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Hotel Grande Bretagne, Athens, 8-9 June
Workshop 1 – Revenue recognition workshop
2015 Global Communications GAAP Summit
June 2015PwC
Where are you with IFRS 15?
2Global Communications GAAP Summit
1 2
25% are consideringchanging tariff
structures to simplifyIFRS 15 accounting
40% are still at theimpact assessment
stage
57% think currentsystems are unable toprovide the datarequired by IFRS 15
38% expect tohave differencesin internal and
external reporting
57% thinkcurrent systemswill be unable to
provide all thedata required by
IFRS 15
75% are thinkingabout their
externalcommunication
….. 13% have haddiscussions with
externalstakeholders
June 2015PwC
Hot topics
Global Communications GAAP Summit
3
1 240% are at the ImpactAssessment stage
57% think currentsystems are unable toprovide the datarequired by IFRS 15
Identifyingperformanceobligations
Determiningthe SSP of
POs
Variableconsideration
Externalversus
internalreporting
Principalversusagent
Treatmentof costs
Indirectversus direct
saleschannels
Financingcomponent
Contractduration
June 2015PwC
What impact will the deferral have on your preparation for IFRS15?
1. No impact – we will be ready to adopt in 2017
2. The deferral gives us confidence we will be ready for 2018
3. We will now adopt the standard on a full retrospective basis
4. We have put our IFRS 15 project on hold
4Global Communications GAAP Summit June 2015PwC
June 2015PwC
TRG – topics referred to the Boards - February 2015
Performanceobligations
Licenceimplementation
guidance
Shipping andhandling
(US GAAP only)
• Meaning of ‘significantly affect’: Which attributes to consider
- Articulation A (IASB): activities that significantly affect utility of IP
- Articulation B (FASB): focuses on the type of IP
• ‘Royalty’ exception: Royalties should not be split; exception only appliesto POs that are ‘predominantly’ licences
• Additional amendments (FASB only)
• ‘Perfunctory or inconsequential’ obligations
- IASB: no standard setting
- FASB: propose factors to determine if promise is immaterial
• Indicator of ‘distinct in the context of the contract’
- IASB: develop examples only
- FASB: also clarify principle and align indicators
• IASB: no discussion
• FASB: policy choice about whether separate performance obligation orfulfilment costGlobal Communications GAAP Summit
PwC 5
June 2015PwC
TRG – topics referred to the Boards - March 2015
Noncashconsideration
Transition
Principal versusagent
• Still under discussion by both boards; IASB to discuss at MayBoard meeting; FASB to discuss at future meeting.
Sales tax(US GAAP only)
Collectibility
• Expedient for modifications before earliest period presented
• IASB only: no requirement to restate completed contracts underthe full retrospective approach
• IASB: no discussion
• FASB: policy choice to present net or perform analysis
• IASB: no standard setting
• FASB: propose to clarify measurement date is at contract inception
• IASB: future discussion
• FASB: propose to clarify
Global Communications GAAP Summit6
June 2015PwC 7Global Communications GAAP Summit
June 2015PwC
A recap of the 5 step approach
Global Communications GAAP Summit8
1
Identificationof a contractwith acustomer
2
Identificationof separateperformanceobligations
3
Determinationof thetransactionprice
4
Allocationof thetransactionprice to theseparateperformanceobligations
5
Revenuerecognitionwhen (or as)the entitysatisfies aperformanceobligation
Global Communications GAAP Summit
9June 2015
PwC
Customer contracts and variable consideration
Performance obligations and standalone selling price
Segmental reporting versus performance obligations
Costs of acquiring and fulfilling customer contracts
Significant financing components
Customer contracts andvariable consideration
10Global Communications GAAP Summit June 2015PwC
Customer contracts
11Global Communications GAAP Summit June 2015PwC
A contract is
“an agreement between two ormore parties that creates
present enforceable rights andobligations (not necessarily
written)”
Contractcombination
Contractmodification
Contract duration
Contract duration may depend on:
• Local regulation
• Local consumer protection laws
• Customary business practices may give customers legally enforceablerights and obligations
12Global Communications GAAP Summit June 2015PwC
Identifying the contract duration is important but not always easy!
The devil can be in the detail
BetaCom offers its customers CATV service. The contracts do not have a statedduration and both BetaCom and the customer can terminate at anytime withoutpenalty.
BetaCom has a special offer this month that guarantees a set price per month for thenext 12 months. The STB provided by BetaCom is actively recovered when thecustomer churns.
No amount is billed to the customer for the STB.
1. 1 month
13Global Communications GAAP Summit June 2015PwC
What is the contract duration?
2. 12 months 3. Indefinite 4. Not sure
Proposed solution
• The contract duration is monthly. Both parties can terminate at any point withoutpenalty
• BetaCom and the customer’s enforceable rights and obligations do not extendbeyond the goods and services already obtained/provided
• The offer of a guaranteed price for 12 months does not create a present enforceableright and obligation to either BetaCom or the customer. The customer would needto opt into this right each month
• If BetaCom concluded the STB was a separate performance obligation, then onemonth of service revenue would be allocated between the STB and service
14Global Communications GAAP Summit June 2015PwC
In Denmark local regulation states customer contracts cannot exceed 6 months.
BetaCom’s customer signs a service contract with no stated end date. The contract hasa non cancellable period of 6 months and can then be cancelled by the customer at 1months notice.
BetaCom provides a subsidised device to the customer. The average customer life is 22months.
15Global Communications GAAP Summit June 2015PwC
1. 1 month
What is the contract duration?
2. 6 months 3. 22 months 4. Other
Proposed solution
• The present enforceable rights and obligations of BetaCom and the customer arefor 6 months
• The consideration for 6 months of service would be used to determine thetransactions price for allocation between the subsidised device and service
NB: This scenario exists in certain markets where telecom regulation and/orconsumer protection legislation limits the duration of contracts and limits theability to renew or extend customer contracts unilaterally
16Global Communications GAAP Summit June 2015PwC
At contract inception of a 24 month contract the customer has the ability toupgrade/renew their contract at any time after month 12. Should they exercise theirright and upgrade/renew after 12 months they are not charged a termination penalty.
How should this early upgrade right be accounted for?
Global Communications GAAP Summit17
June 2015PwC
1. Variable consideration as BetaCom is entitled to anything between 12 – 24 monthsof cash flows
2. There is a contract modification at the point in time the customer chooses toupgrade
3. The early upgrade/renewal right is a separate performance obligation (materialright)
Variable consideration
Included in the transaction price only if it is highly probable that there will not bea significant revenue reversal
Key effect: must recognise ‘minimum amount’ that is highly probably of notreversing
18Global Communications GAAP Summit June 2015PwC
Uncertaintyover a long
period of time
Limitedexperience
with similarcontracts
Susceptible tofactorsoutsidecontrol
Broad rangeof outcomes
Contract modifications
19Global Communications GAAP Summit June 2015PwC
What types ofcontract
modificationshave you
identified?
Have youidentifiedcontract
modificationsthat would
require you toretrospectively
remeasurerevenue?
“Modification is achange in the scope orprice (or both) of acontract that isapproved by the partiesto the contract.”
Performance obligations andstandalone selling price
20Global Communications GAAP Summit June 2015PwC
June 2015PwC
What is a performance obligation?
21Global Communications GAAP Summit
Contract
Performanceobligations
Promises totransfer goods and
services to thecustomer (explicit
or implicit)
Performanceobligation is
distinct if:
• it is of benefit tothe customerseparately; AND
• it is distinct inthe context ofthe contract
Are there any circumstances where a mobile handset is not distinct fromservice?
1. Yes
2. No
3. Not sure
22Global Communications GAAP Summit June 2015PwC
23
BetaCom sells a complex mobile tariff on a 24 month contract. The tariff includes1,000 minutes of voice, 5,000 SMS, 2GB of data and 50 tracks on Spotify.
How many separate performance obligations are there?
1. 1
2. 4
3. Not sure
Global Communications GAAP SummitPwC
June 2015
Proposed solution
Global Communications GAAP Summit24
1. Can the customer benefit from each service in the bundle separately?
2. Are the services distinct in the context of the contract?
• The performance obligations (“PO”) identified should give you a meaningful“unit of accounting” for the purposes of the revenue recognition allocation
• One view is the tariff is a single PO; the customer is buying access to networkservices
• An alternative view is that each service could be defined as a separate PO
• Judgement is required. It is likely that in markets where bundled tariffs arecommon, the complex tariff will be defined as a single PO
June 2015PwC
Would your answer be different if the tariff was “AYCE” with unlimitedvoice, data, SMS and music tracks every month?
1. Yes
2. No
3. It depends
Global Communications GAAP SummitPwC
June 201525
BetaCom offers triple play which includes fixed line calls, broadband and TV services.BetaCom also sells calls, broadband and TV as standalone services.
How many separate POs are there?
Global Communications GAAP SummitPwC
June 201526
1. 1
2. 2
3. 3
4. Not sure
Proposed solution
Global Communications GAAP Summit27
1. Can the customer benefit from the services in the bundle separately?
2. Are the services distinct in the context of the contracts?
• The performance obligations (“PO”) identified should give you a meaningful“unit of accounting” for the purposes of the revenue recognition allocation
• In many markets convergence is in its early stages and customers typicallypurchase more fixed line products and services separately compared with mobile
• It is possible that the maturity of the market (i.e. the extent of bundling) willimpact the judgement on defining performance obligations. As business modelsand markets develop the judgement needs to be kept under review
June 2015PwC
BetaCom also provides a modem and set top box (STB) with its triple play offering.The modem is provided at no charge and cannot technically function on anothernetwork.
The STB is multi platform compatible and provided free of charge. BetaCom activelyrecovers, refurbishes and redeploys the STBs. In the event of fault or the STBbreaking, BetaCom will replace the STB.Is the modem a separate performance obligation?
Global Communications GAAP SummitPwC
June 201528
1. Yes
2. No
Proposed solution
Global Communications GAAP Summit29
1. Can the customer benefit from the modem on its own?
2. Are the services distinct in the context of the contract?
• The modem is not capable of operating independently of BetaCom’s network.The modem is not simply locked; its technical configuration is not compatiblewith any other network
• The material marketing the service highlights the modem made available withthe broadband service, hence it could be viewed as separate in the context of thecontract
• However both criteria must be met to meet the definition of “distinct”
June 2015PwC
Is the set top box a PO?
1. Yes
2. No
3. It depends
Global Communications GAAP Summit30
June 2015PwC
Proposed solution
Global Communications GAAP Summit31
• Paragraph 22 defines a PO (at inception) as each promise to transfer either a goodor service that is distinct or a series of distinct goods or services that are
substantially the same and have the same pattern of transfer
• The STB is compatible with other platforms and the customer could benefit fromthe STB on its own
• The question to consider is whether there has been a transfer to the customer
• It may be necessary to assess this in the context of the new leasing standard
• In the context of the contract the STB must be returned to BetaCom at the end ofthe contract and BetaCom actively enforces this
• In BetaCom’s view the STB is an extension of BetaCom’s network through which itprovides cable TV services and not a good sold to the customer
June 2015PwC
BetaCom offers its customers cinema tickets on a Tuesday if they spend more than€50 per month.
Are the cinema tickets a separate PO?
1. No, they are a marketing activity
2. BetaCom is acting as an agent for the supply of the cinema tickets
3. BetaCom is acting as principal for the supply of the cinema tickets
Global Communications GAAP Summit32
June 2015PwC
Standalone selling price of performance obligations
Global Communications GAAP Summit
“…an entity shall determinethe stand-alone selling priceat contract inception of thedistinct good or serviceunderlying eachperformance obligation inthe contract and allocate thetransaction price inproportion to those stand-alone selling prices.”
Is ‘list price’good evidence
of the standalone selling
price ofequipment?
What otherchallenges
are youfacing in
establishingSSPs for
your POs?
Do you haveexampleswhere youthink theresidual
approach todetermining
the SSP couldapply?
June 2015PwC 33
Segmental disclosures versus POs
Global Communications GAAP Summit
The table below sets out BetaCom’s segmental disclosures:
Europe Africa Asia Eliminations Total
Consumer 328 447 558 - 1,333
Enterprise 459 127 924 (87) 1,423
Wholesale 332 211 473 (127) 889
Other 19 59 5 - 83
Total revenue 1,138 844 1,960 (214) 3,728
Voice 457 612 1024 (161) 1,932
Data 413 220 756 (53) 1,336
TV and content 268 12 180 - 460
Total revenue 1,138 844 1,960 (214) 3,728
June 2015PwC 34
Segmental disclosures versus POs
• BetaCom concluded its mobile tariff was a single PO and that its fixed line multi-play offering represented three POs
• The disclosure by product/service
• Voice includes fixed and mobile and wholesale revenues
• Data includes broadband, mobile data, SMS, MMS etc
• TV and content
How do you reconcile your assessment of PO under IFRS 15 with IFRS 8disclosure requirements?
35Global Communications GAAP Summit June 2015PwC
Costs of acquiring and fulfillingcustomer contracts
36Global Communications GAAP Summit June 2015PwC
June 2015PwC
Contract costs – Capitalisation
37Global Communications GAAP Summit June 2015PwC
Recognise costs of obtaining acontract as an asset, if entity
expects to recover those costs.
“The incremental costs ofobtaining a contract arethose costs that an entity
incurs to obtain a contractwith a customer that it
would not have incurred ifthe contract had not beenobtained (for example, a
sales commission).”
BetaCom pays its local distributor a commission of €100 for each customer contractacquired. The distributor is paid an additional €500 volume bonus if it connects up to250 customers in a month.
What amount should BetaCom capitalise as the cost of acquiring thecustomer?
Global Communications GAAP Summit38
June 2015PwC
1. €100 per customer on acquisition
2. €102 per customer on acquisition
3. €100 per customer on acquisition and €500 as a lump sum if the volume is achieved
4. €100 per customer on acquisition and expense the volume bonus
June 2015PwC
Proposed solution
• The €100 would not have been incurred if the distributor had not acquired acustomer on behalf of BetaCom. This amount should be recorded as an asset.
• The bonus commission would also not have been incurred if the distributor hasnot acquired a specific number of customers. As the volume bonus is paid on amonthly basis BetaCom should be able to reliably assess each month end whatthe actual cost of acquiring the customer was.
• In arrangements where the commission structures are more complex (i.e. notjust paid up-front on a per customer basis) the terms of the arrangements andthe commercial substance of the arrangements will need to be carefully reviewedto determine if the acquisition costs should be recorded as an asset.
39Global Communications GAAP Summit June 2015PwC
Should credit and churn risk be assessed as part of the measurement ofthe initial asset recorded?
1. Yes
2. No, it forms part of the impairment assessment
3. It depends
Global Communications GAAP Summit40
June 2015PwC
Are you planning to take the practical expedient for contracts of lessthan 12 months?
1. Yes
2. No
3. Not sure
4. Not sure we can - our average customer life exceeds 12 months
Global Communications GAAP Summit41
June 2015PwC
What types of costs of fulfilment have you identified?
1. Installation costs
2. Parallel run costs
3. Fleet depreciation
4. Other
Global Communications GAAP Summit42
June 2015PwC
Significant financing component
43Global Communications GAAP Summit June 2015PwC
Is there is a significant financing component in a bundled contract forequipment and service?
1. Yes
2. No
3. It depends
Global Communications GAAP Summit44
June 2015PwC
How would you assess “significant” under IFRS 15?
1. The absolute impact on the reported revenue number
2. Determine a company specific materiality
3. Assessing at a customer contract level
4. Other
Global Communications GAAP Summit45
June 2015PwC
Please make your way to the Grand Ballroom forthe next session - OTE market update
Thank you
This publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.
© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopersInternational Limited, each member firm of which is a separate legal entity.