RevRec in the Complex World of Telecommunication

By Aarthi Rayapura May 29, 2015

The year 2014 marked the introduction of the converged set of revenue recognition principles released by the IFRS and FASB. Upon its release, the new guidance spotlighted several industries likely to see substantial effects of the ASC 606 guidance. The most highlighted and noted one on that list was, undoubtedly, telecommunications. It is indeed a giant, ever-growing and complex world which seems to have numerous ramifications as a result of the new revenue recognition policies.

This sector is one of the largest and the most successful models of a recurring revenue business. It also holds a lot of room for complexity – routinely modified phone contracts which are extended or cancelled. The companies also have complete control over hardware pricing, which is heavily dependent on consumer choice of products and popularity. Accountants, auditors and managers have a lot to think about in this business and they are staring at a big cauldron of questions needing answers in order to ensure they’re ready to face the storm of #RevRec implementation. (Read More Here)

The new ASC 606/ASU 2014-09/IFRS 15 consolidates the old industry specific standards in to 5 simple steps:

  1. Identify the contract with the customer.
  1. Identify the performance obligations in the contract.
  1. Determine the overall transaction price for the contract.
  1. Allocate the transaction price to the performance obligations.
  1. Recognize revenue when performance obligations are satisfied.

Most complications have been noted around the determination of performance obligations and transactions prices.

ASC 606 may allow companies to recognize revenue up front, such as subsidized handsets, for example. In some other cases, there may be the addition of some other layers of problems.

  • Single or multiple users?

Standard plans often include ‘friends and family’ options, especially for wireless carriers. However, the structure of these plans will create challenges under the new guidance. Technically, this plan means multiple users, so carriers need to determine if such offerings consist of a single blanket contract covering all users or if multiple contracts should be considered with specific performance obligations.

Determining the actual and appropriate selling price for each user’s share of the overall service will also be important for accurate revenue recognition.

  • Incentives, discounts, credits – when, where, how?

We’re all familiar with the constant promotions and discounts offered by the telecom industry to lure in customers. It definitely is a very successful way of offering sign-up incentives and also acts as a tool for retention of customers. Now it all depends on when and where these discounts or credits are offered as that determines how it is treated. Is it treated as either a temporary contract modification or a variable consideration under the new guidance? During adoption of the new principles, telecom companies should have a thorough understanding of how to make these distinctions.

This distinction henceforward will be an important step because unlike the current policies, the new #RevRec guidance has very specific provisions for how contract modifications are handled.

  • Bundle or unbundle?

A majority of a company’s installation and activation fees for new subscribers is usually charged up-front and mostly non-refundable. In a typical situation, these fees are bundled with the data and voice services for an easy sales purpose and less so when it comes to recognizing revenue once the new guidance comes in to picture.

Under the new principles, recognition of revenue is possible when the specific performance obligation associated with that revenue is satisfied. So when up-front fees are bundled with an ongoing subscription, the performance obligation in many cases will be the delivery of the actual service. That means revenue isn’t recognized when the customer first gains access, but as voice/data services are provided. Additional issues arise if the contract is renewable, or is terminated ahead of time.

It may be easier to unbundle installation and activation services from the ongoing contract to both reduce complexity and increase flexibility.

Preparation tips

We have looked at various other verticals in recent months and clearly telecom isn’t the only one faced with challenges as a result of the new guidance. Businesses in the US will begin to experience the new standard from December 2017 onward. There’s no better time than the present to start preparing your transition. Start by following updates by the boards as well as the Transition Resource Group discussions, both of which provide excellent forums for Q&A. Please continue to stay tuned to this space, as well, for all the latest happenings brought to you under one roof. We wish you all the best!