee, the first year of service is free of charge. Thereafter, users are required to pay annual subscription fees to continue to utilize the messaging service. Term based subscription arrangements are non-cancelable and the associated revenue is initially deferred and recognized ratably over the subscription period. 9.4 Perpetual Subscription Fee Revenue Recognition: The Company sold perpetual subscription rights to certain users, who paid a one-time user fee prior to mid-July 2013. The perpetual subscription fee revenue is initially deferred and recognized ratably over the estimated user relationship period of seven years. 9.5 Revenue has been recorded at the gross value of the subscription fee paid by the user. The Company is the primary obligor in the arrangement with its users, retains credit risk, and is solely responsible for delivering the messaging services Accounting for the Term Subscription Fees as per Ind As 115 Impact: High Step 1 Identification of the Contract with Customer 9.6 An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met: (a) The parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; (b) The entity can identify each party’s rights regarding the goods or services to be transferred;

3 Annual Report of Whats App Inc for year ended December 31, 2013

Sources of Revenue

Term Subscription

Revenue

Perpetual

Subscription Revenue

Subscription fees from users

utilizing the application over

a subscription period i.e. 1

Year

Subscription fees from users

utilizing the application for

perpetual subscription

period

(c) The entity can identify the payment terms for the goods or services to be transferred; (d) The contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and (e) It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession. (Para 9 of Ind As 115) 9.7 In respect of the term subscription fees, at the inception the entity does not have any reliable evidence that, the customer will pay the subscription charges at the end of the term subscription. 9.8 The below figure summarizes the recognition of the revenue for the entity: Free Messaging & Call Service Subscription Fees for Messaging & Call Step 2 Identifying Performance Obligations 9.9 At contract inception, an entity shall assess the goods or services promised in a contract with a customer and shall identify as a performance obligation each promise to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or (b) a series of distinct goods or services that are substantially the same and that have the same pattern of

transfer to the customer. (Para 22 of Ind As 115) 9.10 The entity has a performance obligation to deliver the following distinct goods and service:

(a) Messaging Service (b) Call Service

Date on which

the application

was downloaded

Date on which

service become

chargeable

Date on which the

subscription is due

for renewal

Since condition mentioned

in Para 9 (e) regarding the

collection of the amount is

not satisfied. Therefore it is

not a contract as per Ind As

115. Therefore, Ind As 115

does not apply in this

period.

Since the collectability of

the amount is assured as

it is paid upfront for the

services to be rendered to

the customer. Hence Ind

As 115 applied in this

period.

9.11 An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset. (Para 31 of Ind As 115) 9.12 An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognizes revenue over time, if one of the following criteria is met: (a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs; (b) The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced; or (c) The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date. (Para 35 of Ind As 115) 9.13 The entity satisfies the performance obligation over a point in time, as customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs. 9.14 The entity received the consideration upfront for the rendering the services over a period of the contract. Therefore, the customer simultaneously consumes the benefit over a specified point from the service rendered by the entity. Step 3 Determine Transaction Price 9.15 In case of term subscription, the transaction price is determined in advance & generally fixed in nature. There is no variable consideration involved in the transaction price. Step 4 Allocating the Transaction Price 9.16 The transaction price determined in Step 3 shall be allocated to the performance obligations as determined in Step 2. 9.17 The transaction price shall be allocated on the basis of the standalone selling price. The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a customer. The best evidence of a stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. A contractually stated price or a list price for a good or service may be (but shall not be presumed to be) the stand-alone selling price of that good or service. (Para 77 of Ind As 115) 9.18 The standard has prescribed three methods for determining the standalone prices: (a) Adjusted Market Approach (b) Expected cost plus margin (c) Residual Approach Step 5 Recognition of the Revenue 9.19 As discussed, in Step 2, the performance obligation is satisfied over a point in time. Therefore, revenue shall be recognized over a point in time. Accounting for the Perpetual Subscription Fees as per Ind As 115 9.20 In case of perpetual subscription fees, the fees are paid upfront at the inception of the contract. Therefore, the same principles as discussed for term subscription are applicable in case of the perpetual subscription fees.

Section 10 Conclusion 10.1 The following points shall be of the significant importance in IFRS Convergence:

Paradigm shift in financial reporting

The adoption of Ind AS would entail a significant change in the financial reporting framework used by Indian

companies to report their financial results. As a consequence, the reported earnings (net income) and financial

position (net worth) reported by all these companies would undergo a change. Impact of this change would vary

from sector to sector and company to company, with some sectors/companies being significantly impacted.

Benefits of the move to Ind AS The move to Ind AS standards will significantly enhance the quality of and transparency in financial reporting by Indian companies. It will also enhance the international comparability of financial statements of Indian companies and make the Indian capital markets more attractive. It will also reduce capital costs and facilitate international fund-raising by Indian companies. First to adopt certain global standards With these Ind AS standards, India will be adopting some of the latest global standards before the rest of the world does. While India has been working on IFRS convergence, IFRS itself, as a body of standards, continues to evolve. Recently, the International Accounting Standards Board (IASB) issued new standards on revenue recognition and financial instruments, and these standards are mandatorily applicable internationally only from 2017 and 2018 respectively. The notified Ind AS standards are converged with these newer standards, including those on revenue and financial instruments, considering the timing of India’s move to IFRS. Early adoption of these standards as compared to the global adoption timelines, would not only ensure that our standards remain current with or ahead of their IFRS equivalents, but also provide a stable platform of reporting for Indian companies for a period of time after they move to Ind AS. If these standards are not early adopted, Indian companies would have to adopt these newer standards a year or two after they move to Ind AS, potentially hampering comparability and increasing cost of compliance. 10.2 The below figure describes the overview of Ind As Conversion Process*.

*Source: KPMG First Notes

Appendix 1 References

1. Annual Report of the following companies

A. Idea Cellular Limited B. Bharti Airtel Limited C. Vodafone Group Plc D. Telenor Group E. Whats App Inc

2. Ind As notified by Ministry of Corporate Affairs (MCA) 3. Carveouts notified by Ministry of Corporate Affairs (MCA) 4. Accounting Standards issued by ICAI 5. Guidance Notes issued by ICAI