Revenue for

Telecoms
Issues In-Depth

September 2016

IFRS and US GAAP

kpmg.com
Contents
Facing the challenges 1 6 Step 5: Recognize revenue when or as the
entity satisfies a performance obligation 113
Introduction 2
6.1 Transfer of control 115
Putting the new standard into context 6 6.2 Performance obligations satisfied over time 118
6.3 Measuring progress toward complete
1 Scope 9
satisfaction of a performance obligation 121
1.1 In scope 9 6.4 Performance obligations satisfied at a point
1.2 Out of scope 10 in time 125
1.3 Partially in scope 13 6.5 Enterprise contracts – Bill-and-hold and
1.4 Portfolio approach 17 customer acceptance 127
2 Step 1: Identify the contract with a customer 19 7 Contract costs 128
2.1 Criteria to determine whether a contract 7.1 Costs of obtaining a contract 128
exists 19 7.2 Costs of fulfilling a contract 134
2.2 Consideration received before concluding 7.3 Amortization 139
that a contract exists 30 7.4 Impairment 143
2.3 Combination of contracts 35
8 Customer options for additional goods or
3 Step 2: Identify the performance obligations in services 146
the contract 38
8.1 Determining if a material right is created by
3.1 Criteria to identify performance obligations 38 contract options 146
3.2 Distinct goods or services 42 8.2 Measuring and accounting for material rights 151
3.3 Telecom equipment 47
9 Nonrefundable up-front fees 156
3.4 Telecom services 50
3.5 Installations 56 9.1 Assessing if nonrefundable up-front fees
3.6 Other telecom services, fees and convey a material right 158
administrative tasks 59 9.2 Accounting for nonrefundable up-front fees
3.7 Incentives and promotional giveaways 61 that do not convey a material right 161
3.8 Warranties 63 10 Indirect channel sales 165
4 Step 3: Determine the transaction price 67 10.1 Determining who the customer is and when
4.1 Contractual minimum commitment or control transfers 165
contracted service amount? 70 10.2 Combining contracts in the indirect channel 173
4.2 Variable consideration (and the constraint) 73 10.3 Accounting for payments in the indirect
4.3 Consideration payable to a customer 81 channel 174
4.4 Significant financing component 87 11 Repurchase agreements 177
4.5 Noncash consideration 93
Detailed contents 182
5 Step 4: Allocate the transaction price to the
performance obligations in the contract 96 Index of examples 184
5.1 Determine stand-alone selling prices 97
Guidance referenced in this publication 186
5.2 Allocate the transaction price 102
5.3 Changes in the transaction price 111 Acknowledgments 189

Keeping you informed 190

 Facing the challenges
The new revenue standard is having a profound effect across the telecommunications
sector.
The past two years have seen telecom companies wrestle with implementation
issues. Every day brings new questions and new insights, which are – sometimes
quite hotly – discussed and debated in various forums globally.
We are helping our clients to navigate through this period and we’ve gained
extensive experience applying the new revenue standard around the world. And
we are delighted to share this experience with you in this publication. It builds on
the discussions to provide preparers, users and auditors with a comprehensive and
illustrated understanding of how to apply the new standard to common transactions.
Whether you are just starting to assess the impact of the new requirements or are
at an advanced stage with your implementation project, this publication will provide
you with the insight that you need into the implementation issues that telecom
companies are facing.
With the effective date of 2018 rapidly approaching, time is running out. If you have
yet to begin your implementation of the new requirements, we urge you to start
as a matter of priority and to engage with investors and other stakeholders to build
expectations of how your key performance indicators or business practices may
change.
Please speak to your usual KPMG contact if you are facing implementation challenges
or would like to discuss any other accounting issues.

Valerie Boissou
Karyn Brooks
Prabhakar Kalavacherla (PK)
Allison McManus
Jason Waldron

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2 | Revenue for Telecoms – Issues In-Depth
| Introduction

Introduction
The new standard will affect the amount, timing and recognition of revenue and some
costs for telecom companies. It will also have a follow-on impact to financial reporting,
IT systems, internal controls and disclosures related to revenue.
This publication examines how the five steps of the new revenue standard applies
to wireless, cable and other telecommunications companies, referred to throughout
this publication as telecom entities or telcos. It also covers more advanced topics
such as the impact of customer options and material rights in telecom contracts,
nonrefundable up-front fees, repurchases, sales through indirect channels, and costs
to obtain or fulfill a contract.
This publication does not cover other topics that telecom entities will need to address
to ensure their accounting complies with the new standard, including contract
modifications, presentation, disclosures and transition. Those topics are covered
broadly, in our publications Revenue Issues-in-Depth, Edition 2016 (Issues In-Depth,
Edition 2016, Guide to annual financial statements – IFRS 15 supplement, Edition
2015 and Illustrative disclosures – Revenue, Edition 2016. We believe that disclosures
and transition, in particular, will be challenging for telecom entities to resolve
because of the large amount of data required to comply with those provisions of the
new standard.
We have illustrated the main points with examples and explained our emerging
thinking on key interpretative issues. Also included are comparisons with current
IFRS and US GAAP requirements, as well as comparisons between the new IFRS and
US GAAP requirements, when relevant.

Key facts
The new standard provides a framework that replaces existing revenue guidance in
US GAAP and IFRS, including the contingent cap. It moves away from the industry-
and transaction-specific requirements under US GAAP, which are also used by some
IFRS preparers in the absence of specific IFRS guidance.
New qualitative and quantitative disclosure requirements aim to enable financial
statement users to understand the nature, amount, timing and uncertainty of revenue
and cash flows arising from contracts with customers.
Entities will apply a five-step model to determine when to recognize revenue, and at
what amount. The model specifies that revenue is recognized when or as an entity
transfers control of goods or services to a customer at the amount to which the entity
expects to be entitled. Depending on whether certain criteria are met, revenue is
recognized:
– over time, in a manner that best reflects the entity’s performance; or
– at a point in time, when control of the goods or services is transferred to the
customer.

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 Revenue for Telecoms – Issues In-Depth | 3
Introduction |

Step 1 Step 2 Step 3 Step 4 Step 5

Determine Allocate
Identify
Identify the the the Recognize
performance
contract transaction transaction revenue
obligations
price price

The new standard provides application guidance on numerous related topics, including
principal versus agent arrangements and customer options. It also provides guidance on
when to capitalize the costs of obtaining a contract and some costs of fulfilling a contract
(specifically those that are not addressed in other relevant authoritative guidance – e.g. for
inventory).
The following table lists the mandatory effective date and early adoption provisions of
the new standard for IFRS and US GAAP entities.

Type of entity Annual periods commencing on or after

IFRS entities January 1, 2018 (with early adoption permitted for

any annual period)

Public business entities December 16, 2017 (with early adoption

and certain not-for- permitted for annual periods beginning on or after
profit entities applying December 16, 2016, the original effective date)
US GAAP1

All other US GAAP December 16, 2018 (with early adoption

entities permitted for annual periods beginning on or after
December 16, 2016, the original early-adoption
date)

Broad impacts for telecom entities

Revenue recognition for handsets may be accelerated
Compared with current accounting, revenue recognition for handsets may be
accelerated. This is due to the fact that the new standard removes the contingent
cap methodology that many telecom entities have used when accounting for sales of
wireless arrangements. The new standard replaces the contingent cap methodology
Low High with a requirement that telecom entities determine the amount of revenue for each
element in a bundle by allocating the transaction price based on stand-alone selling
prices. This change in methodology may also result in a greater amount of revenue
being allocated to goods (equipment) and less revenue being allocated to services.

1. ‘Public business entity’ is defined in ASU 2013-12, Definition of a Public Business Entity – An
Addition to the Master Glossary, available at www.fasb.org. ‘Certain not-for-profit entities’ are
those that have issued or are a conduit bond obligor for securities that are traded, listed, or
quoted on an exchange or an over-the-counter market. All other entities applying US GAAP have
the option to defer application of the new guidance for one year for annual reporting purposes.

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4 | Revenue for Telecoms – Issues In-Depth
| Introduction

The acceleration of revenue and the change in allocation between goods and services
will have an impact on key performance indicators and ratios, affecting analyst
expectations, compensation arrangements and contractual covenants.

Customer options (material rights) require careful analysis

The new standard requires a telecom entity to allocate the transaction price to options
to purchase additional goods and services that provide a customer with a material
right. Given the breadth of offers provided by telecom entities, this will require careful
analysis and may ultimately result in the deferral of revenue, until such options are
exercised or they expire.

Accounting for costs to obtain or fulfil a contract may change

Under the new standard, incremental costs to acquire a contract and certain costs to
fulfill a contract are capitalized and amortized over the period the goods and services
are delivered. This may represent a change in accounting policy for some telecom
entities which expense such costs currently. We expect the new standard will reduce
some of the diversity in current practice.

Revisions may be needed to tax planning, covenant compliance and

sales incentive plans
The timing of tax payments, the ability to pay dividends in some jurisdictions and
covenant compliance all may be affected. Tax changes caused by adjustments to the
timing and amounts of revenue, expenses and capitalized costs may require revised
tax planning. Telecom entities will need to revisit staff bonuses and incentive plans to
ensure that they remain aligned with corporate goals.

Sales and contracting processes may be reconsidered

Some entities may wish to reconsider current contract terms and business practices
– e.g. distribution channels – to achieve or maintain a particular revenue profile.

IT systems will need to be changed

Telecom entities will need to capture the additional data required under the new
standard – e.g. data used to estimate stand-alone selling prices and to support
disclosures. Applying the new standard retrospectively likely means the early
introduction of new systems and processes, and potentially a need to maintain
parallel records during the transition period.

New estimates and judgments will be required

The new standard introduces new estimates and judgmental thresholds that will
affect the amount or timing of revenue recognized. Judgments and estimates will
need updating, potentially leading to more financial statement adjustments for
changes in estimates in subsequent periods.

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 Revenue for Telecoms – Issues In-Depth | 5
Introduction |

Accounting processes and internal controls will need to be revised

Telecom entities will need processes to capture new information at its source –
e.g. customer service activities, operations, marketing offers and new product
introductions – and to document the new processes and information appropriately,
particularly as they relate to estimates and judgments. Telecom entities will also
need to ensure controls are in place to ensure consistent methodologies for both
allocation of the transaction price and accounting for contract modifications. New
internal controls will be required to maintain the completeness and accuracy of all of
this information.

Extensive new disclosures will be required

Preparing new disclosures may be time-consuming, and capturing the appropriate
information may require incremental effort or system changes. There are no
exemptions for commercially sensitive information. Telecom entities will also need
to consider IFRS, SEC and other regulatory requirements to disclose the effect of
recently issued accounting standards on financial statements when adopted.

Entities will need to communicate with stakeholders

Investors and other stakeholders will want to understand the impact of the new
standard on the business before it becomes effective. Areas of interest may include
the effect on financial results, the costs of implementation, expected changes to
business practices and the transition approach selected.

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6 | Revenue for Telecoms – Issues In-Depth
| Putting the new standard into context

Putting the new

standard into context
This publication provides a detailed analysis of the new standard, for those elements
that are most relevant to telecom entities and that will result in a change in practice.
Examples have also been provided to demonstrate those changes. Further analysis
and interpretation will be needed for a telecom entity to apply the requirements to
its own facts, circumstances and individual transactions. Furthermore, some of our
observations may change and new observations will be made as issues from the
implementation of the new guidance arise, and as practice develops.
This section provides important context to the rest of the publication.

Organization of the text

The following diagram highlights how we have organized our discussion of the new
standard in this publication. Within each section we generally provide an overview,
the requirements of the new standard, examples, our observations, comparisons
with current IFRS and US GAAP guidance, and key differences between IFRS and US
GAAP, if any.

5-step model

(2) (3) (4) (5) (6)

Step 1 Step 2 Step 3 Step 4 Step 5
Identify the Identify Determine Allocate the Recognize
contract performance the transaction revenue
obligations transaction price
price

Other guidance

(7) (8) (9) (10) (11)

Contract Customer Non Indirect Repurchase
costs options for refundable channel agreements
additional up-front sales
goods or fees
services

For those elements of the guidance that are not covered in this publication, such as
disclosures, reference is made to Issues In-Depth, Edition 2016.

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 Revenue for Telecoms – Issues In-Depth | 7
Putting the new standard into context |

Guidance referenced in this publication

This publication considers the requirements of IFRS 15 Revenue from Contracts
with Customers and FASB ASU 2014 09, Revenue from Contracts with Customers
(FASB ASC Topic 606), originally published jointly in May 2014, and subsequently
amended for clarifications. This publication reflects the amendments to FASB ASC
Topic 606 made by ASU 2016-08, Principal versus Agent Considerations (Reporting
Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and
Licensing, and ASU 2016-12, Narrow Scope Improvements and Practical Expedients.
This publication also includes, as Future developments, discussion of other FASB
standard-setting projects and technical correction proposals that may further clarify
certain requirements.
For specific provisions of the revenue recognition guidance, KPMG summarizes
the requirements, identifies differences between IFRS and US GAAP, and identifies
KPMG’s observations. Neither this publication nor any of KPMG’s publications should
be used as a substitute for reading the standards and interpretations themselves.
References in the left hand margin of this publication relate to guidance issued
as at September 1, 2016. Future developments are based on information as at
September 1, 2016 and may be subject to changes.
Reference should be made to Issues In-Depth, Edition 2016 for the following
information:
– Authoritative portions of the new standard;
– Guidance replaced by the new standard; and
– Summary of key differences between IFRS and US GAAP.

SEC guidance
This publication contains comparisons to current US GAAP, including the SEC’s
guidance on revenue recognition.2 Although the new standard supersedes
substantially all of the existing revenue recognition guidance issued by the FASB and
included in the Codification, it does not supersede the SEC’s guidance for registrants.
The SEC has rescinded certain observer comments and will continue to evaluate its
guidance and determine which guidance may be relevant under the new standard,
requires revision or will be rescinded.

2. SEC Staff Accounting Bulletin Topic 13, Revenue Recognition, available at www.sec.gov.

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8 | Revenue for Telecoms – Issues In-Depth
| Putting the new standard into context

Transition Resource Group for revenue

recognition
The IASB and the FASB’s Joint Transition Resource Group for Revenue Recognition
(TRG) was formed for the purpose of:
– soliciting, analyzing and discussing stakeholder issues arising from the
implementation of the new standard;
– informing the IASB and the FASB about implementation issues that will help the
Boards determine what action, if any, will be needed to address them; and
– providing a forum for stakeholders to learn about the new guidance from others
involved with implementation.
The TRG advises the Boards, but does not have standard-setting authority. The
members of the TRG include auditors, financial statement preparers and users from
various industries and geographies (both United States and international), and both
public and private companies and organizations. Others who attend and participate
in the meeting as observers include the IASB and FASB Board members and staff,
the PCAOB, the SEC, AICPA and IOSCO. The TRG had its first meeting in July 2014
and has held six joint meetings since that time. During these meetings more than
50 issues were addressed, with some resulting in the amendments issued in early
2016 by both the IASB and FASB.
In addition to the TRG, there are various other industry groups – including the
Telecommunications Revenue Recognition Task Force formed by the AICPA – that are
discussing how to apply the new standard. A telecom entity should actively monitor
these activities and consider adjusting its implementation plan if new guidance
is developed.
The TRG has discussed a number of issues relevant to telecom entities. The
conclusions of the TRG on those issues have been reflected in this publication.
Telecom entities are encouraged to review the relevant TRG agenda papers and
meeting summaries to ensure the TRG discussions are reflected in their accounting
policy choices.

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 Revenue for Telecoms – Issues In-Depth | 9
1.1 In scope |

1 Scope
Overview

The new standard applies to contracts to deliver goods or services to a customer.

However, if a contract, or part of a contract, is in the scope of other specific
requirements, then it falls outside the scope of the new standard. For example,
a lease would be in the scope of the leasing standards. This may apply to some
equipment provided to customers in a telecom contract.
Furthermore, some non-monetary exchanges may be outside the scope of the
new standard, which could potentially apply to exchanges of airtime or network
capacity.
In some cases, the new standard will be applied to part of a contract or to a
portfolio of contracts. The new standard provides guidance on when it should or
may be applied to these circumstances and how to apply it.

1.1 In scope
Requirements of the new standard

606-10-15-3 A ‘customer’ is a party that has contracted with an entity to obtain goods or services
[IFRS 15.6] that are an output of the entity’s ordinary activities in exchange for consideration.

Contract

Goods and services

Entity Customer

Consideration

Example 1 – In-scope arrangement

Telco X is in the business of constructing networks and associated infrastructure

for customers. Telco X enters into a contract with Company C to deliver a call
center.
This transaction is in the scope of the new standard, because Company C has
entered into a contract to purchase an output of Telco X’s ordinary activities and is
therefore considered a customer of Telco X.

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10 | Revenue for Telecoms – Issues In-Depth
| 1 Scope

Example 2 – Out-of-scope arrangement

Telco Y is in the business of providing telecom services to its customers. Telco

Y operates several call-centers across various geographic areas. Telco Y decides
to reorganize its business and enters into a contract to sell the building and the
equipment for one of its call centers to Company D.
This transaction is outside the scope of the new standard. The assets sold are
not an output of Telco Y’s ordinary activities, and Company D is therefore not
considered a customer of Telco Y.
For further discussion on which parts of the model apply to contracts with a
noncustomer, see Section 9 in Issues In-Depth, Edition 2016.

Observations

ASU 2014-09.BC52–BC53 Customer defined but ordinary activities not defined

[IFRS 15.BC.52–BC53]
The definition of a customer focuses on an entity’s ordinary activities. However,
the Boards did not define ‘ordinary activities’, but referred to the definitions
of revenue in their respective conceptual frameworks. The IASB’s Conceptual
Framework for Financial Reporting specifically includes ’ordinary activities of an
entity’, whereas the FASB’s Statements of Financial Accounting Concepts refer to
the notion of an entity’s ’ongoing major or central operations’.

1.2 Out of scope

Requirements of the new standard

606-10-15-2 The new standard does not apply to:

[IFRS 15.5]
– lease contracts;
– insurance contracts (for US GAAP, insurance contracts in the scope of Topic 944);
– financial instruments and other contractual rights or obligations in the scope of
other specific guidance (because of the differences between IFRS and US GAAP,
the standards that are outside the scope of the new revenue standard are not
identical);
– guarantees (other than product or service warranties); and
– non-monetary exchanges between entities in the same line of business that
facilitate sales to customers other than the parties to the exchange.

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 Revenue for Telecoms – Issues In-Depth | 11
1.2 Out of scope |

Example 3 – Non-monetary exchanges

Telco A and Telco B provide wireless services such as voice, data and text to their
customers. However, they maintain and operate networks in different regions.
Telco A and Telco B have agreed to exchange airtime and network capacity
to ensure that their customers always have access to wireless services. The
exchange is expected to be approximately equal and the contract requires no
payment between the entities. Also, the exchange was not assessed as a sale of
property, plant and equipment nor a lease.
This transaction is outside the scope of the new standard because Telco A
and Telco B have entered into an agreement that is a non-monetary exchange
between entities in the same line of business to facilitate sales to their
customers. Because this transaction is outside the scope of the new standard
for both Telco A and B, it would be excluded from disclosures required by the new
standard, including the presentation of revenue from contracts with customers.

Observations

Telecom contracts often contain leased equipment and guarantee

provisions
Telecom contracts can be complex and often contain elements that may be
scoped out of the new standard, such as leases or some guarantees. However,
the remainder of the contract could still be in scope (see 1.3).

Exchanges of airtime and network capacity may be scoped out

Telecom entities often exchange network capacity with their peers in different
606-10-15-2e markets or regions. These transactions may be referred to as ‘peering’ or ‘airtime
[IFRS 15.5(d)] exchange arrangements’. These transactions may take multiple legal forms,
such as the exchange of physical network assets, the exchange of rights to use
certain network assets or the exchange of airtime or capacity with no reference to
particular assets.
Transactions that meet the definition of either a sale of property, plant and
equipment or a lease are outside the scope of new standard and therefore not
addressed in this publication.

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12 | Revenue for Telecoms – Issues In-Depth
| 1 Scope

In addition to sales of property, plant and equipment and leases, some non-
monetary transactions may also be scoped out of the new standard if they
constitute a non-monetary exchange between entities in the same line of
business to facilitate sales to their existing or potential customers. When these
arrangements include some monetary exchange, an entity would need to
consider whether any part of the arrangement is included in the scope of the
new standard. If so, these transactions would be reported as other revenue
or gain or loss, as appropriate under other applicable guidance, and would be
excluded from disclosures required by the new standard.

Payments received from government agencies

Sometimes a telecom entity may receive a grant, subsidy or other payment from
a government agency. In accounting for these payments, an entity would first
apply any explicit guidance in its accounting framework. In the absence of explicit
guidance (assuming the government agency is not making a payment on behalf
of a customer or otherwise does not meet the definition of a customer and is
thus outside the scope of the new standard), the telecom entity should consider
the most appropriate guidance to apply to its specific facts and circumstances.
This could include an assessment of whether the principles in the new standard
can be applied by analogy.

Comparison with current IFRS

Fewer network capacity exchanges may qualify as revenue transactions

[IAS 16.24, IAS 18.12, SIC-31] Under current IFRS, certain non-monetary exchanges of network capacity
are reported as revenue-generating transactions, if the items exchanged are
dissimilar, fair value can be measured reliably and the transaction occurs in the
ordinary course of business.
The new standard includes a specific scope exclusion for non-monetary
exchanges. That scope exclusion requires a different analysis of non-monetary
transactions, specifically whether the exchange involves entities in the same line
of business and is completed to facilitate sales to customers. Transactions that
meet these criteria will be outside the scope of the new standard, even if they
involve dissimilar assets.

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 Revenue for Telecoms – Issues In-Depth | 13
1.3 Partially in scope |

Comparison with current US GAAP

Transaction- and industry-specific guidance is eliminated

Topic 922 The new standard eliminates substantially all transaction- and industry-specific
guidance and applies to all contracts with customers other than those scoped out
as described above. Therefore, entities currently applying transaction- or industry-
specific guidance (e.g. the accounting used for cable companies under Topic 922)
may find that their revenue recognition and cost policies will change under the
new standard (see Section 7).

Minimal change in scope assessment for non-monetary exchanges

845-10-30-1 – 30-4 Existing US GAAP guidance on non-monetary transactions already contains a
notion of “exchanges of a product or property held for sale in the ordinary course
of business, for a product or property to be sold in the same line of business to
facilitate sales to customers other than the parties to the exchange”. This notion is
similar to that included in the new standard and, therefore, the scope exclusion in
the new standard may not result in many changes to existing practice.
However, non-monetary exchanges of network capacity that currently qualify as
a real estate transaction may be affected because the specific guidance on real
estate is superseded (see 9.3 in Issues In-Depth, Edition 2016, and KPMG’s US
publication Revenue: Real Estate – Questions and Answers).

1.3 Partially in scope

Requirements of the new standard

606-10-15-4 A contract with a customer may be partially in the scope of the new standard and
[IFRS 15.7] partially in the scope of other accounting guidance. If the other accounting guidance
specifies how to separate and/or initially measure one or more parts of a contract,
then an entity first applies those requirements. Otherwise, the entity applies the
new standard to separate and/or initially measure the separately identified parts of
the contract.

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14 | Revenue for Telecoms – Issues In-Depth
| 1 Scope

The following flow chart highlights the key considerations when determining the
accounting for a contract that is partially in the scope of the new standard.

Is the contract fully in the Yes

scope of other accounting Apply that other guidance
guidance?

No

Does that standard

Is the contract partially Yes have separation and/or
in the scope of other
initial measurement
accounting guidance?
guidance that applies?

No Yes

Apply guidance in the Apply that guidance to

new standard to separate and/or
separate and/or initially measure
No initially measure the contract
the contract

Exclude the amount

initially measured
under that guidance
from the transaction
price
Apply the new standard to
the contract (or the part of
the contract in its scope)

Difference between IFRS and US GAAP

Guarantee contracts

Topic 460 The new standard scopes out guarantees. The US GAAP version of the new
[IFRS 9, IAS 39] standard specifies that guarantees (other than product and service warranties)
are scoped out because they are covered in a stand-alone accounting topic.
However, the IFRS version of the new standard scopes out financial guarantees
indirectly by scoping out rights and obligations that are in the scope of the
financial instruments guidance in IFRS, which includes guidance on financial
guarantees.
This difference in scoping may result in certain non-financial guarantees being
outside the scope of the new standard for US GAAP but in the scope for IFRS.

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 Revenue for Telecoms – Issues In-Depth | 15
1.3 Partially in scope |

Example 4 – Partially in scope transaction

Telco A enters into a contract that includes a promise to provide telecom

equipment and services to Customer C. Telco A first applies the leasing standard
to assess whether the arrangement contains a lease.
If Telco A concludes that the use of the equipment represents a lease, then the
equipment will be accounted for under the leasing standard. Because the leasing
standard contains guidance on how to identify a lease component and allocate
the transaction price between lease and non-lease components, Telco A first
applies that guidance.
If Telco A concludes that the equipment is not leased, then the entire contract
would be accounted for under the new standard. In applying the new standard,
Telco A would follow all of the relevant guidance, including the requirement to
determine whether the equipment is distinct from the service (see Section 3).

Observations

Guidance included for product and service warranties

606-10-55-30 – 55-35 Telecom entities that offer equipment warranties incremental to manufacturers’
[IFRS 15.B28–B33] warranties apply the guidance in the new standard to determine whether these
warranties are service warranties. If they are, then they would be accounted
for as separate performance obligations under the new guidance. If they are not
accounted for as separate performance obligations, then these warranties are
generally covered by other guidance and give rise to a cost accrual (see 3.8).
Service contracts often include clauses where the telecom entity guarantees
its customer a certain quality of service or performance. These service-level
arrangements may increase or decrease the consideration ultimately received
by the telecom entity and therefore need to be assessed when determining the
transaction price (see 4.2).

Leased equipment accounted for under the leases guidance

Topics 840, 842 When a telecom service contract includes equipment, the telecom entity needs
[IAS 17, IFRS 16] to assess whether that equipment is sold, leased or provided to the customer
as part of its service. This assessment is required even if the contract does not
explicitly refer to the equipment as leased or the lease payments are not billed
separately from other services.
Overall, the telecom entity considers the leases guidance to determine if the
transaction includes one or more elements that meet the definition of a lease. In
some cases, this conclusion may vary depending on whether the telecom entity
applies the current or new leases guidance.

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16 | Revenue for Telecoms – Issues In-Depth
| 1 Scope

Under the new leases guidance, in practice, a lease may exist when the customer
has to return the equipment at the end of the contract and the entity does not
have a substantive right to substitute the equipment during the contract term.
If the lease criteria are met, then the lease guidance also provides a basis for
allocating the overall consideration in the contract between lease and non-
lease components.
If the lease criteria are not met, then the whole transaction is in the scope of the
new standard.

Parts of the new standard apply to sales of nonfinancial assets

ASU 2014-09.BC57 Parts of the new standard also apply to sales of intangible assets and property, plant
[IFRS 15.BC57] and equipment, including real estate in transactions outside the ordinary course of
business (see Section 9 in Issues In-Depth, Edition 2016). For telecom entities that
sell network assets, the historical accounting under US GAAP, which was otherwise
subject to specific real estate sales accounting guidance, no longer applies.

Comparison with current IFRS

Alternative revenue programs for regulated telecom services

[IFRS 14] In some jurisdictions, telecom services are subject to rate regulation. Also,
some regulators have alternative revenue programs that allow for an adjustment
(increase or decrease) to rates charged to customers in the future based on
changes in demand and/or if certain objectives are met (e.g. reducing costs,
reaching milestones or improving customer service).
Currently, the only specific guidance on the accounting for the effects of rate
regulation under IFRS is IFRS 14, an interim standard, which permits – but does
not require – first-time adopters of IFRS to continue using previous GAAP to
account for regulatory deferral account balances. An entity that applies IFRS 14
will therefore measure movements in regulatory deferral account balances using
its previous GAAP. The interim standard requires these movements, as well
as the regulatory deferral account balances, to be presented as separate line
items in the financial statements, distinguished from assets, liabilities, income
and expenses that are recognized under other IFRSs. This is consistent with the
new standard’s requirement to disclose revenue arising from contracts with
customers separately from the entity’s other sources of revenue.

Comparison with current US GAAP

Separation and initial measurement

605-25-15-3 – 15-3A, Topics 825, 460 The guidance on separation and measurement for contracts that are partially in the
scope of the new standard is consistent with the current guidance on multiple-
element arrangements. Examples of guidance in current US GAAP in which an
entity first applies that specific separation and measurement guidance before
applying the new standard include that on financial instruments and guarantees.

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 Revenue for Telecoms – Issues In-Depth | 17
1.4 Portfolio approach |

Alternative revenue programs for regulated telecom services

980-605-25-1 – 25-4, 606-10-50-4a As mentioned above, in some jurisdictions, telecom services are subject to rate
regulation. Current US GAAP requirements on the recognition of regulatory
assets and liabilities from alternative revenue programs are outside the scope
of the new standard. However, the new standard requires revenue arising from
regulatory assets and liabilities to be presented separately from revenue arising
from contracts with customers in the statement of comprehensive income.
The new standard only applies to the operations of rate-regulated entities for
ordinary activities that are not subject to rate regulation. Entities will continue
to follow current US GAAP requirements to account for alternative revenue
programs, because these contracts are considered to be contracts with a
regulator and not with a customer. This may result in a difference for rate-
regulated entities with similar alternative revenue programs if they apply IFRS but
are not eligible to apply the interim standard on regulatory deferral accounts.

1.4 Portfolio approach

Requirements of the new standard

606-10-10-4 The new standard is generally applied to an individual contract with a customer.
[IFRS 15.4] However, as a practical expedient, an entity may apply the revenue model to a
portfolio of contracts with similar characteristics if the entity reasonably expects
that the financial statement effects of applying the new standard to the individual
contracts within that portfolio would not differ materially.

Example 5 – Portfolio approach applied to costs

In April 20X8, Cable A store sold 100 television cable contracts. The store employs
several sales agents who will receive a bonus of 10 for each contract they obtain.
Cable A determines that each bonus constitutes a cost of obtaining a contract
(see 7.1) and should be capitalized and amortized over the life of that underlying
contract and any anticipated renewal that the bonus benefits (see 7.3).
Cable A determines that the portfolio approach is appropriate because the costs
are all related to obtaining a contract and the characteristics of the contracts
are similar. The amortization period for the asset recognized related to these
costs is expected to be similar for the 100 contracts (see 7.3). Additionally, Cable
A documents that the portfolio approach does not materially differ from the
contract-by-contract approach. Instead of recording and monitoring 100 assets of
10 each, Cable A records a portfolio asset of 1,000 for the month of April 20X8.

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18 | Revenue for Telecoms – Issues In-Depth
| 1 Scope

Observations

Entities need to consider costs versus benefits of portfolio approach

Although the portfolio approach may be more cost effective than applying the
new standard on an individual contract basis, it is not clear how much effort may
be needed to:
– evaluate which similar characteristics constitute a portfolio – e.g. the effect of
different offerings, periods of time or geographic locations;
– assess when the portfolio approach may be appropriate; and
– develop the process and controls needed to account for the portfolio.
There are many application issues that can arise when applying the portfolio
approach for telecom entities, including the initial identification of portfolios,
allocation of transaction prices to performance obligations, contract
modifications, the effects of the time value of money, contract asset impairments
and unique reporting and disclosure requirements.

No specific guidance on assessing whether portfolio approach can be used

606-10-55-202 – 55-207 (Example 22), 55-353 – The new standard includes illustrative examples in which the portfolio approach is
55-356 (Example 52) applied, including for rights of return and breakage. However, it does not provide
[IFRS 15.IE110–IE115, IE267–IE270] specific guidance on how an entity should assess whether the results of the
portfolio approach would differ materially from applying the new standard on a
contract-by-contract basis.

Full versus partial portfolio approach

The new standard does not describe if and how the portfolio approach may bring
relief to preparers. Some telecom companies may wish to explore the benefits
of applying the portfolio approach to all of the aspects of the accounting for a
contract with a customer. Others may apply the portfolio approach only for some
aspects of the revenue model (e.g. determining some estimates or accounting
for some contract costs).

Portfolio accounting may be applied to contract acquisition and

fulfillment costs

606-10-10-4, 340-40 The guidance on costs to obtain and fulfill a contract is included in IFRS 15.
[IFRS 15.4, 91–104] Therefore, under IFRS, the portfolio approach can be applied to cost elements of a
contract with a customer if the criteria are met.
Under US GAAP, the new costs and revenue guidance have been codified in
different subtopics, Topics 340 and 606 respectively. The paragraph describing the
portfolio approach, however, has been reproduced only in the revenue subtopic.
The portfolio approach can be applied to the costs of a contract, assuming the
result of applying it would not differ materially from applying the guidance to the
individual contracts within that portfolio.

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 Revenue for Telecoms – Issues In-Depth | 19
2.1 Criteria to determine whether a contract exists |

2 Step 1: Identify the

contract with a
customer
Overview

A contract with a customer exists under the new standard when the contract is
legally enforceable and certain criteria, including collectibility, are met. However,
the collectibility threshold at inception will usually be met for telecom consumer
contracts.
The more complex issue for telecom entities is determining the contract
duration. Although telecom contracts often have a stated term, sometimes the
stated term may not be enforceable. In other cases, the term may be implied. In
each contract, assessing the contract term is key to determining the contract’s
transaction price, which, in turn, significantly affects the allocation of that
transaction price and therefore the recognition of revenue for each performance
obligation (e.g. service and equipment in a bundled arrangement).
Contracts entered into at or near the same time with the same customer (or a
related party of the customer) are combined and treated as a single contract
when certain criteria are met. Combining telecom contracts results in a single
total transaction price that is allocated to all performance obligations in the
combined contract.

2.1 Criteria to determine whether a contract exists

Requirements of the new standard

606-10-25-2 The new standard defines a ‘contract’ as an agreement between two or more parties
[IFRS 15.10] that creates enforceable rights and obligations and specifies that enforceability is
a matter of law. Contracts can be written, oral or implied by an entity’s customary
business practices.

606-10-25-4 A contract does not exist when each party has the unilateral right to terminate a
[IFRS 15.12] wholly unperformed contract without compensation.

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| 2 Step 1: Identify the contract with a customer

606-10-25-1 A contract with a customer is in the scope of the new standard when it is legally
[IFRS 15.9] enforceable and it meets all of the following criteria.

... collection of ... rights to goods or

consideration is services and
probable* payment terms can
be identified
A contract
exists if...
... it is approved
and the parties are
... it has commercial committed to
substance their obligations

* The threshold differs under IFRS and US GAAP due to different meanings of the term ‘probable’.

606-10-25-1e In making the collectibility assessment, an entity considers the customer’s ability
[IFRS 15.9(e)] and intention (which includes assessing its creditworthiness) to pay the amount of
consideration when it is due. This assessment is made after taking into account any
price concessions that the entity may offer to the customer (see 2.1.2).

606-10-25-6 If the criteria are not initially met, then an entity continually reassesses the contract
[IFRS 15.14] against them and applies the requirements of the new standard to the contract from
the date on which the criteria are met. Any consideration received for a contract that
does not meet the criteria is accounted for under the requirements set out in 2.2.

606-10-25-5 If a contract meets all of the above criteria at contract inception, then an entity does
[IFRS 15.13] not reassess the criteria unless there is an indication of a significant change in the
facts and circumstances.

606-10-25-7 If on reassessment an entity determines that the criteria are no longer met, then it
[IFRS 15.15] ceases to apply the new standard to the contract from that date, but does not reverse
any revenue previously recognized.

Observations

Most telecom contracts will not be ‘wholly unperformed’

605-10-25-4 A contract does not exist if each contracting party has the unilateral right to
ASU 2014-09.BC36, BC50 terminate a wholly unperformed contract without compensating the other
[IFRS 15.12, BC36, BC50] party (or parties). However, this guidance will not apply to most typical telecom
contracts in which at contract inception (or very shortly thereafter) either the
customer performs by paying or the entity performs by transferring a good
or service.
Telecom entities will, however, need to consider the remaining criteria when
determining whether a contract exists, including the collectibility criterion
(see 2.1.2 and 2.2). Entities will also need to determine the contract term
(see 2.1.1).

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 Revenue for Telecoms – Issues In-Depth | 21
2.1 Criteria to determine whether a contract exists |

2.1.1 Enforceability and contract term

Requirements of the new standard

606-10-25-3 The new standard is applied to the duration of the contract (i.e. the contractual period)
[IFRS 15.11] in which the parties to the contract have presently enforceable rights and obligations.

Example 6 – 24-month wireless bundle contract with substantive

early-termination penalties

Telco A enters into a 24-month wireless contract with Customer C that includes
voice and data services for 70 per month and a handset for 200. The services and
handset are regularly sold separately for 60 per month and 600, respectively.
Customer C can terminate the contract at any time. In case of early termination,
Telco A will charge Customer C an early termination fee (ETF) of 150 plus
20 per month for each of the months remaining in the service term. Telco A has
separately concluded that the ETFs are enforceable.
Telco A assesses whether the ETF is substantive and observes that at any point
during the contract, the ETF compensates Telco A at an amount greater than the
goods and services already transferred. Specifically, the ETF of 150 together
with the 20 per month remaining in the contract more than compensates Telco A
for the handset already transferred. In addition, at any point during the contract,
the ETF is significant, when compared with the monthly service fee. Therefore,
Telco A concludes that the ETF is substantive, and that the contract term for the
purpose of applying the new standard is 24 months.

Example 7 – 24-month wireless bundle contract that the customer

can terminate after Month 12 without penalty

Telco B enters into a 24-month wireless contract with Customer D that includes
voice and data services for 90 per month and a handset for 200. The services and
handset are regularly sold separately for 60 per month and 600, respectively.
Customer D cannot terminate the contract before Month 12. However,
after Month 12, Customer D can terminate the contract without paying any
termination fee.
Telco B observes that it has no enforceable rights beyond 12 months. The contract
can be terminated after 12 months without compensation; therefore, the contract
should not extend beyond the goods and services transferred in those 12 months.
Telco B therefore concludes that the contract term for the purpose of applying the
new standard is 12 months.

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22 | Revenue for Telecoms – Issues In-Depth
| 2 Step 1: Identify the contract with a customer

Example 8 – 24-month wireless bundle contract that the customer

can terminate after Month 12 with penalty

Telco E enters into a 24-month wireless contract with Customer F that includes
voice and data services for 80 per month and a handset for 200. The services and
handset are regularly sold separately for 60 per month and 600, respectively.
Customer F cannot terminate the contract before Month 12. However, after
Month 12, the customer can terminate the contract by paying an ETF of 10 per
month of remaining service term. Telco E has separately concluded that the ETF
is enforceable.
Statistics show that the average contract duration for similar contracts is
18 months.
Telco E observes that the ETF does not fully compensate Telco E for the
goods and services already transferred. Specifically, the ETF of 10 per month
(after Month 12) is less than the unpaid balance for the handset, calculated
as [(600 - 200) - (20 x 12)]. Telco E also observes that the ETF is not significant
when compared with the monthly service fee (i.e. 10 compared with 80) and
potential offers in the market. Telco E assesses that the ETF in Months 12–24 is
not substantive.
Telco E therefore concludes that the contract term for the purpose of applying
the new standard is 12 months. For the purpose of this assessment, the average
contract duration is not relevant.
Because the accounting assumes a contract term of 12 months and early
termination by Customer F, Telco E assesses whether the ETF charged at the
end of month 12 can be included in the transaction price at the commencement
of the contract (see 4.2).

Example 9 – Month-to-month wireless contract with device

installment plan

Telco A enters into a one-month wireless contract with Customer C that includes
voice and data services and a handset. The monthly service fee is the same as the
price charged to customers that bring their own device (i.e. the monthly service
fee is the stand-alone selling price of the service).
Customer C makes no up-front payment for the handset, but will pay the stand-
alone selling price of the handset through monthly installments over a 24-month
period. Although there is a finance arrangement for the handset, there is no
additional interest charged to Customer C. (Telco A operates in a low-interest rate
environment.) The remaining balance of installments for the handset becomes
immediately due if Customer C fails to renew the monthly service contract. There
is no other amount due if Customer C does not renew.

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 Revenue for Telecoms – Issues In-Depth | 23
2.1 Criteria to determine whether a contract exists |

In assessing the enforceability of the contract, Telco A considers the amounts

due if Customer C decides not to renew at the end of Month 1. Telco A observes
that the requirement to repay the remaining balance of installments for the
handset when the service contract is not renewed is an economic incentive
for Customer C to renew. That is because by renewing the service contract
and extending the financing, Customer C benefits from the ability to ‘pay later’
and ultimately would pay less for the handset (i.e. because of the time value of
money). However, in this circumstance, foregoing this economic incentive is not
a substantive termination penalty, but instead is a repayment of a loan for goods
already transferred. Because Telco A cannot enforce the service contract for a
period longer than one month, Telco A concludes that the contract term is one
month.
Telco A then assesses if the installment plan on the handset conveys a significant
financing component to Customer C (see 4.4).

Observations

Determining the term of a telecom contract is key for applying the new
revenue model
Determining the enforceable contract term is a fundamental step in applying
the new standard for telecom entities. The contract term directly affects the
calculation of the total transaction price for the contract, the allocation of the
transaction price to the distinct goods or services, and the amount of revenue
recognized. For example, in a wireless contract sold with a subsidized handset,
a shorter contract term may result in a smaller amount being allocated to the
handset (depending on the relationship between the stand-alone selling price and
the transaction price – see Section 5).
Additionally, the length of the contract term may affect the applicability of certain
practical expedients, including those related to identifying significant financing
components (see 4.4) and disclosure of the transaction price allocated to the
remaining performance obligations (see 12.1.3 in Issues In-Depth, Edition 2016).
The stated telecom contract term may not always be enforceable

606-10-25-3, ASU 2014-09.BC32 Under the new standard, assessing whether a contract exists, and for what
[IFRS 15.11, BC32] duration, requires an entity to focus on the enforceability of rights and obligations.
This assessment could result in a term shorter than what is stated in the contract.
For example, a telecom contract with a stated term of 24 months could have
a term of less than 24 months, if that 24-month term is determined not to
be enforceable.
This assessment also requires a telecom to consider relevant laws and
regulations. Therefore, this assessment may be affected by customer protection
or similar laws that have recently been passed in many jurisdictions. Often these
laws allow customers to terminate their telecom contracts before the end of the
stated contract term.

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24 | Revenue for Telecoms – Issues In-Depth
| 2 Step 1: Identify the contract with a customer

Assessing enforceability may require significant judgment – e.g. when the

customer can terminate the contract by paying minimal penalties, or when
the entity has a practice of not enforcing the termination clauses (further
discussed below).

A practice of not enforcing termination clauses generally does not negate

the contract’s existence
Some telecom entities may not enforce termination clauses or may have a history
of not collecting termination penalties. This practice would affect customer
behavior and the average contract duration. An entity should assess if it also
affects the legal enforceability of the clause (which is determined in relation to
the relevant legal environment and may require legal consultation). In such cases,
this practice could impact the contract term for the purpose of applying the
new standard.

Credits offered by competitors generally do not affect enforceability

Competitors may have an established practice of obtaining customers through
the reimbursement of the early termination penalties charged by the customers’
current telecom provider. These external factors may affect customers’ behavior
and encourage early termination. However, they will not generally affect the
legal enforceability of the contract with the current telecom provider, which still
is entitled to payment of the termination penalties. The entity will still need to
assess whether these termination penalties are substantive.

Early termination penalties need to be substantive to support the stated

contract term
Termination clauses, when enforceable, may affect the contract term and must
be carefully analyzed. The compensation to the entity needs to be substantive to
support the stated contract term.
Telecom service contracts frequently include termination penalties if a customer
terminates the contract early. However, compensation from the customer is
only substantive if it relates to something other than payments due as a result of
goods delivered or services transferred up to the termination date.
When assessing termination clauses, a telecom entity considers, among other
factors, the:
– contract provisions and all relevant laws and regulations;
– amount due on termination by the customer compared with goods or services
already provided); and
– amount due on termination by the customer compared with the amounts
otherwise payable.

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 Revenue for Telecoms – Issues In-Depth | 25
2.1 Criteria to determine whether a contract exists |

The historical data on actual terminations may provide evidence that is relevant
when assessing whether the termination penalty is substantive. For example, if
the data indicate that a significant number of a telecom entity’s customers regularly
terminate their contract early and pay the early termination fees, then it may suggest
that the termination penalties are not substantive.
In situations where the termination penalty is not substantive and is more
representative of an administrative termination fee, it may be appropriate to
include that amount in the estimate of the transaction price (see Example 8).

Compensation is broader than only termination payments

A payment to compensate the other party on termination is any amount (or other
transfer of value – e.g. equity instruments) other than a payment due as a result of
goods or services transferred up to the termination date. It is not restricted only
to payments explicitly characterized as termination penalties.

The average contract duration may be different from the enforceable

contract term
Telecom contracts are often terminated early, subject to promotional offers,
or renewed beyond their initial term. Telecom entities usually have detailed
customer statistics that may provide evidence that the average contract duration
is different from the stated contract term.
When the average contract duration is shorter than the stated contract term, this
may indicate that termination penalties are not substantive and entities should
therefore make the assessment as described above (also see observation below
on upgrade rights).

When the average contract duration is longer than the stated contract term,
this may indicate that customers are offered a right to renew at a discount
(see Section 8). However, as further discussed below, the customer’s ability to
renew does not necessarily represent enforceable rights for the entity.
As the new standard focuses on the enforceability of rights and obligations, the
average contract duration will generally not be determinative, in itself, of the
contract’s enforceable term.

Ability of either party to cancel the contract at discrete points in time may
limit the term of the contract
If an entity enters into a contract with a customer that can be renewed or
cancelled by either party at discrete points in time without significant penalty,
then it accounts for its rights and obligations as a separate contract for the
period during which the contract cannot be cancelled by either party. On
commencement of each service period (e.g. a month in a month-to-month
arrangement), where the entity has begun to perform and the customer has not
cancelled the contract, the entity normally obtains enforceable rights relative to
fees owed for those services and a contract exists.

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26 | Revenue for Telecoms – Issues In-Depth
| 2 Step 1: Identify the contract with a customer

Evergreen contracts may have an implicit term

For the purpose of assessing contract term, an evergreen contract (i.e. a contract
that automatically renews) that is cancellable by either party each period (e.g. on
a month-to-month basis) without penalty is no different from a similar contract
structured to require the parties to actively elect to renew the contract each
period (e.g. place a new order, sign a new contract). In these situations, an entity
should not automatically assume a contract period that extends beyond the
current period (e.g. the current month).

Therefore, only on the commencement of the next optional service period,

when the telecom entity has begun to perform (i.e. provide cable, internet or
phone service) and the customer’s action of not cancelling the contract provides
the entity with legal recourse relative to fees owed for those services, does a
contract exist for that period under the new standard.

Contract term assessed considering all promised goods or services

The contract term is assessed for the contract as a whole, considering all goods
or services promised in the contract. However, some goods or services can be
transferred over a shorter period than the contract term.

Renewal and upgrade rights rarely affect the enforceability of the contract
Telecom contracts often provide customers with the ability to renew contracts
at a discount. Other contracts may provide customers with the ability to upgrade
to a new handset early (i.e. without paying any termination fees on the current
contract) if the customer enters into a new service contract with a specified term
(e.g. 24 months). Although these renewal and upgrade rights may affect the
duration of the customer relationship, they usually do not affect the enforceability
of the termination penalties in the contract if the customer chooses not to
renew or upgrade early. Renewal and upgrade rights, however, require additional
accounting considerations (see Sections 8 and 9).

Only the customer has a right to terminate the contract

If only the customer has the right to terminate the contract without penalty
and the entity is otherwise obligated to continue to perform until the end of a
specified period, then the contract is evaluated to determine whether the option
gives the customer a material right (see Section 8 for discussion of customer
options for additional goods or services).

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 Revenue for Telecoms – Issues In-Depth | 27
2.1 Criteria to determine whether a contract exists |

Comparison with current IFRS

Determining the contract term is not critical under current accounting

[IAS 11, IAS 18] Current revenue guidance has no explicit contract existence test, though an entity
recognizes revenue only if it is probable that it will receive the economic benefits
under the contract. Also, determining the contract term has a less significant
impact on the accounting outcome for wireless sales under current accounting
because most telecom entities do not allocate revenue to the handset (when it is
subsidized) beyond the cash payment received at contract inception.

Comparison with current US GAAP

Determining the contract term is not critical under current accounting

Topic 605 Similar to current IFRS, determining the contract term has a less significant effect
on the accounting outcome for wireless sales under current accounting. This is
because most telecom entities do not generally recognize revenue in advance of
cash received under the contingent revenue cap guidance.

2.1.2 Collectibility

Example 10 – Assessing collectibility for individual telecom customers

606-10-25-1e Telco A enters into a 24-month wireless contract with Customer C that includes
[IFRS 15.9(e)] voice and data services.
Before accepting Customer C, Telco A runs a routine credit check and concludes
that Customer C meets the expected credit history requirements to be enrolled.
Furthermore, Telco A’s historical evidence shows that 98% of the amounts billed
will be received. In addition, Telco A observes that it can cancel the service to
Customer C at any point if Customer C defaults.
As a result of the evidence received through the credit check, Telco A concludes
that it is probable that Customer C will pay the amounts owed for the goods
and services to be transferred. Therefore, the contract meets the collectibility
threshold. However, any receivable or contract asset should be tested for
impairment under relevant guidance.

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| 2 Step 1: Identify the contract with a customer

Example 11 – Implicit price concession

606-10-55-99 – 55-101 (Example 2) Telco B enters a new geographic market and wants to grow its wireless customer
[IFRS 15.IE7–IE9] base. Telco B is ready to enroll customers with lower credit scores, in contrast
to its usual practice. Based on historical data for similar circumstances, Telco B
expects that 15% of the amounts billed will not be recovered (i.e. on average,
customers will pay 85% of their bill). Based on the assessment of the facts
and circumstances related to this market, Telco B determines that it expects to
provide a price concession and accept a lower amount of consideration from
its customers.
Telco B enters into a 24-month wireless contract with Customer D that includes
voice and data services.
Despite its reduction in acceptable creditworthiness, Telco B concludes that it is
probable that Customer D will pay the amounts for which Telco B expects to be
entitled for goods and services to be transferred. In making that assessment,
Telco B uses the lower amount of consideration, reflecting the price concession
that it expects to grant. In making this conclusion, Telco B also observes that it
can cancel the service if Customer D defaults.
Therefore, the contract meets the collectibility threshold and revenue can be
recognized once goods and services are transferred to Customer D. However,
Telco B has implicitly granted a price concession and should apply the guidance
on variable consideration and the constraint (see 4.2).

Observations

Collectibility is only a gating question

606-10-25-1e Under current requirements, an entity assesses collectibility when determining
[IFRS 15.9(e)] whether to recognize revenue. Under the new standard, the collectibility criterion
is included as a gating question designed to prevent entities from applying the
revenue model to problematic contracts and recognizing revenue and a large
impairment loss at the same time.

Collectibility is assessed based on the amount the entity expects to

receive in exchange for goods or services
The collectibility threshold is applied to the amount to which the entity expects
to be entitled in exchange for the goods or services that will be transferred to the
customer, which may not be the stated contract price. The assessment considers:
– the entity’s legal rights;
– past practice;
– how the entity intends to manage its exposure to credit risk throughout the
contract; and
– the customer’s ability and intention to pay.

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2.1 Criteria to determine whether a contract exists |

Telecom contracts failing Step 1 should be unusual in practice

606-10-25-1e, 606-10-55-3c, ASU 2014-09.BC46, When assessing if collectibility is probable, a telecom entity should not consider
ASU 2016-12.BC10–BC12 if all of the consideration under the contract will be recovered. Rather, the entity
[IFRS 15.9(e), BC46] considers its credit risk exposure in relation to the goods or services that will be
transferred to the customer. Therefore, when the telecom entity has received a
deposit or advance payment or has the ability to stop providing services as soon
as a customer defaults, the collectibility criterion will generally be met.
Generally, telecom entities do not contract for postpaid services with customers
with poor credit ratings without a guarantee, such as a deposit or advance
payment, that would cover the price of equipment delivered up front. Also,
telecom entities generally are able to terminate network services if the customer
does not pay. For these reasons, under these circumstances, many telecom
contracts would meet the collectibility criterion in Step 1.

‘Probable’ is a higher threshold under US GAAP than IFRS

Topic 450 Although both the IASB and FASB versions of the new standard use the term
[IAS 37] ‘probable’ in the collectibility criterion, that term has a different meaning in IFRS
and US GAAP. Under IFRS, probable is defined as ‘more likely than not’ while
under US GAAP it indicates a higher threshold of ‘likely to occur’. As explained
above, this difference is not expected to materially impact telecom entities.

Collectibility is assessed at contract level

606-10-10-4 Telecom entities may have historical portfolio data that indicate that a certain
[IFRS 15.4] percentage of customers are likely to default and therefore not all billed amounts
are collectible.
When collectibility has been assessed as probable at the contract level, a contract
exists (assuming the other Step 1 criteria are also met). Therefore, revenue is
recognized in full, unless historical data suggest that the entity has a history of
granting price concessions (see below).
Topic 310 Historical data of defaulting customers by portfolio may be relevant for conducting
[IAS 39, IFRS 9] impairment testing on receivables and contract assets under relevant guidance.

Judgment required to differentiate between a collectibility issue and a

price concession
606-10-55-99 – 55-105 (Example 2, Example 3), Judgment will be required in evaluating whether the likelihood that a telecom
606-10-32-7, ASU 2014-09.BC45 entity will not receive the full amount of stated consideration in a contract gives
[IFRS 15.52, IE7–IE13, BC45] rise to a collectibility issue or a price concession. As illustrated in Example 11
above, if the entity concludes that the transaction price is not the stated price or
standard rate, then the promised consideration is variable. Consequently, an entity
may need to determine the transaction price in Step 3 of the model, including any
price concessions (see Section 4), before concluding on the collectibility criterion
in Step 1 of the model.
This judgment also affects the income statement presentation. Price concessions
are presented as a reduction of revenue. However, collectibility issues arising
after contract inception (that do not require a reassessment of the collectibility
criterion – see 2.2) will be presented as bad debt expenses.

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| 2 Step 1: Identify the contract with a customer

2.2 Consideration received before concluding that a

contract exists
Requirements of the new standard

606-10-25-7 – 25-8 The following flow chart outlines when consideration received from a contract that is
[IFRS 15.15–16] not yet in the scope of the new standard can be recognized.

Has the contract been terminated and is the Yes

consideration received nonrefundable?

No

Are there no remaining performance

obligations and has all, or substantially all, Yes Recognize
of the consideration been received and consideration
is nonrefundable? received
as revenue
No

[US GAAP only] Has the entity stopped

transferring goods or services and there is no obligation Yes
to transfer additional goods or services and all
consideration received is nonrefundable?

No

Recognize consideration received as a liability

The entity is, however, required to reassess the arrangement and, if Step 1 of the
model is subsequently met, begin applying the revenue model to the arrangement.

Difference between IFRS and US GAAP

606-10-25-7(c), ASU 2016-12.BC24 The FASB included an additional step in the requirements to address concerns
[IFRS 15.BC45F–BC46H] over potential diversity in the understanding of when a contract is considered
terminated, which could have led in some cases to revenue not being recognized
even though the entity had stopped delivering goods or services to the customer.
The IASB decided not to add the clarification to IFRS 15. It concluded that the
existing guidance in IFRS 15 is sufficient for an entity to conclude that a contract
is terminated when it stops providing goods or services to the customer without
further clarification.

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 Revenue for Telecoms – Issues In-Depth | 31
2.2 Consideration received before concluding that a contract exists |

Example 12 – Customer ceases payment in Month 7 in a 24-month

landline voice contract

Telco A enters into a 24-month contract with Customer C to provide landline

voice services for a fixed, prepaid monthly fee. At inception, Telco A expects to
collect all revenue, and the contract term is assessed as 24 months. Telco A also
concludes that it does not provide price concessions on the service.
The bill for Month 7 is unpaid. Routine recovery procedures escalate until
Month 12 without further payment from Customer C. According to local
regulations, Telco A can only disconnect service to a customer after six months of
unpaid services and all legal recovery actions have been performed. At the end of
Month 12, Telco A disconnects service to Customer C and has an unpaid account
receivable for six months of service.
Telco A has determined that a four-month unpaid service bill constitutes a
significant change in circumstances for its prepaid customers. Therefore, at
the end of Month 10, Telco A reassesses collectibility for its contract with
Customer C. Telco A has historical evidence that only 40% of bills overdue by four
months will be recovered and concludes that collectibility is no longer probable
and that the contract with Customer C no longer meets the requirements for a
contract to exist.

Collectibility is
Customer
Contract reassessed Service is
stops
is signed and is no longer stopped
paying
probable

Month 1 2 6 7 10 12

Cash Cash is collected No cash collected

No
Revenue Revenue is recognized revenue
recognized

Bad debt expense

Impairment
is recognized

Although Telco A is required by law to continue to provide landline voice services

to Customer C for Months 11 to 12 and will issue monthly bills for these services,
no revenue (and no receivable) will be recognized beyond Month 10. This means
that Telco A will recognize revenue for 10 months and an impairment charge (i.e.
bad debt expense) for four months (Months 7 to 10).

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| 2 Step 1: Identify the contract with a customer

Example 13 – Consideration received after a contract ceases to exist

Continuing Example 12, Telco A determines that its contract with Customer C
ceases to exist at the end of Month 10. At the end of Month 11, however,
Telco A receives payment from Customer C for one month of service. In these
circumstances, Telco A is still entitled to terminate the contract at the end of
Month 12.
Although some payment has been received, Telco A does not revise its
assessment of collectibility and the contract with Customer C still does not
exist. Additionally, Telco A has not received substantially all of the consideration
promised by the customer and continues to transfer services to Customer C.
Therefore, consideration received in Month 11 is not recognized as revenue.

Example 14 – Recognition of a deferred activation fee once a

contract ceases to exist

Continuing Example 12, Telco A charged Customer C an up-front nonrefundable

activation fee of 60 at contract inception. Telco A determined that activation
activities are not a separate performance obligation. It also determined that the
activation fee conveys no material right and should be included in the transaction
price and recognized over the 24-month contract term. At the end of Month 10,
the amount of the activation fee not yet recognized as revenue is 35.
The activation fee is nonrefundable. However, it is consideration received in
advance of services to be provided. At the end of Month 10, the contract with
Customer C no longer meets the requirements in Step 1 of the new standard
for a contract to exist (see Example 12). Therefore, the unrecognized amount of
35 can only be recognized as revenue when the contract is terminated or Telco
A has no further service obligation. Telco A still has a legal obligation to continue
to provide services for two months after the contract has ceased to exist for
accounting purposes. The remaining 35 activation fee will only be recognized as
revenue at the end of Month 12.

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2.2 Consideration received before concluding that a contract exists |

Observations

Collectibility needs to be monitored throughout the contract term

606-10-25-5 If a contract meets the collectibility criterion at contract inception, then the
[IFRS 15.13] telecom entity does not reassess that criterion unless there is a significant
change in facts and circumstances that results in a significant deterioration of the
customer’s creditworthiness. When the customer’s ability to pay deteriorates
progressively, judgment is required to determine at what point the collectibility
criterion needs to be reassessed and revenue should stop being recognized. It
may not be appropriate to wait until service is disconnected to stop recognizing
revenue. For example, a significant and repetitive delay in payment may
constitute a significant change in the facts and circumstances and require the
telecom entity to reassess the collectibility criterion.

Cash basis accounting is not appropriate when consideration is received

after a contract ceases to exist
606-10-25-7 – 25-8 There may be situations where a telecom entity is contractually or legally required
[IFRS 15.15–16] to continue providing network services even though collectibility is no longer
considered probable. As explained above, if the telecom entity has reassessed
the contract and determined that collectibility is no longer probable, then revenue
should not be recognized when these services are billed to the customer.
The customer may eventually pay for the services rendered during that period
after the contract ceases to exist from an accounting perspective. In this case,
the telecom entity needs to assess if collectibility is once again probable.
Alternatively, the telecom entity would consider whether one of the following
events has occurred in order to recognize revenue:
– the contract has been terminated and the consideration is nonrefundable;
– the entity has no remaining obligation to transfer goods or services or refund
the consideration received and all or substantially all of the consideration has
been received; or
– (US GAAP only) the entity has stopped providing goods or services and there
are no remaining obligations to transfer additional goods or services or refund
the consideration received.
Because the legal contract is not terminated, or because the telecom entity is still
pursuing collection or is entitled to payment, it may not be clear at what point the
above criteria would be met. This is why the FASB added the above third event.
As a consequence, under US GAAP, the entity may be able to recognize revenue
when it ceases to provide additional goods and services.

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| 2 Step 1: Identify the contract with a customer

Comparison with current IFRS

Timing of revenue recognition may change when collectibility is not

probable
[IAS 18] Under current guidance, collectibility is assessed to determine when revenue
can be recognized, rather than when a contract exists. Revenue is recognized if
recovery is probable. Some telecom entities may stop recognizing revenue when
recovery is no longer probable, even though services are still provided and billed
to the customer. However, current guidance does not prevent the recogniton
of consideration received as revenue if collectibility of the full contract price is
not probable.

Comparison with current US GAAP

Timing of revenue recognition may change when collectibility is not

probable
SEC SAB Topic 13 Under current SEC guidance, and similar to current IFRS, collectibility is assessed
to determine when revenue can be recognized, rather than when a contract
exists. Revenue is recognized if collectibility is reasonably assured. Some
telecom entities may stop recognizing revenue when recoverability is no longer
reasonably assured, even though services are still provided and billed to the
customer. Because the threshold (‘reasonably assured’ versus ‘probable’) is
stated differently, practice may change.

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2.3 Combination of contracts |

2.3 Combination of contracts

Requirements of the new standard

606-10-25-9 The following flow chart outlines the criteria in the new standard for determining when
[IFRS 15.17] an entity combines two or more contracts and accounts for them as a single contract.

Are the contracts entered into at or near the same No

time with the same customer or related parties
of the customer?

Yes Account for

as
Are one or more of the following criteria met? separate
 Contracts were negotiated as a single contracts
commercial package
 Consideration in one contract depends on No
the other contract
 Goods or services (or some of the goods
or services) are a single performance
obligation (see Section 3)

Yes

Account for contracts as a single contract

Example 15 – Combination of contracts in a wireless installment

plan

In 20X7, Telco A simultaneously enters into two separate contracts with

Customer C.
– Contract 1 is a month-to-month contract for the provision of voice and data
services.
– Contract 2 is for the sale of a handset and provides that the contract price of
the handset will be paid in full by monthly installments over 24 months. Full
repayment of the remaining balance of the handset becomes due as soon as
the customer fails to renew its monthly service contract.
Telco A determines that the two contracts should be combined because they
were entered into at the same time with the same customer and they are
negotiated as a single commercial package. This is evidenced by the fact that
the amount and timing of the consideration received for the sale of the handset
is impacted by the renewal of the service contract. Telco A still needs to assess
whether the combined contract contains one or more performance obligations
and the term of the combined contract (see Example 9).

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| 2 Step 1: Identify the contract with a customer

Observations

Evaluating ‘at or near the same time’ when determining whether contracts
should be combined
ASU 2014-09.BC68 The accounting for a contract depends on an entity’s present rights and
[IFRS 15.BC68] obligations, rather than on how the entity structures the contract. The new
revenue standard does not provide a bright line for evaluating what constitutes
‘at or near the same time’ to determine whether contracts should be combined
for the purpose of applying the standard. Therefore, an entity should evaluate its
specific facts and circumstances when analyzing the elapsed period of time.
Specifically, the entity should consider its business practices to determine what
represents a period of time that would provide evidence that the contracts were
negotiated at or near the same time. Additionally, the entity should evaluate why
the arrangements were written as separate contracts and how the contracts
were negotiated (e.g. both contracts negotiated with the same parties versus
different divisions within the entity negotiating separately with a customer).
An entity needs to establish procedures to identify multiple contracts initiated
with the same customer on a timely basis to ensure that these arrangements are
evaluated to determine whether they should be combined into a single contract
for accounting purposes.
In addition, an entity should consider whether a separate agreement is a
modification to the original agreement and whether it should be accounted for
as a new contract or as part of the existing contract. For a discussion of contract
modifications, see Section 7 in Issues In-Depth, Edition 2016.

Definition of related parties acquires new significance

ASU 2014-09.BC74, 850-10-20 The new standard specifies that for two or more contracts to be combined,
[IFRS 15.BC74, IAS 24] they should be with the same customer or related parties of the customer. The
Boards state that the term ‘related parties’ as used in the new standard has the
same meaning as the definition in current related party guidance. This means
that the definition originally developed in US GAAP and IFRS for disclosure
purposes acquires a new significance, because it can affect the recognition and
measurement of revenue transactions.

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2.3 Combination of contracts |

Criteria for combining contracts are similar but not identical to current
guidance for construction contracts

605-35 Both US GAAP and IFRS contain explicit guidance on combining construction
[IAS 11.8–9] contracts. The contracts must be: negotiated as a package; function as a single
project; require closely interrelated activities; and performed concurrently or in a
continuous sequence), which is sometimes applied by analogy to other contracts
to identify different components of a transaction.
The new standard’s guidance on combining contracts applies to all contracts in its
scope. The approach to combining contracts in the new standard is similar but not
identical to that in current US GAAP and IFRS (e.g. the rebuttable presumption
under current US GAAP is not present under the new standard), which may result
in different outcomes under the new standard as compared with current practice.

Additional complexities for indirect wireless sales

When applying the guidance on combining contracts to indirect sales, a telecom
entity needs to determine who its customer is under the contract and when
control transfers (see Section 10).

Comparison with current US GAAP

Elimination of rebuttable presumption

605-25-25-3 Current US GAAP on multiple-element arrangements contains a rebuttable
presumption that contracts entered into at or near the same time with the same
entity or related parties are a single contract. The new standard does not include a
similar rebuttable presumption, although it is unclear whether that will affect the
analysis in practice.

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| 3 Step 2: Identify the performance obligations in the contract

3 Step 2: Identify the

performance obligations
in the contract
Overview

The process of identifying performance obligations requires a telecom entity

to determine whether it promises to transfer either goods or services that are
distinct, or a series of distinct goods or services that meet certain conditions.
These promises may not be limited to those explicitly included in written
contracts. The new standard provides indicators to help determine when the
‘distinct’ criteria are met.
Telecom offerings typically bundle equipment (e.g. wireless handset) and
various services. Assessing whether these goods and services are distinct is not
dependent on whether the goods or services are provided for free or on a heavily
discounted basis. Under the new standard, discounted (or free) equipment
and other incentives, such as free service periods or gift cards, can be distinct
goods or services – i.e. performance obligations – to which revenue needs to
be allocated.

3.1 Criteria to identify performance obligations

Requirements of the new standard

606-10-25-14 – 25-15, 25-18 A ‘performance obligation’ is the unit of account for revenue recognition. An entity
[IFRS 15.22–23, 26] assesses the goods or services promised in a contract with a customer and identifies
as a performance obligation either a:
– good or service (or a bundle or goods or services) that is distinct; or
– series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer (i.e. each distinct good or service
in the series is satisfied over the time and the same method is used to measure
progress).
This includes an assessment of implied promises and administrative tasks.
Administrative tasks are not performance obligations (see 3.6).

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3.1 Criteria to identify performance obligations |

Observations

Identifying the separate performance obligations is key for telecom entities

Telecom entities evaluate goods and services promised to customers to
determine if they are performance obligations that should be accounted for
separately. Identifying the performance obligations in the contract is key because
it may impact the amount and timing of revenue recognition.
Examples of common telecom offerings and activities that are evaluated to
determine whether they are goods or services promised to the customer or
merely activities that do not transfer goods or services to the customer, include,
but are not limited to:
– equipment – e.g. set-top boxes, wireless handsets, modems, routers, tablets
(see 3.3);
– cable services – e.g. basic, premium and pay-per-view services (see 3.4);
– internet services, broadband or other capacity arrangements (see 3.4);
– wireless services – e.g. voice, data and text plans (which may include a SIM
card) and various add-on services (see 3.4);
– landline voice services (see 3.4);
– rights to purchase additional goods or services (see 3.4 and Section 8);
– installations for home phone, internet and television, including inside and
outside wiring (see 3.5);
– activation of wireless handsets, set-top boxes or other equipment and services
(see 3.6);
– other customer services – e.g. support and other activities that may or may not
result in fees charged to the customer (see 3.6);
– incentives, including gift cards, or other free goods or services (see 3.7); and
– warranties (see 3.8).
This evaluation is performed for all goods or services promised and activities
explicitly stated in arrangements with the customer. The evaluation also takes
into account implicit promises arising from customary business practices – e.g.
incentives and discounts for early renewal.

Materiality assessment
Under both IFRS and US GAAP, when entities perform their assessment of the
performance obligations in the contract, they may consider materiality (that is,
whether a performance obligation is immaterial and therefore is not accounted
for separately) (see below). The examples in this section illustrate the required
analysis to determine whether a promise in a contract represents a performance
obligation, without considering the application of materiality.

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| 3 Step 2: Identify the performance obligations in the contract

Differences between IFRS and US GAAP

Promised goods or services that are immaterial in the context of the

contract
606-10-25-16A, ASU 2016-10.BC12–BC14 The FASB decided to permit an entity not to identify promised goods or services that
[IFRS 15.BC116A–BC116E] are immaterial in the context of the contract as performance obligations. It reached
this decision because it could be unduly burdensome in some circumstances to
require an entity to aggregate and determine the effect on its financial statements
of those items or activities determined to be immaterial at the contract level.
In contrast, the IASB decided not to include the exception in the IFRS version
of the standard, but noted that it did not intend to require an entity to identify
every possible promised good or service in the contract individually. The IASB
therefore expects that this difference between the IFRS and US GAAP versions
of the standard will not give rise to significant differences in practice. However, it
remains to be seen whether this really is the case, because the US GAAP version
of the standard permits the evaluation at the contract level whereas the IFRS
version continues to rely on general materiality guidance, which is viewed from
the financial statement level.

Shipping and handling activities

606-10-25-18A – 25-18B The IFRS version of the standard does not include an accounting policy election to
ASU 2016-10.BC20–BC22 treat shipping and handling activities undertaken by the entity after the customer
[IFRS 15.BC116R–BC116U] has obtained control of the related good as a fulfillment activity. The IASB rejected
this election because it considered that the election would result in an exception
to the revenue model and would make it more difficult for users to compare
entities’ financial statements.
A difference now exists between IFRS and US GAAP on this point. This will
affect the comparability of the financial statements of entities reporting under
IFRS and US GAAP that have a significant number of transactions – e.g. telecom
equipment sales – in which shipping and handling activities are performed after
control of the goods transfers to the customer, and the entity elects to treat the
shipping and handling activity as a fulfillment cost under US GAAP.

Comparison with current US GAAP

Approach to determining the accounting is different

Although some of the concepts are similar under the new standard and current
US GAAP, an entity’s approach to the accounting may be slightly different.
Generally, under current US GAAP, an entity determines its accounting by starting
at the contract level. An entity determines if the contract can be separated into
multiple units of accounting based on whether separation criteria are met or
other specific guidance applies. Under the new standard, an entity determines
its accounting by beginning at the promise level. An entity identifies all of its
promises and then begins combining them if they are determined not to be
distinct or are immaterial in the context of the contract.

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3.1 Criteria to identify performance obligations |

Perfunctory or inconsequential
SEC SAB Topic 13, ASU 2014-09.BC89–BC90 The FASB emphasized that ‘immaterial’ in the context of the contract is a
qualitative and quantitative assessment based on what may be important to
the customer. This concept is expected to be similar to the current US GAAP
guidance on inconsequential or perfunctory deliverables.
The current US GAAP guidance states that a performance obligation is
inconsequential or perfunctory if it is not essential to the functionality of the
delivered products or services. Activities are not inconsequential or perfunctory
if failure to complete the activities would result in a full or partial refund or the
customer’s right to reject the delivered goods or services.
The FASB also specifically noted that customer options to acquire additional
goods or services that represent a material right to the customer will need to be
identified as a performance obligation even if they might have been considered
immaterial in the context of the contract (see Section 8).

Shipping and handling activities

Under the new standard, shipping and handling activities can be accounted for
as follows. If they are performed:
– before the customer obtains control of the goods, then they are fulfillment
activities; and
– after the customer obtains control of the goods, then:
- an entity electing to account for shipping and handling as a fulfillment
activity accrues the costs of these activities and recognizes all revenue at
the point in time at which control of the goods transfers to the customer; or
- an entity not choosing the policy election is likely to conclude that shipping
and handling activities that occur after control of the goods transfers to the
customer are a performance obligation, and therefore it allocates a portion
of the transaction price to the shipping and handling and recognizes revenue
as the shipping and handling performance obligation is satisfied.
The accounting policy choice included in the FASB’s version of the new standard
will allow entities to accrue shipping and handling costs as an expense at the
time when revenue is recognized for the delivery of a good, thereby achieving a
‘matching’ of the revenue and related fulfillment cost.

However, because this is a policy election, entities will not be required to do so,
which could result in potential diversity in practice arising both from different:
– economic arrangements (e.g. shipping and handling occur before control of the
goods transfers versus occurring after control transfers); and
– policy elections (when control of goods transfers before shipping and handling
activities occur).
If the policy election is used under US GAAP, then this could create a difference
with IFRS.

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| 3 Step 2: Identify the performance obligations in the contract

3.2 Distinct goods or services

Requirements of the new standard

606-10-25-14 A single contract may contain promises to deliver to the customer more than one
[IFRS 15.22] good or service. At contract inception, an entity evaluates the promised goods or
services to determine which goods or services (or bundle of goods or services) are
distinct and therefore constitute performance obligations.
A good or service is distinct if both of the following criteria are met.

606-10-25-19
[IFRS 15.27]
Criterion 1: Criterion 2:
Capable of being distinct Distinct within the context
of the contract
Can the customer benefit
from the good or service on and Is the entity’s promise to
its own or together with transfer the good or
other readily service separately identifiable
available resources? from other promises
in the contract?

Yes No

Not distinct – combine with

Distinct performance obligation
other goods and services

606-10-25-20 Criterion 1 Good or service is capable of being distinct

[IFRS 15.28]
A customer can benefit from a good or service if it can be used,
consumed, sold for an amount that is greater than scrap value, or
otherwise held in a way that generates economic benefits.
A customer can benefit from a good or service on its own or in
conjunction with:
– other readily available resources that are sold separately by the
entity, or by another entity; or
– resources that the customer has already obtained from the
entity – e.g. a good or service delivered up front – or from other
transactions or events.
The fact that a good or service is regularly sold separately by the
entity is an indicator that the customer can benefit from a good or
service on its own or with other readily available resources.

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3.2 Distinct goods or services |

606-10-25-21 Criterion 2 Distinct within the context of the contract

[IFRS 15.29]
The objective when assessing whether an entity’s promises to
transfer goods or services are distinct within the context of the
contract is to determine whether the nature of the promise is to
transfer each of those goods or services individually, or whether
the promise is to transfer a combined item or items to which the
promised goods or services are inputs.
The new standard provides the following indicators to assist in
evaluating whether two or more promises to transfer goods or
services to a customer are not separately identifiable:
– The entity provides a significant service of integrating the
goods or services with other goods or services promised in
the contract into a bundle of goods or services that represent
the combined output or outputs for which the customer has
contracted. This occurs when the entity is using the goods or
services as inputs to produce or deliver the output or outputs
specified by the customer. A combined output (or outputs)
might include more than one phase, element or unit.
– One or more of the goods or services significantly modifies
or customizes, or is significantly modified or customized
by, one or more of the other goods or services promised in
the contract.
– The goods or services are highly interdependent or highly
interrelated, such that each of the goods or services is
significantly affected by one or more of the other goods
or services.
The list of indicators in the new standard is not exhaustive.

606-10-25-22 If a promised good or service is determined not to be distinct, then an entity

[IFRS 15.30] continues to combine it with other promised goods or services until it identifies
a bundle of goods or services that is distinct. In some cases, this results in the
entity accounting for all of the goods or services promised in a contract as a single
performance obligation.

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| 3 Step 2: Identify the performance obligations in the contract

Observations

Applying the indicators will require judgment

The new standard does not include a hierarchy or weighting of the indicators of
whether a good or service is separately identifiable from other promised goods or
services within the context of the contract. An entity evaluates the specific facts
and circumstances of the contract to determine how much emphasis to place on
each indicator.
Certain indicators may provide more compelling evidence in the separability
analysis than others in different scenarios or types of contracts. For example,
factors such as the degree of customization, complexity, customer’s motivation
for purchasing goods/services, contractual restrictions and the functionality of
individual goods/services may have differing effects on the distinct analysis for
different types of contracts.
In addition, the relative strength of an indicator, in light of the specific facts and
circumstances of a contract, may lead an entity to conclude that two or more
promised goods or services are not separable from each other within the context
of the contract. This may occur even if the other two indicators might suggest
separation.

Applying Criterion 2 requires an entity to assess if there is a transformative

relationship between the two items being analyzed

ASU 2016-10.BC30 The Boards noted that the evaluation of whether an entity’s promise to transfer
[IFRS 15.BC116K] a good or service is separately identifiable from other promises in the contract
considers the relationship between the various goods or services within the
contract in the context of the process of fulfilling the contract. An entity should
consider the level of integration, interrelation or interdependence among
promises to transfer goods or services in evaluating whether the goods or
services are distinct.
The Boards also observed that an entity should not merely evaluate whether one
item, by its nature, depends on the other (i.e. whether the items have a functional
relationship). Instead, an entity should evaluate whether there is a transformative
relationship between the two items in the process of fulfilling the contract
(see 3.3 and 3.4).

Contractual restrictions may not be determinative

Contracts between an entity and a customer often include contractual limitations
or prohibitions. These may include prohibitions on reselling a good in the contract
to another third party, or restrictions on using certain readily available resources
– e.g. the contract may require a customer to purchase complementary services
from the entity in conjunction with its purchase of a good or license.

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3.2 Distinct goods or services |

606-10-55-150E – 55-150F (Example 11D) In Example 11D of the new standard, the customer is contractually required to
[IFRS 15.IE58E–IE58F] use the seller’s installation service to install the purchased good. The example
notes that the contractual restriction does not affect the assessment of whether
the installation services are considered distinct. Instead, the entity applies
Criteria 1 and 2 to assess whether the installation services are distinct. By
applying these criteria, Example 11D illustrates that substantive contractual
provisions alone do not lead to a conclusion that the goods and services are
not distinct. For telecom installation services, see 3.5.
ASU 2014-09.BC100 A contractual restriction on the customer’s ability to resell a good may prohibit
[IFRS 15.BC100] an entity from concluding that the customer can benefit from a good or service,
because the customer cannot resell the good for more than scrap value in
an available market. However, if the customer can benefit from the good
together with other readily available resources, even if the contract restricts the
customer’s access to those resources – e.g. by requiring the customer to use
the entity’s products or services – then the entity may conclude that the good
or service has benefits to the customer and that the customer could purchase
or not purchase the entity’s products or services without significantly affecting
that good.

Comparison with current IFRS

Separately identifiable components

[IAS 18.13, IFRIC 13, IFRIC 15, IFRIC 18] Current IFRS includes limited guidance on identifying whether a transaction
contains separately identifiable components. However, our view is that, based on
analogy to the test in IFRIC 18, an entity should consider whether a component
has a stand-alone value to the customer and whether the fair value can be reliably
measured (see 4.2.50.60 in Insights into IFRS, 13th Edition).
The new standard introduces comprehensive guidance on identifying separate
components, which applies to all revenue-generating transactions. This could
result in telecom goods or services, such as equipment or incentives, being either
unbundled or bundled more frequently than under current practice.

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| 3 Step 2: Identify the performance obligations in the contract

Comparison with current US GAAP

Benefit to the customer versus stand-alone value

605-25-25-5 For a promised good or service to be distinct under the new standard, it has to be:
– capable of being distinct (Criterion 1); and
– distinct within the context of the contract (Criterion 2).
Criterion 1 (capable of being distinct) is similar, but not identical, to the stand-
alone value criterion required under current US GAAP. Specifically, under current
US GAAP a delivered item has value on a stand-alone basis if it is sold separately
by any entity or if the customer could resell the delivered item on a stand-alone
basis (even in a hypothetical market).
Under the new standard, an entity evaluates whether the customer can benefit
from the good or service on its own or together with other readily available
resources. This evaluation no longer depends entirely on whether the entity
or another entity sells an identical or largely interchangeable good or service
separately, or whether the delivered item can be resold by the customer. Rather,
in evaluating whether the customer can benefit from the good or service on its
own, an entity determines whether the good or service is sold separately (by the
entity or another entity) or could be resold for more than scrap value. An entity
also considers factors such as a product’s stand-alone functional utility.
Therefore, potentially more goods may qualify as distinct under Criterion 1 than
under current US GAAP. However, an entity also has to evaluate Criterion 2.
Promised goods or services versus deliverables

There may not be an exact correlation in all cases between what is considered a
’deliverable’ under current US GAAP and what is considered a ‘promised good or
service’ under the new standard.
The term ’deliverable’ is not defined in current US GAAP. However, in a 2007
speech3,the SEC staff noted that the following criteria are a helpful starting point
in determining whether an item is a deliverable:
– the item is explicitly referred to as an obligation of the entity in a contractual
arrangement;
– the item requires a distinct action by the entity;
– if the item is not completed, then the entity will incur a significant contractual
penalty; or
– inclusion or exclusion of the item from the arrangement will cause the
arrangement fee to vary by more than an insignificant amount.
Under the new standard, promised goods or services are the promised
obligations within the contract, which are considered as part of the analysis in
Step 1 (see Section 2) and Step 2 (see Section 3).

3. SEC Speech, “Remarks Before the 2007 AICPA National Conference on Current SEC and
PCAOB Developments,” by Mark Barrysmith, Professional Accounting Fellow at the SEC,
available at www.sec.gov.

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3.3 Telecom equipment |

3.3 Telecom equipment

Consumer and business telecom contracts often include equipment that is provided
to the customer. The first step in assessing the accounting for the equipment is to
determine whether it is the subject of a lease (see 1.3). When the equipment is not
the subject of a lease, the entity assesses whether it is a promised good or service
and, if so, if it is distinct from the other goods or services in the contract by applying
the criteria in 3.2. Judgment may be required. If the equipment does not transfer to
the customer, then the entity considers whether the costs can be capitalized as an
asset or as a fulfillment cost (see Section 7).

Example 16 – Wireless contract with handset

Telco T has a contract with Customer R that includes the delivery of a handset and
24 months of voice and data services. Customer R obtains title to the handset.
The handset can be used by Customer R to perform certain functions – e.g.
calendar, contacts list, email, internet access, accessing apps via Wi-Fi, and to
play music or games.
There is evidence of customers reselling the handset on an online auction site
and recapturing a portion of the selling price of the handset. Telco T regularly sells
its voice and data services separately to customers, through renewals or sales to
customers who acquire their handset from an alternative vendor – e.g. a retailer.
Telco T concludes that the handset and the wireless services are two separate
performance obligations based on the following evaluation.

Criterion 1 Capable of being distinct

– Customer R can benefit from the handset either on its
own – i.e. because the handset can be resold for more
than scrap value and has substantive, although diminished,
functionality that is separate from Telco T’s network – or
together with its wireless services that are readily available
to Customer R, because Telco T sells those services
separately.
– Customer R can benefit from the wireless services in
conjunction with readily available resources – i.e. either the
handset is already delivered at the time of contract set-up,
or could be purchased from alternative retail vendors or the
wireless service could be used with a different handset.

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Criterion 2 Distinct within the context of the contract

– The handset and the wireless services are separable in this
contract because they are not inputs to a single asset – i.e.
a combined output – which indicates that Telco T is not
providing a significant integration service.
– Neither the handset nor the wireless service significantly
modifies or customizes the other.
– Customer R could purchase the handset and the voice/data
services from different parties – e.g. Customer R could
purchase the handset from a retailer – therefore providing
evidence that the handset and voice/data services are not
highly dependent on, or highly interrelated with, each other.

Example 17 – Purchased modem and router with internet

Telco A enters into a two-year contract for internet services with Customer C.
Customer C also purchases a modem and a router from Telco A and obtains
title to the equipment. Telco A does not require customers to purchase its
modems and routers and will provide internet services to customers using other
equipment that is compatible with Telco A’s network. There is a secondary market
on which modems and routers can be purchased or sold for amounts greater than
scrap value.
Telco A concludes that the modem and router are each distinct and that the
arrangement includes three performance obligations (the modem, the router and
the internet services) based on the following evaluation.

Criterion 1 Capable of being distinct

– Customer C can benefit from the modem and router on
their own as they can be resold for more than scrap value.
– Customer C can benefit from the internet services in
conjunction with readily available resources – i.e. either
the modem and router are already delivered at the time
of contract set-up, or could be purchased from alternative
retail vendors or the internet service could be used with
different equipment.

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3.3 Telecom equipment |

Criterion 2 Distinct within the context of the contract

– The modem and router are distinct within the context
of the contract because Telco A does not provide an
integration service.
– The modem, router and internet services do not modify or
customize one another.
– Customer C could benefit from the internet services using
routers and modems that are not sold by Telco A. Therefore,
the modem, router and internet services are not highly
dependent on, or highly interrelated with, each other.

Observations

Telecom equipment may be sold, leased or provided to the customer as

part of their service
Topics 840, 842 When a telecom service contract includes equipment, the entity assesses
[IAS 17, IFRS 16] whether that equipment is leased, sold, or provided to the customer as part of its
service. This assessment is required even if the contract does not explicitly refer
to the equipment as leased or the lease payments are not billed separately from
other services. Leased equipment is out of scope of the new standard (see 1.3).
If the entity concludes that the equipment is not leased to the customer, then
it needs to analyze the nature of the promise made to the customer. If the
equipment transfers to the customer, then it may be distinct and therefore a
separate performance obligation.
There may be situations where the telecom entity charges a monthly fee for
the use of the equipment that does not represent a lease but is provided to the
customer as part of its service. For example, an entity may provide modems or
set-top boxes, over which it retains control, because they can be exchanged by
the entity as technology changes. In those cases, the equipment remains an
asset of the entity. Determining whether the use of the equipment is a service
distinct from the network services may not have a significant effect on the timing
of revenue recognition because both services are typically provided concurrently.
The classification of the revenues received, however, for disaggregated revenue
disclosure or segment reporting requirements, as well as management,
regulatory and tax reporting, should be considered.
Equipment used to deliver service is often an element of the telecom network
(e.g. backbone, cable drops, wireless towers and repeaters). This equipment is
typically owned and operated by the telecom entity and is accounted for as an
asset/fulfillment cost. These items are not performance obligations because they
are not a promised good or service and do not transfer to the customer.

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Telecom equipment that transfers to the customer is generally capable of

being distinct
Criterion 1 (capable of being distinct) indicates that if an entity regularly sells a good
or service separately, then that is an indication that a customer can benefit from
the good or service on its own or with other readily available resources. Telecom
entities may not regularly sell equipment, such as phones, wireless devices,
modems and set-top boxes without network service. Whether the equipment
is sold by others is part of the analysis in determining whether it is distinct. The
existence of alternative dealers, and secondary markets for telecom equipment,
often provides evidence that the equipment is capable of being distinct.

Proprietary or locked telecom equipment can also be distinct

The fact that telecom equipment may be proprietary or locked to the provider’s
network is not in itself evidence that the customer cannot benefit from the good
or service on its own or with other readily available resources. Some telecom
equipment has stand-alone functionalities and can be used in a variety of ways
by the customer without being connected to the telecom entity’s network. For
example, wireless handsets can be used with Wi-Fi or as cameras, and set-top
boxes may be used to store video content. These factors, in addition to the ability
to sell the equipment separately, may provide evidence that the equipment is
capable of being distinct.

Assessing whether telecom equipment is distinct in the context of the

contract requires judgment
In general, telecom services cannot be provided without the customer having
the appropriate telecom equipment. However, this functional dependency is not
sufficient to demonstrate that the equipment and services are highly dependent
or interrelated with one another. The telecom entity should not merely evaluate
whether one item, by its nature, depends on the other (e.g. the service that
would never be obtained by a customer without the appropriate equipment).
Criterion 2 (distinct in the context of the contract) focuses the analysis on whether
the service and the equipment significantly affect or transform each other, rather
than on functional dependency. Therefore, if the services and the equipment are
functionally dependent but do not transform or affect one another, then they will
generally be distinct in the context of the contract and will be accounted for as
separate performance obligations (assuming Criterion 1 is also met).

3.4 Telecom services

3.4.1 Network telecom services and add-ons
Once the determination has been made that telecom equipment and services are
distinct, the entity determines if the various services are distinct from one another,
although they may be provided concurrently. Optional features (referred to in this
publication as ‘add-ons’) may be opted in or out at contract inception or later and will
generally represent distinct goods and services. Add-ons are further discussed in
Section 8.

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3.4 Telecom services |

Example 18 – Residential triple-play

Telco A contracts with Customer C to provide cable television, internet and

landline voice services for a fixed monthly fee for 24 months.
Customer C can benefit from each of the three services on their own (i.e.
Customer C can benefit from cable television without either of the other
contracted services). None of the three contracted services are highly
interrelated or interdependent because Customer C is able to purchase any of
the three services separately. Furthermore, Telco A does not provide a significant
integration service in the contract as these services are not inputs to a combined
service offering that significantly modifies or customizes any of the other stand-
alone service offerings.
Telco A concludes that each of the three services is a distinct good or service.
However, as a practical matter, because the three services are provided
concurrently, Telco A may conclude that it is acceptable to account for the
bundle as a single performance obligation, if they have the same pattern
of transfer (see 6.3). The classification of the revenues received should be
considered, however, for disaggregated revenue disclosure or segment reporting
requirements, as well as management, regulatory or tax reporting.

Example 19 – Cable television service and additional premium

channel

Cable B contracts with Customer D to provide television services for a fixed

monthly fee for 24 months. The base television services package gives
Customer D the right to purchase additional premium channels. At contract
inception, Customer D adds a premium sports channel for an additional 5 per
month.
The premium channel service is capable of being distinct because the customer
can benefit from the service together with readily available resources (i.e. the
existing base television services). In addition, the premium channel service is
distinct in the context of the contract because the premium channel service does
not significantly affect, or transform, the base television services and therefore
is not highly interrelated with the base television services. Furthermore, the
premium channel can be added or dropped by the customer without affecting the
base television services. Therefore, Cable B concludes that the premium channel
service is a performance obligation. For further considerations, if the premium
channel is not added at contract inception, see 8.1, Example 58.

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Example 20 – Wireless family plan with shared data

Telco X enters into a contract with Customer C to provide Customer C and his
child a family wireless share plan. The plan is comprised of two voice plans, two
text plans and 5GB of shared data for a fixed monthly fee. The minutes and texts
are not shared. Customer C and his child each have their own wireless handsets.
Customer C and his child are able to benefit from the voice, text and data services
individually, together with readily available resources (i.e. the existing handsets).
Similarly, the two voice plans and the two text plans do not transform one another
and are therefore not highly interrelated. Telco X also promised to provide data
services to two users (Customer C and his child), and assesses if this creates two
performance obligations. Even though the data is shared between the two users,
Telco X determines that the data service is one performance obligation.
Telco X therefore concludes that the contract contains five performance
obligations: the two voice plans, the two text plans and the shared data plan.
Similar to the triple-play in Example 18, Telco X may decide as a practical matter
that it is acceptable to account for the bundle as a single performance obligation if
all performance obligations have the same pattern of transfer (see 6.3).

Observations

Bundled telecom contracts may contain several service performance

obligations
A telecom entity typically offers arrangements that can include varying service
combinations, such as wireless, internet, television and landline voice. Each
service is regularly sold separately, further supporting the conclusion that
customers can benefit from each on its own (Criterion 1). Applying Criterion 2,
however, requires judgment. The entity should analyze if the services are
separately identifiable. The fact that the services are regularly sold separately
generally evidences that they do not transform one another. Furthermore, that
analysis considers whether there is an interrelationship between the services –
e.g. in enterprise contracts where the services are complex.

For practical reasons, dissimilar telecom services delivered concurrently

can be treated as one performance obligation when they have the same
pattern of transfer
ASU 2014-09.BC116 Many telecom services are dissimilar (e.g. television, internet, voice) but are
[IFRS 15.BC116] delivered concurrently. When performance obligations are dissimilar but have the
606-10-50-5 – 50-6
same pattern of transfer (see 6.3), treating them as one performance obligation
[IFRS 15.114–115]
may have no effect on the overall pattern of revenue recognition. The classification
of the revenues received, however, for disaggregated revenue disclosure or
segment reporting requirements, as well as management, regulatory and tax
reporting, should be considered.

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3.4 Telecom services |

Optional services will usually be distinct but need to be evaluated for

potential material rights
Telecom contracts often include optional features that can be purchased
separately – e.g. adding minutes, texts or data to a fixed usage plan, additional
bundles of voice, text and data to an existing plan, international roaming plans,
additional television channels or pay-per-view movies.
When these add-ons are subscribed to by the customer, either at contract
inception or later in the contract, the entity needs to assess whether they are
distinct from the other services. As described above, because these add-ons can
be purchased separately and can often be opted in to or out of at any time during
the contract, they are generally capable of being distinct (Criterion 1). Although
the add-ons (e.g. an international wireless voice plan) are typically not offered to
a customer that has not subscribed to a base service plan (e.g. a wireless voice
plan), the add-ons do not generally transform the base service and therefore meet
Criterion 2 (distinct in the context of the contract).
When these add-ons are available to the customer but the customer has not yet
subscribed to them, the telecom entity should consider the guidance on options
and material rights (see Section 8).

Share plans add complexity

Share plans add complexity when identifying the performance obligations in
a contract. Their specific facts and circumstances may vary and need to be
analyzed carefully. In addition, share plans may be entered into through several
contracts with different users. The telecom entity should therefore determine
who its customer is, which may include assessing who is responsible for
payment. It should also consider the contract combination guidance (see 2.3).

3.4.2 The series guidance applied to telecom services

Telecom entities need to define the nature of their promise to the customer, which
may be a promise to deliver time increments of network service (minute, day etc.)
or other service units (text, data gigabyte etc.). In many cases, telecom services
will meet the criteria to be accounted for as a series because each time increment
or service unit is distinct, similar and delivered over time. If so, the telecom
service is accounted for as one performance obligation. This may have follow-on
consequences when determining the pattern of transfer (see 6.3) and accounting
for contract modifications. The practical outcome of accounting for the services as a
series is a simplified approach to what the new standard otherwise would require.

Requirements of the new standard

606-10-25-14b A contract may contain promises to deliver a distinct series of goods or services
[IFRS 15.22(b)] that are substantially the same. At contract inception, an entity assesses the goods
or services promised in the contract and determines whether the series is a single
performance obligation. This is the case when it meets the following criteria.

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| 3 Step 2: Identify the performance obligations in the contract

606-10-25-15
[IFRS 15.23]
The goods or services are substantially the same

+
Each distinct good or service in the series is a performance
obligation satisfied over time
(see 6.2)

+
The same method would be used to measure progress toward
satisfaction of each distinct good or service in the series
(see 6.3)

=
A single performance obligation

Example 21 – Term cable television contract with fixed fee and

unlimited usage

Cable Company R enters into a two-year service contract with Customer M

to provide cable television services for a fixed fee of 100 per month. Cable
Company R has concluded that its cable television services are satisfied over
time because Customer M receives and consumes the benefit from the services
as they are provided – e.g. customers generally benefit from each day that they
receive Cable Company R’s services.
Cable Company R determines that each increment of its services – e.g. day or
month – is distinct because Customer M benefits from that period of service
on its own and each increment of service is separately identifiable from those
preceding and following it – i.e. one service period does not significantly affect,
modify or customize another.
However, Cable Company R applies the series guidance and concludes that its
contract with Customer M is a single performance obligation to provide two years
of cable television service because each of the distinct increments of services
is satisfied over time and the same method would be used to measure progress
(see 6.3 for a discussion of measure of progress).

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3.4 Telecom services |

Example 22 – Term wireless service contract with fixed fee and

limited usage

Telco A enters into a two-year wireless contract with Customer C to provide

120 minutes of voice service for a fixed fee of 20 per month. The voice plan
includes both incoming and outgoing calls. The voice plan allows the customer
to use 120 minutes each month for incoming and outgoing calls and the handset
will not function for voice purposes once the minutes are used. The 120 minutes
expire at the end of every month. Telco A concludes that the voice services are
satisfied over time because Customer C receives and consumes the benefit from
the services as they are provided – e.g. customers generally benefit from each
minute that they receive Telco A’s services.
Telco A determines that each minute is distinct because Customer C benefits from
that minute of service on its own. Additionally, each minute is separable from those
preceding and following it – i.e. one service period does not significantly affect,
modify or customize another.
However, Telco A applies the series guidance and concludes that its contract with
Customer C is a single performance obligation to provide 2,880 minutes (120 x 24
months) of wireless service. Telco A determines that each of the distinct minutes
of voice is satisfied over time, and the same method would be used to measure
progress (see 6.3 for a discussion of measure of progress).

Observations

Determining the nature of the telecom entity’s promise to the customer is

the first step in applying the series guidance
Determining the nature of the telecom entity’s promise is the first step in
determining whether the criteria to account for the services as a series are met.
For example, if the nature of the promise is the delivery of a specified quantity
of a good or service, then the evaluation should consider whether each good or
service is distinct and substantially the same.
Conversely, if the nature of the telecom entity’s promise is to stand ready to
provide a single service for a period of time (i.e. there is not a specified quantity
to be delivered), then the evaluation would likely focus on whether each time
increment, rather than the underlying activities, is distinct and substantially
the same.

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| 3 Step 2: Identify the performance obligations in the contract

Telecom services generally meet the criteria to be accounted for as a series

but determining the nature of the service obligation may require judgment
606-10-25-14b Generally, telecom network services represent a promise to deliver time
[IFRS 15.22(b)] increments of network services (minute, day, month etc.). Alternatively, they may
represent the promise to deliver a specific amount of service units (text, data
606-10-25-15
gigabyte etc.). In either case, those services generally meet the criteria to be
[IFRS 15.23]
accounted for as a series. This is because each time increment or service unit is
distinct but similar. Additionally, the customer receives and consumes the benefit
from the services as they are provided; therefore, services are satisfied over time
(see 6.2). When the series criteria are met, the network services are accounted
for as one performance obligation, rather than as distinct service units.

Accounting for the services as a series usually brings relief to the

application of the revenue model
In a telecom environment, the series guidance can simplify the application of the
five-step revenue model because monthly network services are accounted for
as a single performance obligation. Therefore, a telecom entity does not need
to determine the individual stand-alone selling prices for each time increment or
service unit promised. However, the telecom entity still needs to carefully assess
the nature of its promise to the customer (time increments versus service units
etc.) because this will impact the pattern of revenue recognition (see 6.3).

606-10-25-12 – 25-13 When a contract is modified and a telecom entity accounts for the services as a
[IFRS 15.20–21] series, it accounts for the change prospectively because the underlying services
in the series are distinct from one another and some of the monthly performance
obligations will have been satisfied when the contract modification or change in
price occurred (see Section 7 in Issues In-Depth, Edition 2016 for the accounting
for contract modifications).

606-10-32-44 Furthermore, if a contract includes variable consideration, then a change in the

[IFRS 15.89] measurement of that variable consideration can be applied to one or more of the
distinct services, rather than to the overall performance obligation when applying
the series guidance, if certain criteria are met (see 5.4.2.2 in Issues In-Depth,
Edition 2016).

3.5 Installations
Many telecom entities offer residential and business installation services that
need to be carefully evaluated to determine if they transfer a distinct service to
the customer and are separate performance obligations. In many cases, judgment
is required.

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3.5 Installations |

Example 23 – Residential installation services

A new residential customer purchases television services from Telco A under a

three-year contract. The contract requires that Telco A perform certain installation
activities, including connecting Telco A’s network to the customer’s house and
wiring the inside of the house so that set-top boxes can be connected. The
customer could have selected a third party to perform the inside wiring services.
Under the terms and conditions of the contract, the connection to the customer’s
home belongs to Telco A and it is responsible for any repairs or maintenance.
Telco A concludes that connecting the network to the customer’s house results
in an extension of its own network, does not transfer a good or service to the
customer and is not a performance obligation. Telco A then considers whether
any of the installation costs qualify to be capitalized as property, plant and
equipment or costs of fulfilling a contract (see Section 7).
Since the terms and conditions of the contract indicate that the inside wiring
is the responsibility of the customer, Telco A needs to determine if this service
is distinct from other goods and services in the contract. Telco A notes that the
customer can benefit from the inside wiring on its own because this service is
sold separately, which is evidenced by the fact that the customer could have
obtained the service from a third party. The promise related to the inside wiring
is separately identifiable – Telco A does not provide a service of integrating the
inside wiring with other services to create a combined output, the inside wiring
does not modify or customize another good or service, and the inside wiring
is not highly dependent on or interrelated with the television services. Thus,
Telco A concludes that the inside wiring is distinct and constitutes a separate
performance obligation.

Example 24 – Business installation services

Business Customer Y purchases a customized telecommunications package from

Telco Z that requires Telco Z to make a significant network investment. Customer Y
enters into a 10-year network services contract and pays 500,000 up front (to
compensate Telco Z for its network investment costs) and 10,000 per month for the
services. The network subject to the contract is not transferred to the customer but
is used and managed by Telco Z to deliver the specific network services.
The activities related to the network investment do not result in the transfer of
goods or services to Customer Y. Telco Z concludes that the activities are set-up
activities. Accordingly, there is only one activity that transfers a good or service to
the customer (i.e. network services). Therefore, revenue will not be recognized
until the network services begin to be provided. Telco Z also considers the
guidance on nonrefundable up-front fees (see Section 9).
Because the network assets are owned by Telco Z but used to satisfy this
contract, Telco Z also may assess if the contract includes a lease. If Telco Z
concludes that the equipment is subject to a lease, then Telco Z would account
for that lease under the appropriate guidance and the remainder of the contract
would be accounted for under the new standard.

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| 3 Step 2: Identify the performance obligations in the contract

Observations

Installation and activation fees do not necessarily mean that the

underlying activities are distinct
Whether an activity is referred to as an ‘activation’ or ‘installation’, and whether a
fee is charged to a customer are not determinative factors in assessing whether
the activity is a separate performance obligation. A telecom entity needs to
consider the specific facts of the arrangement to understand the nature of the
activation or installation activities performed and whether they transfer control of
a distinct good or service to the customer. Any up-front fee would be included in
the transaction price and allocated to the performance obligations identified in the
contract (see Section 9).

Activities that improve the telecom’s network do not transfer a good or

service to the customer
Telecom entities may incur up-front costs for improvements to their networks to
set up, install or hookup a customer’s services. The fact that these costs may be
significant is not sufficient to conclude that the related activities transfer a good
or service to the customer, even if the telecom entity is able to recover those
costs from the customer.
When assessing if installation activities are distinct, a telecom entity first needs
to determine whether these activities are an improvement to or extension of its
network, rather than a transfer of a service or good to the customer. Technologies
change rapidly in the telecom industry and, therefore, appropriately identifying all
of the activities related to an installation will require careful consideration.
If installation and other related activities do not transfer a good or service to the
customer, then the costs should be analyzed to determine if they qualify to be
capitalized as property, plant and equipment or as a cost of fulfilling the contract
(see Section 7).
Assessing whether installation activities are distinct requires judgment
For those installation activities that transfer a good or service to a customer – e.g.
those that are not improving or extending its network – the telecom entity needs
to assess if the installation services are capable of being distinct (Criterion 1)
and are distinct in the context of the contract (Criterion 2). Determining whether
installation activities are a performance obligation will require judgment.
For example, the customer may have the option to self-install its equipment
and wiring, or to select another provider to do so, rather than purchasing the
installation from the entity. This would generally evidence both that the customer
can benefit from the installation on its own and that the network services and
the installation are not highly interdependent. However, if the installation is
performed by a third party, then this in itself may not be sufficient to conclude
that the installation brings benefit to the customer on its own – e.g. if the telecom
entity has simply subcontracted the installation activity to a third party. The entity
also considers whether the installation would need to be reperformed if the
customer changes service providers or renews or upgrades its service contract.

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3.6 Other telecom services, fees and administrative tasks |

Comparison with current US GAAP

Hookup revenue guidance for cable/satellite entities is superseded

922-430-25-1, 35-1, 922-605-25-3 Under current guidance for cable television providers, hookup revenue (i.e. fees
that customers pay for the installation/set-up of their cable/satellite television
services) is recognized up front to the extent of direct selling costs, with the
remainder deferred over the expected customer relationship period. This
guidance will be withdrawn when the new standard becomes effective. However,
some of the guidance on costs for cable companies has not been withdrawn (see
Section 7).
There is no industry-specific revenue recognition guidance under the new
standard. Therefore, whether a portion of any up-front fee for an installation
will be recognized at contract inception under the new standard depends on
the specific facts and whether the installation activities meet the definition of a
performance obligation.

3.6 Other telecom services, fees and administrative

tasks
Requirements of the new standard

606-10-25-16 – 25-17 Promises to transfer a good or service can be explicitly stated in the contract, or be
[IFRS 15.24–25] implicit based on established business practices or published policies that create a
valid (‘reasonable’ under US GAAP) expectation that the entity will transfer the good
or service to the customer.
Conversely, administrative tasks do not transfer a good or service to the customer and
are not performance obligations – e.g. administrative tasks to set up a contract.

Example 25 – Activation fee in a wireless contract

Telco A charges a one-time activation fee of 25 to Customer C when Customer C

enters into a wireless contract for a voice and data plan. The activation of a new
wireless customer to the network requires various administrative tasks, including
setting up the wireless service, processing a new customer in the billing system,
and credit checks.
Telco A determines that activation activities are administrative in nature and
therefore do not constitute a separate promise to the customer to be assessed
as a separate performance obligation. Because the activation fee is charged
at contract inception and is not refundable, Telco A applies the guidance on
nonrefundable up-front fees (see Section 9).

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| 3 Step 2: Identify the performance obligations in the contract

Example 26 – Wi-Fi hotspot access

Telco A offers a premium internet package that includes, among other services,
access to Wi-Fi hotspots with the advantage to customers that they are able to
save on their data usage. Alternatively, Telco A offers a basic internet package
which allows, for an additional fee, the same access to Wi-Fi hotspots as the
premium package.
Telco A determines that the access to the Wi-Fi hotspots is distinct from the
other network services. This is because the customer can benefit from the Wi-Fi
hotspot access on its own (i.e. it is sold separately). Furthermore, this service
is distinct in the context of the contract because the Wi-Fi hotspot access is not
highly interrelated with the network services. This is because the customer could
choose not to take Wi-Fi hotspot access and the network services would not be
significantly affected.

Observations

Administrative activities are not performance obligations

Telecom entities charge a number of fees to their customers at inception or
during the contract term. These fees cover activities that should be evaluated to
determine if they are distinct goods or services and therefore accounted for as
separate performance obligations.
Fees such as wireless activation fees, credit check fees, service level change
fees (sometimes referred to as ‘service upgrade’ or ‘downgrade fees’) and
early contract termination fees are generally charged to recover the cost
of administrative activities. Therefore, they would not typically give rise to
performance obligations.
Fees for administrative tasks that are charged at contract inception or upon
contract modification, if they are nonrefundable, are assessed further under the
guidance on nonrefundable up-front fees (see Section 9).
Optional services may represent separate performance obligations
Some telecom entities offer optional services, such as help desk support, to
their customers. Judgment is needed to determine if the optional services are
promises made to the customer and represent separate performance obligations.
If they are included in all network service bundles, then they may still meet the
criteria for being distinct. For practical purposes, in these circumstances, these
optional services can however be accounted for as part of the same bundle, as a
single performance obligation, if all services are provided concurrently and have
the same pattern of transfer.

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3.7 Incentives and promotional giveaways |

Comparison with current US GAAP

Administrative tasks
SEC SAB Topic 13 The notion of an administrative task exists in current SEC guidance and refers to
activities that do not represent discrete earnings events – i.e. selling a membership,
signing a contract, enrolling a customer, activating telecommunications services
or providing initial set-up services. Current SEC guidance distinguishes between
deliverables and these activities. It states that activities that do not represent
discrete earnings events are typically negotiated in conjunction with the pricing of
the deliverables to the contract, and that the customer generally views these types
of non-deliverable activities as having significantly lower or no value separate from
the entity’s overall performance under the contract.
In general, entities are unlikely to reach a substantially different conclusion under
the new standard when they attempt to identify administrative tasks from that
reached under current SEC guidance in identifying activities that do not represent
discrete earnings events.

3.7 Incentives and promotional giveaways

Incentives and promotional giveaways are performance obligations if they meet the
‘distinct’ criteria. Even if the intent of the entity in offering the incentive is solely
to entice customers to subscribe to a telecom service by, for example, giving free
equipment or gift cards, that does not negate the requirement to evaluate whether
the incentives are performance obligations (see 3.1).

Example 27 – Free handset case and gift card

Customer C purchases a wireless handset and a two-year service contract (both

identified as separate performance obligations) from Telco A. Telco A offers
Customer C a free handset case and a gift card for a local electronics store. These
items are not typically included at contract inception.
Telco A determines that, although the handset case and gift card are incremental
goods provided to Customer C as a marketing incentive to enter the wireless
contract, they represent promises made by Telco A to Customer C. Therefore,
there are four promised goods and services, as follows:
– wireless handset;
– handset case;
– gift card; and
– service contract.
Telco A concludes that the handset case and gift card are distinct because
Customer C could have purchased them separately, can benefit from these items
separately and they are not highly interrelated with the handset and wireless
services. Therefore, Telco A accounts for four performance obligations.

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Observations

Judgment is required to evaluate which guidance applies to telecom

customer incentives
Telecom incentives may be offered in many different forms. Some may be
performance obligations, while others may raise accounting issues addressed in
other sections of the new standard.

Accounting issue and

Incentive applicable guidance Examples

Free or Assess if the good Free charger, free

discounted good or service is distinct premium television
or service (Step 2) and allocate the services for two months,
transaction price (Step 4 gift card
– see Section 5)

Discount or bill Estimate the transaction Handset subsidy, bundle

credit price (Step 3 – see discount, goodwill credit,
Section 4) volume rebate

Up-front Estimate the transaction Port-in credit, debit card

payment to price (Step 3 – see
customer Section 4)

Options for Assess if a material right Option to renew a service

additional exists (see Section 8) contract at a discounted
discounted price
goods or
services

Due to the inherent promise included in customer incentives (e.g. a free good
or service offered if the customer signs a contract), many incentives will be
considered performance obligations, rather than a marketing expense.

Additional complexities in accounting for gift cards

Determining the proper accounting for gift cards given as incentives to a telecom
customer requires judgment. The telecom entity needs to consider whether a gift
card represents a performance obligation or consideration payable to a customer
(see 4.3).
When the entity sells or offers third-party gift cards, it also needs to evaluate if it
acts as a principal or an agent (see 10.3 in Issues In-Depth, Edition 2016).

End customer incentives in indirect channels

Telecom entities that have dealer or reseller networks should consider the proper
accounting for incentives or payments made to the dealer (see Section 10).

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3.8 Warranties |

Comparison with current US GAAP

Significant change for many entities that provide sales incentives

The new standard could result in a significant change in practice for entities that
provide sales incentives, such as free goods or services, to their customers or to
their customers’ customers in a distribution chain. It will generally result in those
goods or services being identified as promised goods or services in the entity’s
contract with its customer when the sales incentives are put in place before the
sale to the customer. Existing practice when the sales incentive is a free product or
service is mixed, with many entities accruing the cost of the free product or service
and recognizing all of the revenue when the original good is sold to the customer.

3.8 Warranties
Requirements of the new standard

606-10-55-31 Under the new standard, a warranty is considered a performance obligation if it is

[IFRS 15.B29] distinct under the Step 2 criteria (see 3.2). If the customer has an option to purchase
the good or service with or without the warranty, then the warranty is a distinct
service. If the warranty includes a service beyond assuring that the good complies
with agreed-upon specifications, then it is distinct.
606-10-55-31 – 55-32, Topic 450 When a warranty is not sold separately, it or part of it may still be a performance
[IFRS 15.B29–B30, IAS 37] obligation if it provides the customer with a service in addition to the assurance that
the product complies with agreed-upon specifications. A warranty that only covers
a product’s compliance with agreed-upon specifications (an ‘assurance warranty’) is
accounted for under other guidance.

An entity distinguishes between the types of warranties as follows.

Does the customer have the option to purchase Yes

Service warranty
the warranty separately?

Account for the

No
warranty or part
of the warranty
Does the promised warranty, or a part as a
of the promised warranty, provide the Yes performance
customer with a service in addition to the obligation.
assurance that the product complies with
agreed-upon specifications?

No

Assurance warranty

Not a performance obligation. Account for

as a cost accrual under relevant guidance.

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606-10-55-33 To assess whether a warranty provides a customer with an additional service, an

[IFRS 15.B31] entity considers factors such as:
– whether the warranty is required by law: because such requirements typically exist
to protect customers from the risk of purchasing defective products;
– the length of the warranty coverage period: because the longer the coverage
period, the more likely it is that the entity is providing a service, rather than just
guaranteeing compliance with an agreed-upon specification; and
– the nature of the tasks that the entity promises to perform.
606-10-55-31 If the warranty – or part of it – is considered to be a performance obligation, then
[IFRS 15.B29] the entity allocates a portion of the transaction price to the service performance
obligation by applying the requirements in Step 4 of the model (see Section 5).
606-10-55-34 If an entity provides a warranty that includes both an assurance element and a
[IFRS 15.B32] service element and the entity cannot reasonably account for them separately, then it
accounts for both of the warranties together as a single performance obligation.
606-10-55-35, 450-20 A legal requirement to pay compensation or other damages if products cause damage
[IFRS 15.B33, IAS 37] is not a performance obligation, and is accounted for under other relevant guidance.

Example 28 – Wireless handset extended warranty

Customer C purchases a wireless handset and a two-year service contract

from Telco B. Customer C has the option, and chooses to purchase, a one-year
extended warranty to cover the operation of the handset for the second year of
the two-year contract.
As Customer C has the option to purchase the extended one-year warranty,
Telco B identifies this warranty as a separate performance obligation.

Observations

Wireless handset warranties

Wireless customers can often purchase separate warranty coverage for their
wireless handset from their telecom provider. This coverage may guarantee that
the handset will continue to function properly after the manufacturer’s warranty
has expired. It may also provide additional coverage during the manufacturer’s
warranty period, such as the loan of a handset during the repair period, or
the replacement of a broken, lost or stolen handset. Whether the warranty
is separately priced is not determinative of whether a separate performance
obligation exists and these warranty plans will typically represent separate
performance obligations.
Additionally, if the warranty activities are performed by a third party, then the
entity considers the principal versus agent guidance (see 10.3 in Issues In-Depth,
Edition 2016). Under IFRS, the entity also considers any interaction with the
insurance guidance.

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3.8 Warranties |

Service level guarantees

The term ‘service level guarantee’ is used in some telecom contracts to require
an entity to meet a minimum service level – e.g. having the network available
to transport data for 95 percent of the time. When the minimum service level is
not met, adjustments to the transaction price occur, typically through penalties
that reduce the consideration paid to the telecom entity. These service level
guarantees are not a performance obligation but, instead, generally result in
variable consideration and affect the transaction price (see 4.2).

Comparison with current IFRS

Presence of warranty clause does not preclude recognition of revenue

[IAS 18.16(a), 17, IAS 37.C4] Under IAS 18, a standard warranty clause in a sales contract that does not result
in the seller retaining significant risks does not preclude revenue recognition
at the date of sale of the product. In this case, the telecom entity recognizes a
warranty provision under IAS 37 at the date of sale, for the best estimate of the
costs to be incurred for repairing or replacing the defective products.
However, an abnormal warranty obligation could indicate that the significant risks
and rewards of ownership have not been passed to the buyer, and that revenue
should therefore be deferred.
Unlike current IFRS, the new standard does not envisage that the presence of
a warranty would ever preclude the recognition of all of the revenue associated
with the sale of the product. This could accelerate revenue recognition in some
cases compared to current IFRS.

Comparison with current US GAAP

Entities will be required to consider factors in addition to considering

whether a warranty is separately priced
Topics 450, 460 Under current US GAAP, warranties that are not separately priced are accounted
for when the goods are delivered, by recognizing the full revenue on the product
and accruing the estimated costs of the warranty obligation. The warranty
is only treated as a separate unit of account under current US GAAP if it is
separately priced.
Under the new standard, an entity evaluates whether the warranty provides a
service regardless of whether it is separately priced – and, if it does, assesses
whether it (or part of it) is a separate performance obligation.

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| 3 Step 2: Identify the performance obligations in the contract

Amount of revenue allocated to a separately priced warranty may change

Topic 460, 605-20-25-1 – 25-6 The amount of revenue recognized for some separately priced extended
warranties and product maintenance contracts may change when the transaction
price is allocated on a relative stand-alone selling-price basis, rather than by
deferring the contractually stated amount of the warranty, as required under
current US GAAP.
Service level agreement
460-10-15-7(i) Contracts may guarantee an entity’s performance through a service level
agreement (SLA) under which an entity is required to pay compensation to
a customer if it fails to provide the required level of service. Because these
guarantees relate to an entity’s own performance, they are not accounted for
under the guidance on guarantees but under the new revenue standard.
There is diversity in practice in the accounting for an SLA under current US GAAP,
including whether compensation payments are recorded as an expense or a
reduction of revenue.
However, under the new standard an SLA that provides the customer with
consideration if performance conditions are not met is accounted for as variable
consideration (see 4.2). This may require an entity to estimate the anticipated
pay-outs under its SLAs for the contractual period and include those estimated
payments as a reduction of the transaction price and revenue.

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4 Step 3: Determine the transaction price |

4 Step 3: Determine the

transaction price
Overview
606-10-32-2 The ‘transaction price’, determined at contract inception, is the amount
[IFRS 15.47] of consideration to which an entity expects to be entitled in exchange for
transferring goods or services to a customer. The transaction price excludes
amounts collected on behalf of third parties – e.g. some sales taxes or some
telecom regulatory fees. Conversely, nonrefundable up-front fees, such as
activation fees or set-up fees, are included in the transaction price (see Section 9).
606-10-32-4 In determining the transaction price, the entity considers its enforceable rights
[IFRS 15.49] and obligations within the contract. It does not consider the possibility of a
contract being cancelled, renewed or modified. As seen in 2.1.1, the contract
term is key to defining the transaction price. Additionally, telecom contracts often
permit customers to navigate through service levels or add and remove optional
services. Therefore, determining the enforceable rights and obligations may
require judgment.
The transaction price also considers variable consideration (and the constraint),
consideration payable to a customer and noncash consideration. Telecom entities
need to analyze their contractual and business practices of offering incentives,
rebates, goodwill and port-in credits etc., as those may affect the transaction
price and need to be estimated at contract inception. Usage-based charges may
represent a customer option (see Section 8), but in certain circumstances may
constitute variable consideration and need to be analyzed.
Finally, at contract inception, the transaction price is adjusted for any significant
financing component. Many wireless customers receive a handset at
contract inception, which is ultimately paid for over time. In other situations, a
nonrefundable fee is often paid at the beginning. Telecom entities therefore need
to determine if such arrangements contain a significant financing component.

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| 4 Step 3: Determine the transaction price

Requirements of the new standard

In determining the transaction price, an entity considers the following components.

606-10-32-3
[IFRS 15.48] Variable consideration (and the Significant financing
constraint) (see 4.2) component (see 4.4)

An entity estimates the amount of For contracts with a significant

variable consideration to which it financing component, an entity adjusts
expects to be entitled, giving the promised amount of consideration
consideration to the risk of revenue to reflect the time value of money
reversal in making the estimate

Transaction
price

Noncash consideration Consideration payable to

(see 4.5) a customer (see 4.3)

Noncash consideration is measured An entity needs to determine

at fair value, if that can be reasonably whether consideration payable to
estimated; if not, an entity uses the a customer represents a reduction of
stand-alone selling price of the good the transaction price, a payment for a
or service that was promised in distinct good or service, or a
exchange for noncash consideration combination of the two

Customer credit risk is not considered when determining the amount to which an
entity expects to be entitled – instead, credit risk is considered when assessing the
existence of a contract (see Section 2). However, if the contract includes a significant
financing component provided to the customer, then the entity considers credit risk in
determining the appropriate discount rate to use (see 4.4).

Practical expedient for sales taxes (US GAAP only)

606-10-32-2A An entity applying US GAAP may elect to exclude from the measurement of the
transaction price all taxes assessed by a government authority that are both imposed
on and concurrent with the specific revenue-producing transaction and collected by
the entity from a customer – e.g. sales, use, value added and some excise taxes.
Taxes assessed on an entity’s total gross receipts or imposed during the inventory
procurement process are not included in the scope of this election.
An entity that applies the election is required to exclude from the transaction price
all taxes in the scope of the election and comply with accounting policy disclosure
requirements. Entities not adopting this policy need to evaluate whether they are
principal or agent for each transaction/jurisdiction.

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4 Step 3: Determine the transaction price |

Difference between IFRS and US GAAP

Sales and other similar taxes

605-45-15-2e The policy election available under US GAAP for the treatment of sales taxes is
[IAS 18.8, IFRS 15.BC188A–188D] similar to the one that is currently available under US GAAP. The IASB decided
not to provide a similar exception because it would reduce comparability and an
analysis similar to that required under the new standard is required under current
IFRS revenue requirements.
Therefore, consistent with current IFRS requirements, telecom entities applying
IFRS assess taxes and regulatory fees and determine if they are collected on
behalf of third parties to conclude whether they should be excluded from the
transaction price. This would require an entity to consider whether it is acting in a
manner similar to that of an agent or a principal with respect to such sales taxes
(see 4.2.700 in Insights into IFRS, 13th Edition).

Observations

The treatment of sales taxes is an accounting policy choice under US GAAP

606-10-32-2A Under US GAAP, entities are permitted to exclude amounts collected from
customers for all sales and other similar taxes from the transaction price, as
an accounting policy choice. This policy choice has to be applied consistently
to all sales taxes. Telecom entities that make this election are also required to
assess other sundry amounts billed to the customer to determine whether they
represent a sales tax and are eligible to the practical expedient.

Changes in transaction price can be contract modifications

606-10-32-42 – 32-45 The transaction price can change for various reasons. If the change arises as a
[IFRS 15.87–90] result of a contract modification, then the entity applies the guidance on contract
modifications (see Section 7 in Issues In-Depth, Edition 2016). For other changes
in the transaction price, an entity applies the guidance described in 5.3.

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| 4 Step 3: Determine the transaction price

4.1 Contractual minimum commitment or

contracted service amount?
Requirements of the new standard

606-10-25-2, 32-4 A contract is an agreement between two or more parties that creates enforceable
[IFRS 15.10, 49] rights and obligations. The terms of the contract (including the period over which the
contract is enforceable, see 2.1.1) and an entity’s customary business practices are
considered in determining the transaction price. Furthermore, in determining the
transaction price, the entity assumes that the goods or services will be transferred
to the customer as promised in the existing contract and that the contract will not be
cancelled, renewed or modified.

Observations

Careful analysis of enforceable rights and obligations and customary

business practices
Many contracts in the telecom industry require a customer to commit to a
specified term (duration). In addition, these contracts often implicitly or explicitly
require the customer to commit to a minimum level of service or a minimum
monthly payment amount that cannot be decreased without terminating the
contract and incurring termination penalties. In conjunction with this minimum
commitment over the specified term, telecom entities may provide the customer
with discounted goods or services (e.g. handsets or installation) that are typically
delivered up front.
However, at the outset of the contract, or during the term of the contract,
customers sometimes select (and the contract specifies) a level of service or
monthly payment amount that may be higher than the minimum amount.
Such contractual terms raise a question about the enforceable rights and
obligations of the telecom entity that have to be considered when determining the
transaction price at contract inception. That is, the amount that a telecom entity
“expects to be entitled in exchange for transferring the service” is either:
– the minimum amount to which the customer has committed for the contract
term (the ‘contractual minimum commitment’); or
– the actual amount for which the customer has contracted at contract inception
(the ‘contracted service amount’).
Careful analysis of the facts and circumstances is required to determine the
transaction price.

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4.1 Contractual minimum commitment or contracted service amount? |

Example 29 – Determining the transaction price: Contractual

minimum commitment

Telco T enters into a 24-month wireless voice and data services contract with
Customer C. At contract inception, Telco T transfers a handset to Customer C, and
Customer C pays 200 to Telco T, which is less than the stand-alone selling price of
the handset.
The 24-month contract includes 1,000 monthly minutes of voice and 1GB of data
usage for a monthly fee of 80 (Service Package A). During the two-year term,
Customer C may decrease the service package to 500 monthly minutes of voice
and 500MB of data usage for a monthly fee of 60 (Service Package B). (In other
contracts, Telco T also offers an ‘add-on’ package of 500 minutes of voice and
500MB of data usage that can be added or dropped monthly at the customer’s
option.)
Customer C cannot reduce the service package below 60 without terminating the
contract and incurring substantive termination penalties. In addition, Customer C
can only reduce the service package in the month following that in which he
provides notice.
Note that this example does not assess whether the contract includes a
significant financing component.

After analyzing the terms and conditions of the contract, Telco T concludes
that using the contractual minimum commitment approach to determine the
transaction price would be appropriate.
Following this approach, the transaction price for the service is 1,460, calculated
using one month at the contracted amount of 80 and 23 months at 60 per month
for Service Package B, which is the minimum amount to which Customer C can
reduce his service package without incurring penalties.
Thus, following this approach, the total transaction price is 1,660 (200 promised
consideration for the handset and 1,460 promised consideration for the services).
See 5.2, Example 41 for allocating the transaction price.

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| 4 Step 3: Determine the transaction price

Example 30 – Determining the transaction price: Contracted service

approach

Telco X enters into a 24-month wireless voice and data services contract with
Customer F. At contract inception, Telco X transfers a handset to Customer F, and
Customer F pays 200 to Telco X, which is less than the stand-alone selling price of
the handset.
The 24-month contract includes 800 monthly minutes of voice and 1GB of data
usage for a monthly fee of 70. During the two-year term, Customer F cannot
change the service package without terminating the contract and incurring
substantive termination penalties.
However, Telco X has in limited circumstances allowed customers to downgrade
their service without paying a termination penalty.
Note that this example does not assess whether the contract includes a
significant financing component.
After analyzing the terms and conditions of the contract, Telco X concludes that
using the contracted service approach to determine the transaction price would
be appropriate.
Following this approach, the transaction price for the service is 1,680 (24 months
at 70 per month), which is the amount specified in the contract.
Thus, the total transaction price for this contract is 1,880 (200 promised
consideration for the handset and 1,680 promised consideration for the services).
See 5.2, Example 42 for allocating the transaction price.

Observations

Consider enforceable rights and obligations when determining the

transaction price
In determining which approach is the more appropriate, telecom entities will
need to carefully analyze all of the facts and circumstances, including the relevant
contractual terms. After analyzing those facts, the approach that reflects the
rights and obligations of the entity will be used to determine the transaction price.
The following explains the key difference between the approaches.
– The contractual minimum commitment approach accounts for any rights to
obtain services above the contractual minimum commitment as an option
to acquire additional goods or services, typically at their stand-alone selling
prices. The transaction price includes the contracted amount in the first month
and the contractual minimum amounts for the remaining months of the
contract. (This approach also intersects with the guidance on customer options
and material rights. See Section 8).

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4.2 Variable consideration (and the constraint) |

– In contrast, the contracted service approach accounts for the customer’s initial
commitment throughout the term of the contract and therefore any changes
in those rights would be accounted for as a contract modification when
they occur.
One example of a contractual right that may determine the accounting for
the contract is the existence of a substantive penalty to move from a higher
service package to a lower service package. That might suggest that there are
enforceable rights and obligations relating to the higher service level. However, all
of the contractual rights and obligations need to be considered in determining the
appropriate accounting.

Practical implications of the contractual minimum commitment approach

or the contracted service approach
Each approach has different practical implications for data requirements and
on the accounting required by other parts of the new standard. For example,
using the contractual minimum commitment requires an entity to gather data to
determine the minimum amount for each service plan. However, there may be
fewer implications for the future accounting if a customer changes the service
plan to the minimum amount.
In contrast, if a customer makes a change to the service plan, under the
contracted service approach, then the change will be accounted for as a contract
modification, which could create complexity in the future accounting for the
contract with commensurate system implications (see Section 7 in Issues In-
Depth, Edition 2016 on contract modifications).

4.2 Variable consideration (and the constraint)

Requirements of the new standard

606-10-32-6 – 32-7 Items such as discounts, rebates, refunds, rights of return, credits, price concessions,
[IFRS 15.51–52] incentives, performance bonuses, penalties or similar items may result in variable
consideration. Promised consideration also can vary if it is contingent on the occurrence
or non-occurrence of a future event. Variability may be explicit or implicit, arising from
customary business practices, published policies or specific statements, or any other
facts and circumstances that would create a valid expectation by the customer.

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| 4 Step 3: Determine the transaction price

606-10-32-8, 32-11, 32-13 An entity assesses whether, and to what extent, it can include an amount of
[IFRS 15.53, 56, 58] variable consideration in the transaction price at contract inception. The following
flow chart sets out how an entity determines the amount of variable consideration
in the transaction price, except for sales- or usage-based royalties from licenses of
intellectual property.

Is the consideration variable or fixed?

Variable Fixed

Estimate the amount using the expected

value or most likely amount (see 4.2.1)

Determine the portion, if any, of that amount for

which it is probable (highly probable for IFRS)
that a significant revenue reversal will not
subsequently occur (the constraint – see 4.2.2)

Include the amount in the transaction price

Example 31 – Enterprise service contract with usage fee treated as

variable consideration

Telco A enters into a contract with enterprise Customer C to provide call center
services. These services include providing dedicated infrastructure and staff to
stand ready to answer calls. Telco A receives consideration of 0.50 per minute for
each call answered.
Telco A observes that Customer C does not make separate purchasing decisions
every time a user places a call to the center. Therefore, Telco concludes that its
performance obligation is the overall service of standing ready to provide call-
center services, rather than each call answered being the promised deliverable. It
therefore concludes that the per-minute fee is variable consideration.
The accounting for this contract, including measurement of progress, is further
discussed in Example 50 (see 6.3).

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4.2 Variable consideration (and the constraint) |

Observations

Consideration can be deemed to be variable even if the price stated in the

contract is fixed
ASU 2014-09.BC190–BC194 The guidance on variable consideration may apply to a wide variety of
[IFRS 15.BC190–BC194] circumstances in the telecom industry. The promised consideration may be
variable if an entity’s customary business practices and relevant facts and
circumstances indicate that the entity may accept a price lower than that stated in
the contract – i.e. the contract contains an implicit price concession, or the entity
has a history of providing price concessions or price support to its customers.
In these cases, it may be difficult to determine whether the entity has implicitly
offered a price concession, or whether it has chosen to accept the risk of default
by the customer of the contractually agreed-upon consideration (customer credit
risk). Entities need to exercise judgment and consider all of the relevant facts and
circumstances in making this determination.
Telecom entities may provide other credits that may be viewed as variable
consideration, including one-time credits such as goodwill or retention credits
(see 4.3).

A fixed rate per unit of output may be variable consideration

When an entity enters into a contract with a customer for an undefined quantity
of output at a fixed contractual rate per unit of output, the consideration may be
variable. In some cases there may be substantive contractual terms that indicate
a portion of the consideration is fixed – e.g. contractual minimums.
For contracts with undefined quantities, it is important to appropriately evaluate
the entity’s underlying promise to determine how the variability created by the
unknown quantity should be treated under the new standard. For example,
the entity’s underlying promise could be a series of distinct goods or services
(see 3.4.2), an obligation to provide the specified goods or services, or a stand-
ready obligation (see Example 31). Unknown quantities could also represent
customer options for which the entity will need to consider whether a material
right exists (see Section 8).

Some charges that depend on usage are not considered to be variable

consideration
Many telecom consumer contracts allow the customer to elect to purchase usage
606-10-55-340 – 55-342 (Example 50)
in excess of the contractual network service amounts. The price for the excess
[IFRS 15.IE254–IE256]
usage is specified in the contract. When the amounts charged for the excess
usage are based on the stand-alone selling price of that usage, the amounts are
not estimated and are not included in the determination of the transaction price.
This is because they represent an option to purchase additional distinct goods or
services at their stand-alone selling price (see Section 8).

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Volume discounts or rebates may be variable consideration or may convey

a material right
Some large business telecom contracts may include volume-based or other
discounts. Different structures of discounts and rebates may have a different
effect on the transaction price. For example, some agreements provide a
discount or rebate that applies to all purchases made under the agreement – i.e.
the discount or rebate applies on a retrospective basis once a volume threshold
is met. In other cases, the discounted purchase price may only apply to future
purchases once a minimum volume threshold has been met.
If a discount applies retrospectively to all purchases under the contract once
the threshold is achieved, then it represents variable consideration. In this case,
the entity estimates the volumes to be purchased and the resulting discount in
determining the transaction price and updates that estimate throughout the term
of the contract.
However, if a tiered pricing structure provides discounts for future purchases only
after volume thresholds are met, then the entity evaluates the arrangement to
determine whether the arrangement conveys a material right to the customer
(see Section 8). If a material right exists, then this is a separate performance
obligation, to which the entity allocates a portion of the transaction price. If a
material right does not exist, then there are no accounting implications for the
transactions completed before the volume threshold is met, and purchases after
the threshold has been met are accounted for at the discounted price.

Termination penalties
606-10-32-4 When determining the transaction price, a telecom entity assumes that the
[IFRS 15.49] contract will not be cancelled, renewed or modified. Therefore, termination
penalties should not be included in the determination of the transaction price.
However, when the termination penalties are not substantive, and as a result the
contract term is assessed as less than the stated term (see 2.1.1), it is necessary
to assess if the termination penalty should be included in the transaction price.
In all cases, the treatment of a termination penalty should be consistent with the
assessment of the contract term.

Example 32 – Enterprise contract with SLA penalties

Telco B enters into an agreement to provide data hosting services to a large

business customer, C, for a period of five years. Certain SLAs are agreed to by
Telco B as part of the contract with Customer C. Specifically, the SLAs will result
in a reduction of consideration paid by Customer C to Telco B, if Telco B does not
meet a specified level of service. Because the SLAs are part of the contract with
Customer C, the SLA penalties create variable consideration.
Therefore, Telco B estimates the amount of the penalties at contract inception in
determining the transaction price.

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4.2 Variable consideration (and the constraint) |

Observations

SLA penalties can represent variable consideration or a product warranty

606-10-32-6 Some telecom entities may enter into SLAs that result in penalties if the entity’s
[IFRS 15.51] performance fails to achieve certain specifications. Penalties are explicitly referred
to in the new standard as an example of variable consideration. However, in some
circumstances these provisions may be similar to a warranty on the promised
goods and services (see 3.8).

4.2.1 Estimate the amount of variable consideration

Requirements of the new standard

606-10-32-8 When estimating the transaction price for a contract with variable consideration, an
[IFRS 15.53] entity’s initial measurement objective is to determine which of the following methods
better predicts the consideration to which the entity will be entitled.

Expected The entity considers the sum of probability-weighted amounts

value for a range of possible consideration amounts. This may be an
appropriate estimate of the amount of variable consideration if an
entity has a large number of contracts with similar characteristics.

Most likely The entity considers the single most likely amount from a range
amount of possible consideration amounts. This may be an appropriate
estimate of the amount of variable consideration if the contract
has only two (or perhaps a few) possible outcomes.

606-10-32-9 The method selected is applied consistently throughout the contract and to similar
[IFRS 15.54] types of contracts when estimating the effect of uncertainty on the amount of
ASU 2014-09.BC195
variable consideration to which the entity will be entitled.
[IFRS 15.BC195]

Example 33 – Estimate of variable consideration: Expected value

Telco A agrees to sell to Business C, its customer, voice minutes over a period
of one year. Business C promises to pay 0.15 per minute for the first 100,000
minutes. If minutes purchased exceed 100,000 minutes, then the price
falls to 0.12 per minute for all minutes purchased (i.e. the price is reduced
retrospectively). If the minutes purchased exceed 150,000, then the price
falls to 0.10 per minute for all minutes purchased (i.e. the price is reduced
retrospectively). Based on Telco A’s experience with similar arrangements, it
estimates the following outcomes.

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| 4 Step 3: Determine the transaction price

Minutes used Probability

Less than 100,000 70%

100,000 to 150,000 20%
Over 150,000 10%

Telco A determines that the expected value method provides the better prediction
of the amount of consideration to which it expects to be entitled. As a result, it
estimates the transaction price to be 0.14 per minute (i.e. (0.15 × 70%) + (0.12 ×
20%) + (0.10 × 10%)).

Example 34 – Estimate of variable consideration: Most likely amount

Telco B enters into a contract with a customer to build a call center. Depending on
when the asset is completed, Telco B will receive either 110,000 or 130,000.

Outcome Consideration Probability

Call center is completed on time 130,000 90%

Call center is delayed 110,000 10%

Because there are only two possible outcomes under the contract, Telco B
determines that using the most likely amount provides the better prediction of
the amount of consideration to which it expects to be entitled. Telco B estimates
the transaction price to be 130,000, which is the single most likely amount.

Observations

All facts and circumstances are considered when selecting estimation

method
ASU 2014-09.BC200 The use of a probability-weighted estimate, especially when there are binary
[IFRS 15.BC200] outcomes, could result in revenue being recognized at an amount that is not a
possible outcome under the contract. In such situations, using the most likely
amount may be more appropriate. However, all facts and circumstances need
to be considered when selecting the method that best predicts the amount of
consideration to which a telecom entity will be entitled.

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4.2 Variable consideration (and the constraint) |

Historical experience may be a source of evidence

606-10-32-8, 32-11, 32-34a, An entity may use a group of similar transactions as a source of evidence when
ASU 2014-09.BC200 estimating variable consideration, particularly under the expected value method.
[IFRS 15.53, 56, 79(a), BC200] The estimates using the expected value method are generally made at the
contract level, not at the portfolio level. Using a group as a source of evidence in
this way is not itself an application of the portfolio approach (see 1.4).
For example, an entity may enter into a large number of similar contracts
whose terms include a performance bonus. Depending on the outcome of each
contract, the entity will either receive a bonus of 100 or will not receive any
bonus. Based on its historical experience, the entity expects to receive a bonus
of 100 in 60 percent of such contracts. To estimate the transaction price for future
individual contracts of this nature, the entity considers its historical experience
and estimates that the expected value of the bonus is 60. This example illustrates
that when an entity uses the expected value method, the transaction price may
be an amount that is not a possible outcome of an individual contract.
The entity needs to use judgment to determine whether the number of similar
transactions is sufficient to develop an expected value that is the best estimate
of the transaction price for the contract and whether the constraint (see 4.2.2)
should be applied.

4.2.2 Determine the amount for which it is probable (highly

probable for IFRS) that a significant reversal will not
occur (‘the constraint’)
Requirements of the new standard

606-10-32-11 After estimating the variable consideration, an entity may include some or all
[IFRS 15.56] of it in the transaction price – but only to the extent that it is probable (highly
probable for IFRS) that a significant reversal in the amount of cumulative revenue
will not occur when the uncertainty associated with the variable consideration is
subsequently resolved.

606-10-32-12 To assess whether – and to what extent – it should apply this constraint, an entity
[IFRS 15.57] considers both the:
– likelihood of a revenue reversal arising from an uncertain future event; and
– potential magnitude of the revenue reversal when the uncertainty related to the
variable consideration has been resolved.
In making this assessment, the entity uses judgment, giving consideration to all
facts and circumstances – including the following factors, which could increase the
likelihood or magnitude of a revenue reversal.

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– The amount of consideration is highly susceptible to factors outside of the entity’s

influence – e.g. volatility in a market, the judgment or actions of third parties,
weather conditions and a high risk of obsolescence.
– The uncertainty about the amount of consideration is not expected to be resolved
for a long period of time.
– The entity’s experience with (or other evidence from) similar types of contracts is
limited, or has limited predictive value.
– The entity has a practice of either offering a broad range of price concessions
or changing the payment terms and conditions of similar contracts in similar
circumstances.
– The contract has a large number and a broad range of possible consideration
amounts.

606-10-32-14 This assessment needs to be updated at each reporting date.

[IFRS 15.59]

Difference between IFRS and US GAAP

Level of confidence – A difference in wording only

ASU 2014-09.BC208–BC212 The term ‘highly probable’ in the IFRS version of the new standard has been used
[IFRS 15.BC208–BC212] with the intention of converging with the term ‘probable’ as used in the US GAAP
version of the new standard. The IASB took a similar approach in IFRS 5.

Observations

Constraint assessment made against cumulative revenue

When constraining its estimate of variable consideration, a telecom entity
assesses the potential magnitude of a significant revenue reversal relative to the
cumulative revenue recognized – i.e. for both variable and fixed consideration,
rather than on a reversal of only the variable consideration. The assessment of
magnitude is relative to the transaction price for the contract, rather than the
amount allocated to the specific performance obligation.

Specified level of confidence included in constraint requirements

ASU 2014-09.BC209 The inclusion of a specified level of confidence – ‘probable’ (‘highly probable’
[IFRS 15.BC209] under IFRS) – clarifies the notion of whether a telecom entity expects a significant
revenue reversal. The use of existing defined terms should improve consistency
in application between preparers, and reduce concerns about how regulators
and users will interpret the requirement. This is an area of significant judgment,
and entities will need to align their judgmental thresholds, processes and internal
controls with these new requirements. Documenting these judgments will also
be critical.

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4.3 Consideration payable to a customer |

Constraint introduces an element of prudence

ASU 2014-09.BC207 The constraint introduces a downward bias into estimates, requiring entities
[IFRS 15.BC207] to exercise prudence before they recognize revenue – i.e. they have to make a
non-neutral estimate. This exception to the revenue recognition model, and to
the Boards’ respective conceptual frameworks’ requirement to make neutral
estimates, reflects the particular sensitivity with which revenue reversals are
viewed by many users and regulators.

Comparison with current IFRS

Estimation uncertainty limits rather than precludes revenue recognition

[IAS 18.14(c)] The constraint is a significant change in accounting for revenue under IFRS.
Under current IFRS, an entity recognizes revenue only if it can reliably estimate
the amount – so uncertainty over the outcome may preclude revenue recognition.
By contrast, the constraint sets a ceiling – it limits rather than precludes revenue
recognition.

Comparison with current US GAAP

Applying the constraint

SEC SAB Topic 13 Unlike current US GAAP, the new standard requires an entity to estimate variable
consideration and apply the constraint in determining the transaction price, rather
than assessing whether the amount is fixed or determinable. This will result in
earlier revenue recognition in a number of circumstances.

4.3 Consideration payable to a customer

Requirements of the new standard

606-10-32-25 Consideration payable to a customer includes cash amounts that an entity pays or
[IFRS 15.70] expects to pay to the customer, or to other parties that purchase the entity’s goods
or services from the customer. Consideration payable to a customer also includes
credits or other items – e.g. a coupon or voucher – that can be applied by the customer
against the amount owed to the entity or to other parties that purchase the entity’s
goods or services from the customer.
An entity evaluates the consideration payable to a customer to determine whether the
amount represents a reduction of the transaction price, a payment for distinct goods
or services, or a combination of the two.

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606-10-32-26 If the entity cannot reasonably estimate the fair value of the good or service received
[IFRS 15.71] from the customer, then it accounts for all of the consideration payable to the
customer as a reduction of the transaction price.

606-10-32-25 – 32-27
[IFRS 15.70–72] Does the consideration payable to a customer (or to the customer’s
customer) represent a payment for a distinct good or service?

Yes No

Can the entity reasonably No Consideration payable is

estimate the fair value of the good accounted for as a
or service received? reduction of the
transaction price and
Yes recognized at the later
of when:
Does the consideration payable  the entity recognizes
exceed the fair value of the distinct revenue for the
good or service? transfer of the related
Yes No goods or services
 the entity pays or
promises to pay the
 Excess of consideration Consideration consideration (which
payable is accounted for payable might also be implied)
as a reduction of the is accounted for
transaction price as a purchase
 Remainder is accounted from suppliers
for as a purchase from
suppliers

Example 35 – Goodwill credits

Customer C has a two-year network service contract with Telco A. In Month 6,

Telco A experiences two-days of service quality issues. Past experience indicates
that service quality issues are infrequent for Telco A.
In Month 7, Customer C receives a bill of 100 for Month 6 services. On receiving
the bill, Customer C calls Telco A and requests a credit for the service outage.
Telco A grants Customer C a credit of 5.
Because the credit can be applied against amounts owed to Telco A, it should
be accounted for as consideration payable to the customer. And, because the
payment is not in exchange for a distinct good or service, the consideration is
accounted for as a reduction of the transaction price.

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4.3 Consideration payable to a customer |

Telco A considers whether the credit could have been considered to be akin to
a discount or a price concession and therefore within the definition of variable
consideration to be estimated at the time of entering into the contract with
Customer C (i.e. at the beginning of Month 1). However, Telco A notes that
service quality issues are infrequent. When they do occur, Telco A generally
does not provide credits to customers. Furthermore, customers do not have an
expectation that they will receive such credits at contract inception. Thus, the
goodwill credit is not considered to be variable consideration to be estimated at
contract inception.
Telco A considers the guidance on allocating the change in transaction price
(see 5.3) and concludes that the credit is recognized as a reduction of revenue
to be estimated at contract inception only when Telco A grants Customer C the
credit (i.e. when Telco A promises to pay the consideration), which occurs in
Month 7.

Example 36 – Credits to a new customer

Customer C is currently in the middle of a two-year contract with Telco B,

his current wireless service provider, and would be required to pay an early
termination penalty if he terminated the contract today.
If Customer C cancels the existing contract with Telco B and signs a two-year
contract with Telco D for 80 per month, then Telco D promises at contract
inception to give Customer C a one-time credit of 200 (referred to as a ‘port-
in credit’). The amount of the port-in credit does not depend on the volume of
service subsequently purchased by Customer C, during the two-year contract.
Telco D determines that it should account for the port-in credit as consideration
payable to a customer. This is because the credit will be applied against amounts
owing to Telco D. Because Telco D does not receive any distinct goods or services
in exchange for this credit, it will account for it as a reduction of the transaction
price (i.e. 80 × 24 – 200). In this case, Telco D has promised the credit at
contract inception; therefore, the timing of actual payment is not relevant for the
purpose of determining the transaction price. Therefore, Telco D will recognize
the reduction in the transaction price as the promised goods or services
are transferred.

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Observations

Amounts payable to a customer may be either variable consideration or

consideration payable to a customer
Telecom entities provide credits to customers for a variety of reasons – e.g.
goodwill credits, port-in-credits, and credits resulting from pricing or billing
disputes. Many of these credits may be consideration payable to the customer.
The new standard states that consideration payable to a customer includes
amounts that a telecom entity pays, or expects to pay, to a customer or to
other parties that purchase the telecom entity’s goods or services from the
customer. The guidance on consideration payable to a customer states that it is
recognized at the later of when the telecom entity recognizes revenue or when
the telecom entity pays or promises to pay the consideration. However, because
consideration payable to a customer can be included in the transaction price, it
can also be a form of variable consideration.
Variable consideration is estimated and included in the transaction price at
contract inception, and remeasured at each subsequent financial reporting date.
This is different from the guidance on when to recognize consideration payable to
a customer.
This discrepancy puts pressure on the determination, at contract inception, of
whether the telecom entity intends to provide an incentive or the customer has a
reasonable expectation that an incentive will be provided.
This evaluation includes an assessment of the telecom entity’s past practice and
other activities that could give rise to an expectation at contract inception that
the transaction price includes a variable component. The consideration payable
to a customer guidance is used only when an entity has not promised a payment
to the customer at contract inception, either implicitly (including through its
customary business practice) or explicitly.

Guidance on consideration payable to a customer may apply to handset

trade-in programs
Telecom entities may purchase a new customer’s existing handset, when
entering a new wireless contract. In these cases, the telecom entity purchases
a distinct good from the customer, which is recorded in accordance with the
applicable inventory guidance. Accordingly, if the fair value of the handset is less
than its cost, then the difference is consideration payable to a customer and
reduces the transaction price.
See Section 11 for repurchases or trade-in of handsets sold by the telecom entity.

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4.3 Consideration payable to a customer |

Scope of consideration payable to a customer is wider than payments

made under the contract
Payments made to a customer that are not specified in the contract may still
represent consideration payable to a customer. A telecom entity will need
to develop a process for evaluating whether any other payments made to a
customer are consideration payable that requires further evaluation under the
new standard.
The determination of how broadly payments within a distribution chain should be
evaluated requires judgment. However, a telecom entity need not always identify
and assess all amounts ever paid to a customer to determine if they represent
consideration payable to a customer.

Payments through indirect channels require analysis

Many telecom entities enter into contractual arrangements with third-party
distributors or retailers that sell the entity’s equipment and services (often
referred to as an ‘indirect channel sale’). These arrangements often require
telecom entities to make payments to those third parties, which are sometimes
passed on to the end customer (see Section 10).

Comparison with current IFRS

Customer incentives

[IFRIC 13] Accounting for customer incentives and similar items is a complex area for
which there is limited guidance under current IFRS, other than specific guidance
on customer loyalty programs (see 10.4.2 in Issues In-Depth, Edition 2016).
Customer incentives take many forms, including cash incentives, discounts
and volume rebates, free or discounted goods or services, customer loyalty
programs, loyalty cards and vouchers.
Currently, there is some diversity in practice over whether incentives are
accounted for as a reduction in revenue, an expense or a separate deliverable (as
in the case of customer loyalty programs), depending on the type of incentive.
The requirements of the new standard may change the accounting for some
telecom entities.

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Comparison with current US GAAP

No rebuttable presumption

605-50-45-2 Under current US GAAP, cash payments made from an entity to a customer are
presumed to be a reduction of revenue. This presumption can be overcome if the
entity receives an identifiable benefit in exchange for the cash payment and the
fair value of the benefit can be reasonably estimated.
Unlike current US GAAP, the new standard requires an entity to evaluate whether
it receives distinct goods or services in exchange for its payment to a customer,
instead of whether the entity has received an identifiable benefit. Although these
concepts appear to be similar, the new standard does not contain the rebuttable
presumption that the payment is a reduction of revenue, which exists under
current US GAAP.

Other parties in the distribution chain

605-50-15-2 Similar to current US GAAP, the new standard requires an entity to consider other
parties in the distribution chain that purchase the entity’s goods or services from
the entity’s customer when applying the guidance on consideration payable to
the customer. However, judgment needs to be applied to evaluate the nature of
the transaction with a customer’s customer in order to conclude whether the
transaction should be included in the determination of the transaction price (see
Section 10).

Reduction of revenue may be recognized earlier in some cases

605-50-25-3 The new standard indicates that consideration payable to a customer might be
implied by the entity’s customary business practices. Under current US GAAP,
consideration payable to a customer is recognized at the later of when revenue
is recognized and when an offer is made to a customer – which some have
interpreted to be when an explicit offer is made to the customer. When an entity’s
promise to pay the consideration is implied by its customary business practices,
the consideration payable to a customer that is accounted for as a reduction of
revenue could be recognized earlier under the new standard than under current
US GAAP.

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4.4 Significant financing component |

4.4 Significant financing component

Requirements of the new standard

606-10-32-15 To estimate the transaction price in a contract, an entity adjusts the promised amount
[IFRS 15.60] of consideration for the time value of money if that contract contains a significant
financing component.
606-10-32-16 The objective when adjusting the promised amount of consideration for a significant
[IFRS 15.61] financing component is to recognize revenue at an amount that reflects what the
cash selling price of the promised good or service would have been if the customer
had paid cash at the same time as control of that good or service transferred to the
customer. The discount rate used is the rate that would be reflected in a separate
financing transaction between the entity and the customer at contract inception.
To make this assessment, an entity considers all relevant factors – in particular the:
– difference, if any, between the amount of promised consideration and the cash
selling price of the promised goods or services;
– combined effect of the expected length of time between the entity transferring the
promised goods or services to the customer and the customer paying for those
goods or services; and
– prevailing interest rates in the relevant market.

606-10-32-17 A contract does not have a significant financing component if any of the following
[IFRS 15.62] factors exists.

Factor Example

An entity receives an advance A prepaid phone card or customer

payment and the timing of the loyalty points
transfer of goods or services to a
customer is at the discretion of the
customer

A substantial portion of the A transaction whose consideration is a

consideration is variable, and sales-based royalty
the amount or timing of the
consideration is outside the
customer’s or entity’s control

The difference between the amount Protection from the counterparty not
of promised consideration and the completing its obligations under the
cash selling price of the promised contract
goods or services arises for non-
finance reasons

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606-10-32-19 The new standard indicates that:

[IFRS 15.64]
– an entity should determine the discount rate at contract inception, reflecting the
credit characteristics of the party receiving credit; and
– the discount rate should not generally be updated for a change in circumstances.
606-10-32-18 As a practical expedient, an entity is not required to adjust the transaction price for
[IFRS 15.63] the effects of a significant financing component if, at contract inception, the entity
expects the period between customer payment and the transfer of goods or services
to be one year or less.
For contracts with an overall duration greater than one year, the practical expedient
applies if the period between performance and payment for that performance is one
year or less.

Significant financing component?

Interest Practical expedient Interest

expense available income

Payment in Payment in
t-12 months t0 t+12 months
advance arrears

Performance

606-10-32-20 The financing component is recognized as interest expense (when the customer pays
[IFRS 15.65] in advance) or interest income (when the customer pays in arrears), and is presented
separately from revenue from customers.

Observations

Assessment is undertaken at the individual contract level

ASU 2014-09.BC234 A telecom entity determines the significance of the financing component at an
[IFRS 15.BC234] individual contract level, rather than at a performance obligation or portfolio level.
The individual contract level for a particular customer could consist of more than
one contract if the contract combination criteria in the new standard are met.
However, the Boards believe that it would be unduly burdensome to require
an entity to account for a financing component if the effects of the financing
component are not material to the individual contract, but the combined effects
for a portfolio of similar contracts would be material to the entity as a whole. An
entity should apply judgment in evaluating whether a financing component is
significant to the contract.
As a practical matter, it may be appropriate to perform the assessment for each
type of telecom offering rather than for each individual contract.

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4.4 Significant financing component |

Example 37 – Wireless installment plan with a two-year service

contract

Telco M enters into a contract with Customer J for a two-year wireless service
plan at 125 per month (which also represents its stand-alone selling price). In
the same contract, Customer J also purchases a handset and selects from the
following two payment options:
– up front for a price of 600, which is its stand-alone selling price; or
– 30 per month over the two-year contract term (i.e. an installment plan).
Telco M does not charge a stated interest rate to the customer for selecting an
installment plan for the handset. Telco M determines that the contract term for
accounting purposes is two years.

Does the installment plan include a significant financing component?

Total consideration Total consideration

paid if installment paid if installment
plan is selected plan is NOT selected

3,000 3,000
Wireless service (125 x 24 months) (125 x 24 months)
Handset 720 (30 x 24 months) 600

Total 3,720 3,600

The installment plan creates a difference in timing between performance and

payment, because the handset is delivered on day one and its payment occurs
over 24 months. Consequently, the installment plan represents a financing
transaction.
The contract does not specify an interest rate. However, there is a 120 difference
between the ‘cash selling price’ (i.e. 600) of the handset and the sum of the
payments under the installment plan (i.e. 720). Telco M therefore uses this
difference and the payment of 30 per month for 24 months to determine the
implicit interest rate in the contract, which is 19.7%. Telco M also concludes that
this rate reflects the rate that would be used by Telco M and Customer J in a
separate financing transaction.
Therefore, Telco M uses the financing component of 120, calculated above, to
determine if it is significant. Telco M determines that the relative value of the
financing component of 120 to the total contract price is approximately 3%.
Telco M concludes that a financing component that represents 3% of the contract
price is not significant to the contract as a whole and does not account for a
financing component for this contract.

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Example 38 – Wireless subsidized handset with a two-year service

contract

Telco R enters into a contract with Customer S for a two-year wireless service plan
at 85 per month (stand-alone selling price is 65 per month). In the same contract,
Customer S also purchases a handset for 130 (stand-alone selling price is 630).
Telco R determines that the contract term for accounting purposes is two years.
The transaction price and stand-alone selling prices in the contract are
summarized as follows.

Stand-alone selling
Transaction price price

Wireless service 2,040 1,560

(85 x 24 months) (65 x 24 months)

Handset 130 630

Total 2,170 2,190

There is a difference in timing between performance and payment because

the handset is delivered on day one and payment for at least a portion of that
handset occurs over 24 months. Consequently, the contract includes a financing
transaction.
However, because there is an overall discount on the bundle (2,170 transaction
price versus 2,190 stand-alone selling price), Telco R needs to allocate that
discount before determining whether the financing component is significant.
This is because it is necessary to determine the cash flows that relate specifically
to the handset. To allocate that discount, Telco R allocates the transaction price
based on relative stand-alone selling prices (see Section 5). This results in an
allocation of 624 to the handset and 1,546 to the wireless service.
The contract does not specify an interest rate. Telco R concludes that 7% reflects
the rate that would be used by Telco R and Customer S in a separate financing
transaction. (This rate is assessed as reasonable given the customer’s facts
and circumstances). Telco R then calculates the present value of the payment
stream related to the handset (i.e. 624 less 130 repaid over 24 months) using
the discount rate of 7%, which results in an imputed interest component of 33.
The relative value of the financing component of 33, compared with the total
contract price, is less than 2%. Telco R concludes that a financing component that
represents less than 2% of the contract is not significant and does not account
for a financing component in this contract.

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4.4 Significant financing component |

Example 39 – Month-to-month wireless contract with handset

installment plan

Continuing Example 9 in Step 1 (see 2.1.1). The facts of that example are repeated
here for convenience.
– Telco A enters into a one-month wireless contract with Customer C that
includes voice and data services and a handset. The monthly service fee
represents the price charged to customers that bring their own device (i.e. it
is the stand-alone selling price of the service). After Month 1, the service fee
is the then stand-alone selling price for that plan.
– Customer C makes no up-front payment for the phone but will pay its stand-
alone selling price by monthly installments over 24 months. There is no
additional interest charge for the financing. Full repayment of the remaining
balance of the phone becomes due if Customer C fails to renew the monthly
service contract. There is no other amount due if Customer C does not
renew.
In Example 9, it was concluded that the term of the contract is one month. Telco A
then needs to assess if the installment plan on the handset conveys a significant
financing component to the customer.
In making that assessment, Telco A observes that installment payments are
due immediately if the service contract is not renewed. Thinking about this
conditionality and the contract term together, Telco A may conclude that either
the financing component may not be significant or the practical expedient applies.
In such cases, Telco A would not adjust the transaction price for the financing
component. Telco A also needs to consider the applicable financial instrument
guidance in the measurement of any receivable resulting from the installment plan.

Observations

No significant financing component if the timing of transfer of goods or

services is at customer’s discretion
Customers pay for some types of goods or services in advance – e.g. prepaid
ASU 2014-09.BC233a
phone cards, gift cards and customer loyalty points – and the transfer of the
[IFRS 15.BC233(a)]
related goods or services to the customer is at the customer’s discretion. In
these cases, the contracts do not include a significant financing component,
because the payment term does not relate to a financing arrangement. Also, the
Boards believe that the costs of requiring an entity to account for the financing
component in these situations would outweigh any perceived benefits, because
the entity would not know – and would therefore have to continually estimate –
when the goods or services will transfer to the customer.

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Using an interest rate that is explicitly specified in the contract may not
always be appropriate
It may not always be appropriate to use an interest rate that is explicitly specified
ASU 2014-09.BC239–BC241
in the contract, because the entity might offer below-market financing as a
[IFRS 15.BC239–BC241]
marketing incentive. Consequently, an entity applies the rate that would be used
in a separate financing transaction between the entity and its customer that does
not involve the provision of goods or services.
This can lead to practical difficulties for telecom entities with large volumes of
customer contracts and/or multinational operations, because they will have
to determine a specific discount rate for each customer, class of customer or
geographic region of customer.

A contract with an implied interest rate of zero may contain a financing

component
When the consideration to be received for a good or service with extended
payment terms is the same as the cash selling price, the implied interest rate is
zero. However, a significant financing component may still exist.
For example, telecom entities sometimes offer a promotional incentive that
allows customers to buy handsets and pay the cash selling price over two years
after delivery. Judgment is required to evaluate whether in these circumstances
an entity is offering a discount or other promotional incentive for customers
who pay the cash selling price at the end of the promotional period equal to
the financing charge that would otherwise have been charged in exchange for
financing the purchase.
If the telecom entity concludes that financing has been provided to the customer,
then the transaction price is reduced by the implicit financing amount and interest
income is accreted. The implicit financing amount is calculated using the rate that
would be used in a separate financing transaction between the telecom entity
and its customer.

Presentation of interest income as revenue is not precluded

ASU 2014-09.BC247 The new standard does not preclude a telecom entity from presenting interest
[IFRS 15.BC247] income (when it has provided financing to the customer) as a type of revenue if
the interest represents income arising from ordinary activities – e.g. entities that
have significant lending operations.

Comparison with current IFRS

No specific guidance for advance payments

[IAS 18.11] Under current IFRS, an entity discounts consideration to a present value if
payment is deferred and the arrangement effectively constitutes a finance
transaction. However, current IFRS is silent on whether an entity adjusts
consideration if payment is received in advance.

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4.5 Noncash consideration |

Comparison with current US GAAP

Advance payments

835-30-15-3b Amounts that do not require repayment in the future, but that will instead be
applied to the purchase price of the property, goods or services involved, are
currently excluded from the requirement to impute interest. This is because the
liability – i.e. deferred revenue – is not a financial liability.
The requirements under the new standard are a change from current practice and
may particularly impact contracts in which payment is received significantly earlier
than the transfer of control of goods or services.
When the financing component is significant to a contract, an entity increases the
contract liability and recognizes a corresponding interest expense for customer
payments received before the delivery of the good or service. When it satisfies
its performance obligation, the entity recognizes more revenue than the cash
received from the customer, because the contract liability has been increased by
the interest expense that has accreted.

4.5 Noncash consideration

Requirements of the new standard

606-10-32-21 – 32-22 Noncash consideration received from a customer is measured at fair value. If an entity
[IFRS 15.66–67] cannot make a reasonable estimate of the fair value, then it refers to the estimated
selling price of the promised goods or services.

606-10-32-23 Estimates of the fair value of noncash consideration may vary. Although this may be
[IFRS 15.68] due to the occurrence or non-occurrence of a future event, it can also vary due to the
form of the consideration – e.g. variations due to changes in the price per share if the
noncash consideration is an equity instrument.
When the fair value of noncash consideration varies for reasons other than the form of
the consideration, those changes are reflected in the transaction price and are subject
to the guidance on constraining variable consideration.

US GAAP only
606-10-32-21 Noncash consideration is measured at contract inception.

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| 4 Step 3: Determine the transaction price

Comparison with current IFRS

Changes in the measurement threshold

[IAS 18.12, IFRS 2] The requirement to measure noncash consideration at fair value is broadly similar
to the current IFRS requirements. However, under current IFRS, when the fair
value of the goods or services received cannot be measured reliably, the revenue
is measured at the fair value of the goods or services given up, adjusted by any
cash transferred. By contrast, under the new standard, the entity measures
the transaction price at the stand-alone selling price of the goods or services
transferred.
Furthermore, the threshold for using the fair value of the noncash consideration
as the measurement basis is that the entity can ’reliably measure’ the fair value,
not ’reasonably estimate’ it.

Barter transactions involving advertising services

[SIC-31] Currently, revenue from advertising barter transactions is measured at the fair
value of the advertisement services given, if their fair value can be measured
reliably. Furthermore, an exchange of similar advertisement services is not a
transaction that generates revenue under current IFRS.
The new standard does not contain any specific guidance on the accounting
for barter transactions involving advertising services; therefore, the general
principles for measuring consideration apply.

Transfer of assets from customers

[IFRIC 18] Unlike current IFRS, the new standard does not contain any specific guidance
on transfers of items of property, plant and equipment that entities receive from
their customers. However, if a telecom entity recognizes revenue on the transfer,
then there is no change in the measurement attribute, and the entity continues to
measure revenue at the fair value of the item transferred.

Comparison with current US GAAP

Exchanges of non-monetary assets

845-10-30-3 – 30-4 The accounting for non-monetary transactions based on fair value under the
new standard is broadly consistent with the current US GAAP on non-monetary
transactions, except for those in which the consideration received from the
customer is a share-based payment.
One of the requirements for a contract to exist under the new standard is that it
has commercial substance, which would result in non-monetary exchanges being
accounted for at fair value. Under the new standard, if an entity cannot reasonably
estimate the fair value of the noncash consideration received, then it looks to the
estimated selling price of the promised goods or services.

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4.5 Noncash consideration |

However, under current US GAAP, rather than looking to the estimated selling
price of the promised goods or services, the telecom entity uses the fair value
of either the assets received or the assets relinquished in the exchange – unless
the fair value of the assets cannot be determined within reasonable limits, or the
transaction lacks commercial substance.

Use of the estimated selling price

Topic 845, 605-20-25-14 – 25-18 The alternative of using the estimated selling price of the promised goods or
services if the fair value of the noncash consideration cannot be reasonably
estimated may result in differences from current practice if an entity uses the
stand-alone selling price rather than following the guidance for other fair value
measurements.
In addition, the new standard eliminates the specific requirements on
determining whether sufficient evidence exists – including prescriptive guidance
requiring sufficient recent cash transactions to support the selling price – when
recognizing revenue on exchanges of advertising space and exchanges involving
barter credit transactions. Rather, under the new standard a telecom entity
recognizes revenue based on the fair value of the services received if that fair
value can be reasonably estimated in a barter transaction involving advertising
services. If not, the entity recognizes revenue based on the estimated stand-
alone selling price of the services provided.
However, a telecom entity will need to conclude that the contract has commercial
substance – i.e. that it will change the amount, timing or uncertainty of the
contract’s future cash flows – in order to conclude that a contract exists;
otherwise, no revenue is recognized because the requirements for a contract
under the new standard are not met.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

5 Step 4: Allocate the

transaction price to
the performance
obligations in the
contract
Overview
606-10-32-28, 32-30 The transaction price is allocated to each performance obligation – generally
[IFRS 15.73, 75] each distinct good or service – to depict the amount of consideration to which a
telecom entity expects to be entitled in exchange for transferring the promised
goods or services to the customer.
606-10-32-29 A telecom entity generally allocates the transaction price to each performance
[IFRS 15.74] obligation in proportion to its stand-alone selling price. However, when specified
criteria are met, a discount or variable consideration is allocated to one or more,
but not all, performance obligations.
In wireless transactions, when subsidized handsets are bundled with service
plans, the new allocation requirements will often result in higher equipment
revenue and lower service revenue compared with existing practices.
The telecom industry also may face challenges in determining stand-alone selling
prices due to variations in plans and fast-changing conditions in the market.
606-10-32-31 This step of the revenue model comprises two sub-steps that a telecom entity
[IFRS 15.76] performs at contract inception.

Determine stand-alone Allocate the

selling prices transaction price
(see 5.1) (see 5.2)

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5.1 Determine stand-alone selling prices |

5.1 Determine stand-alone selling prices

Requirements of the new standard

606-10-32-32 The ‘stand-alone selling price’ is the price at which an entity would sell a promised
[IFRS 15.77] good or service separately to a customer. The best evidence of this is an observable
price from stand-alone sales of the good or service to similarly situated customers.
A contractually stated price or list price may be the stand-alone selling price of that
good or service, but this is not presumed to be the case.

606-10-32-33 If the stand-alone selling price is not directly observable, then the entity estimates the
[IFRS 15.78] amount using a suitable method, as illustrated below. In limited circumstances, an
entity may estimate the amount using the residual approach.

606-10-32-34
[IFRS 15.79] Allocate based on relative stand-alone selling prices
Performance obligation 1 Performance obligation 2 Performance obligation 3

Determine stand-alone selling prices

Is an observable price available?

Yes No

Use the observable price Estimate price

Adjusted Residual
Expected cost
market approach
plus a margin
assessment (only in limited
approach
approach circumstances)

606-10-32-33 An entity considers all information that is reasonably available when estimating
[IFRS 15.78] a stand-alone selling price – e.g. market conditions, entity-specific factors and
information about the customer or class of customer. It also maximizes the use of
observable inputs and applies consistent methods to estimate the stand-alone selling
price of other goods or services with similar characteristics.

606-10-32-34 The new standard does not preclude or prescribe any particular method for estimating
[IFRS 15.79] the stand-alone selling price for a good or service when observable prices are not
available, but describes the following estimation methods as possible approaches.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

Adjusted market Evaluate the market in which goods or services are sold
assessment and estimate the price that customers in the market
approach would be willing to pay

Expected cost Forecast the expected costs of satisfying a performance

plus a margin obligation and then add an appropriate margin for that
approach good or service

Residual Subtract the sum of the observable stand-alone selling

approach (limited prices of other goods or services promised in the
circumstances) contract from the total transaction price

606-10-32-43 After contract inception, an entity does not reallocate the transaction price to reflect
[IFRS 15.88] subsequent changes in stand-alone selling prices.

Observations

New standard does not contain a reliability threshold

Under the new standard, the stand-alone selling price is determined at contract
inception for each performance obligation. There are no circumstances in which
revenue recognition is postponed because it is difficult to determine a stand-
alone selling price.
If an observable price is available, then it is used to determine the stand-alone
selling price; if not, then the telecom entity is required to estimate the amount.
The new standard does not require that the amount can be ‘reliably’ estimated,
nor does it prescribe another threshold. A telecom entity is required to maximize
the use of observable inputs, but in all circumstances will need to arrive at a
stand-alone selling price and allocate the transaction price to each performance
obligation in the contract.

Observable prices may often be available for consumer telecom contracts

In a number of cases, observable prices will be available for telecom goods and
services, and there will be no need to estimate their stand-alone selling price.
Examples of observable prices can include published prices for equipment sold
separately (either by the telecom entity or third parties) or ‘bring your own device’
or ‘SIM only’ prices for comparable network service plans.

Observable prices may also be different by class of customer (see 8.1). For
example, telecom entities may segment their customer base in various ways,
such as consumer or enterprise, multi-line users or single-line users, or according
to other factors such as geography or distribution channel.

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5.1 Determine stand-alone selling prices |

Judgment may be required for more complex telecom contracts

ASU 2014-09.BC269 Prices may not always be observable, particularly for enterprise and wholesale
[IFRS 15.BC269] contracts. This is because many contracts are priced based on individual customer
needs rather than standard pricing. In addition, there can be a significant variation
in price for a good or service between customers. In these case, judgment will be
required in estimating the stand-alone selling price.
Some telecom entities may already have robust processes in place to determine
selling prices, including vendor-specific objective evidence (VSOE). However,
others will need to develop new processes with appropriate internal controls for
documenting observable selling prices, and estimating stand-alone selling prices
of goods or services that are not typically sold separately or for which there is
significant price variation.
The following framework may be a useful tool for estimating and documenting
the stand-alone selling price and for establishing internal controls over the
estimation process.

Gather all reasonably available data points

Consider adjustments based on market conditions and entity-specific factors

Consider the need to stratify selling prices into meaningful groups

Weigh available information and make the best estimate

Establish processes for ongoing monitoring and evaluation

If there is a range of observable prices, then a stated contract price within

the range may be an acceptable stand-alone selling price

In some cases, a telecom entity may sell a good or service separately for a
range of observable prices. When this is the case and the stated contract price
is within a sufficiently narrow range of observable selling prices, it may be
appropriate to use a stated contract price as the estimated stand-alone selling
price of a good or service.
To determine whether this is appropriate, a telecom entity assesses whether
an allocation of the transaction price based on such an estimate would meet
the allocation objective (see 5.2). As part of this assessment, a telecom entity
considers all information that is reasonably available (including market conditions,
entity-specific factors, information about the customer or class of customer, how
wide the range of observable selling prices is and where the stated price falls
within the observable range).

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

Using a range to estimate stand-alone selling prices

When estimating stand-alone selling prices, it may be acceptable to select from
a range of prices, particularly when stand-alone selling prices would be expected
to vary for similar types for customers. A range has to be narrow and based on
an analysis that maximizes observable inputs and supports an assertion that any
price within that range would be a valid pricing point if the performance obligation
were sold on a stand-alone basis.
It would not be appropriate to establish a range by determining an estimated
stand-alone selling price and then arbitrarily adding a range of a certain
percentage on either side of the point estimate to create a reasonable range of
estimated selling prices.

Some techniques for estimating the stand-alone selling price of telecom

goods and services may not be appropriate
The residual approach for determining the stand-alone selling price is generally
not appropriate for telecom goods and services. This is because observable
prices are usually available. Although observable prices may change rapidly, they
are not highly variable or uncertain when comparing similar goods and services.
Furthermore, when observable prices are not available, the cost plus margin
approach is likely to be appropriate only in cases where the expected costs of
satisfying the performance obligation are identifiable. This may apply to some
enterprise and wholesale landline and internet contracts.

Stand-alone selling prices of telecom services and equipment may need to

be reassessed frequently
Stand-alone selling prices for a particular good or service may change over time
due to changes in market conditions and entity-specific factors. Although the
estimated stand-alone selling prices for previously allocated arrangements are
not revised, new arrangements should reflect current, reasonably available
information, including changes in pricing, customer base or product offerings.
The extent of the monitoring process and the frequency of necessary changes
to estimated stand-alone selling prices will vary based on the nature of the
performance obligations, the markets in which they are being sold and various
entity-specific factors.
Given the frequency and magnitude of rate plan price changes, particularly in
consumer markets, the process for reviewing and updating stand-alone selling
prices will require careful planning and implementation.

Regulatory and other fees

Many telecom entities itemize and bill customers for regulatory and other
government fees. If the telecom entity concludes that these fees are part of the
transaction price (see Section 4), then it should also determine whether they
should be included in the stand-alone selling price of the relevant service.

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5.1 Determine stand-alone selling prices |

Comparison with current IFRS

Introduction of specific guidance

[IFRIC 12.13, IFRIC 13.5–7, IFRIC 15.8] Current IFRS is largely silent on the allocation of consideration to components of
a transaction. However, recent interpretations include guidance on allocation for
service concession arrangements, customer loyalty programs, and agreements
for the sale of real estate. Under these interpretations, consideration can be
allocated to:
– components with reference to the relative fair values of the different
components (relative fair value method); or
– the undelivered components measured at their fair value, with the remainder
of the balance allocated to components that were delivered up front (residual
method).
The new standard introduces guidance applicable to all in-scope contracts with
customers. It therefore enhances comparability and brings more rigor and
discipline to the process of allocating the transaction price.

Similar emphasis on use of observable inputs

[IAS 18.IE11, IFRIC 13.AG3] Under current IFRS, our view is that a cost plus a margin approach should
generally be applied only when it is difficult to measure the fair value of a
component based on market inputs because there are few inputs (see 4.2.60.110
of Insights into IFRS, 13th Edition). This emphasis on the use of available market
inputs – e.g. sales prices for homogeneous or similar products – is consistent
with the new standard’s requirement to maximize the use of observable inputs.

Comparison with current US GAAP

No specified hierarchy for non-observable inputs

605-25, ASU 2014-09.BC274–BC276 Currently, arrangement consideration is allocated to all deliverables meeting the
separation criteria on the basis of their relative selling price, unless some other
specific guidance is applicable – e.g. software arrangements and separately
priced warranty contracts. In addition, selling prices are currently determined
using a specified hierarchy of evidence as follows:
– VSOE of the selling price, if it exists;
– third-party evidence of the selling price, if VSOE does not exist; or
– the best estimate of the selling price, if neither VSOE nor third-party evidence
exists.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

However, the new standard does not prescribe a hierarchical order or a particular
method for estimating the stand-alone selling price when observable prices
are not available. For example, even when observable prices are not consistent
enough to constitute VSOE, a telecom entity will still consider those observable
transactions in estimating the stand-alone selling price of the good or service.
Furthermore, a telecom entity may be able to use an alternative estimation
method, even if third-party evidence of the selling price is available, as long as the
approach taken maximizes the use of observable inputs.

The new standard applies the same approach regardless of the type of
transaction or industry, and therefore differs from certain transaction- and
industry-specific guidance in US GAAP.

5.2 Allocate the transaction price

Requirements of the new standard

606-10-32-31 At contract inception, the transaction price is generally allocated to each performance
[IFRS 15.76] obligation on the basis of relative stand-alone selling prices. However, when specified
criteria are met, a discount (see 5.2.1) or variable consideration (see 5.4.2.2 in Issues
In-Depth, Edition 2016) is allocated to one or more, but not all, of the performance
obligations in the contract.
606-10-32-43 – 32-44 After initial allocation, changes in the transaction price are allocated to satisfied and
[IFRS 15.88–89] unsatisfied performance obligations on the same basis as at contract inception, subject
to certain limited exceptions (see 5.3).

Example 40 – Allocation of the transaction price

Telco A enters into a 12-month wireless contract in which Customer C is provided

with a handset and a voice and data plan (the wireless plan) for a price of 35 per
month. Telco A has identified the handset and the wireless plan as separate
performance obligations.
Telco A sells the handset separately for a price of 200, which provides observable
evidence of a stand-alone selling price. Telco A also offers a 12-month service
plan without a phone that includes the same level of services for a price of 25 per
month. This pricing is used to determine the stand-alone selling price of the
wireless plan as 300 (25 x 12 months).

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5.2 Allocate the transaction price |

The transaction price of 420 (35 x 12 months)(a) is allocated to the performance

obligations based on their relative stand-alone selling prices as follows.

Transaction
Performance Stand-alone Selling price
obligation selling prices price ratio allocation Calculation

Handset 200 40% 168 (420 x 40%)

Wireless plan 300 60% 252 (420 x 60%)

Total 500 100% 420

At the inception of the contract, the following accounting entry is made.

Debit Credit

Contract asset 168

Equipment revenue 168

The difference between the revenue recognized and the transaction price is
recorded as a contract asset because Telco A does not have the legal right to
invoice the amount at contract inception.

When the monthly service fee is billed, this entry is made.

Debit Credit

Receivable 35
Service revenue (252 ÷12) 21
Contract asset (168 ÷12) 14

Note

a. In this example, Telco A does not adjust the consideration to reflect the time value of
money. This means Telco A concluded that the transaction price does not include a
significant financing component or Telco A elected to use the practical expedient (see 4.4).

Example 41 – Allocation of the transaction price in a wireless

contract: Minimum commitment approach

Continuing Example 29 in Step 3 (see 4.1). The fact pattern is repeated here for
convenience.
Telco T enters into a 24-month wireless voice and data services contract with
Customer C. At contract inception, Telco T transfers a handset to Customer C and
Customer C pays 200 to Telco T, which is less than the stand-alone selling price of
the handset.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

The 24-month contract includes 1,000 monthly minutes of voice and 1GB of data
usage for a monthly fee of 80 (Service Package A). During the two‑year term,
Customer C may decrease the service package to 500 monthly minutes of voice
and 500MB of data usage for a monthly fee of 60 (Service Package B). Telco T also
sells an ‘add-on’ package of 500 minutes of voice and 500MB of data usage for
20 per month that can be added or dropped monthly at the customer’s option.
Customer C cannot reduce the service package below 60 without terminating the
contract and incurring substantive termination penalties. In addition, Customer C
can only reduce the service package in the month following that in which he
provides notice.
Note that this example does not assess whether the contract includes a significant
financing component.
The stand-alone selling prices of the handset and the service packages are as
follows.

Stand-alone
Performance obligation selling prices
Handset 600
Service Package A (monthly fee) 75
(1,000 monthly minutes of voice; 1GB of data usage)
Service Package B (monthly fee) 55
(500 monthly minutes of voice; 500MB of data usage)

After analyzing the terms and conditions of the contract, Telco T concludes that
using the contractual minimum commitment to determine the transaction price
would be appropriate.
Using this approach, the transaction price is determined using 80 for Package
A in the first month, then 60 per month for Service Package B. Therefore, the
transaction price is 1,660 (200 for the handset; 1,460 (80 + 60 x 23 months) for
the services). This amount is allocated to the handset and the service as follows.

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5.2 Allocate the transaction price |

Stand-alone Transaction
selling price
Performance obligation prices allocation Calculation

Handset 600 513 [(600 ÷ 1,940) x

1,660]
Service in Month 1 (based 75 64 [(75 ÷ 1,940) x
on Service Package A) 1,660]
Service in remaining 1,265 1,083 [(1,265 ÷ 1,940)
23 months (based on (approx 47 per x 1,660]
Service Package B) month)

Total (for purposes of

allocation) 1,940 1,660

This approach views the ability to upgrade to Service Package A as a customer

option or right to purchase additional distinct services for 20 per month (see
Section 8). Accordingly, assuming no change to the plan, service revenue
recognized in Month 2 is 67 (47 + 20).

Example 42 – Allocation of the transaction price in a wireless

contract: Contracted service amount

Continuing Example 30 in Step 3 (see 4.1). Fact pattern is repeated here for
convenience.
Telco X enters into a 24-month wireless voice and data services contract with
Customer F. At contract inception, Telco X transfers a handset to Customer F, and
Customer F pays 200 to Telco X, which is less than the stand-alone selling price of
the handset.
The 24-month contract includes 800 monthly minutes of voice and 1GB of data
usage for a monthly fee of 70. During the two-year term, Customer F cannot
change the service package without terminating the contract and incurring
substantive termination penalties.
However, Telco X has in limited circumstances allowed customers to downgrade
their service without paying a termination penalty.
Note that this example does not assess whether the contract includes a
significant financing component.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

The stand-alone selling prices of the handset and the service packages are as
follows.

Stand-alone
Performance obligation selling prices
Handset 600
Wireless service (1,000 monthly minutes of voice; 1GB of 65
data usage)

After analyzing the terms and conditions of the contract, Telco X concludes that
using the contracted service amount to determine the transaction price would
be appropriate.
Using this approach, the transaction price is determined using 70 per month for
the service. Therefore, the transaction price is 1,880 (200 for the handset; 1,680
(70 x 24 months) for the services). This amount is allocated to the handset and the
service as follows.

Stand-alone Transaction
Performance selling price
obligation prices allocation Calculation

Handset 600 522 [(600 ÷ 2,160) x

1,880]
Service (24 months) 1,560 1,358 [(1,560 ÷ 2,160)
(or 56.58 per x 1,880]
month)

Total (for purposes of

allocation) 2,160 1,880

606-10-25-12 – 25-13 If changes to this plan do not result in a contract termination but instead in a
[IFRS 15.20–21] contract modification, then the telecom entity should consider the guidance on
contract modifications (see Section 7 in Issues In-Depth, Edition 2016).

Comparison with current IFRS

Removal of the contingent cap

[IFRS 15.BC287–BC293] Under current IFRS, many telecom entities have analogized the contingent
cap approach in current US GAAP when accounting for bundled arrangements
that include subsidized handsets. For those entities, the effect of the new
requirements on allocating the transaction price will be the same as under
US GAAP (see below).

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Comparison with current US GAAP

Removal of the contingent cap

ASU 2014-09.BC287–BC293, 605-25-30 The allocation of arrangement consideration to delivered items is currently
limited to amounts of revenue that are not contingent on a telecom entity’s future
performance (often referred to as ‘the contingent cap’). Currently, many wireless
contracts are subject to the contingent cap methodology. That methodology
limits the amount of revenue recognized for handsets that are delivered at the
beginning of the contract to the amount of cash received when the remaining
payments under the arrangement are contingent on the ongoing network service.
The new standard does not have such a limitation: the full estimated transaction
price – which includes all amounts, including contingent amounts, to which the
telecom entity expects to be entitled – is allocated on a relative stand-alone
selling price basis to each separate performance obligation.
However, the recognition of variable consideration may be constrained (see 4.2).
Nevertheless, the new standard’s removal of the contingent cap may accelerate
the recognition of contingent or variable consideration. In previously constrained
arrangements, telecom entities will allocate more transaction price to the
handset, which will ultimately result in more revenue being recognized when the
handset is transferred to the customer. This allocation will also reduce the amount
of monthly service revenue recognized in bundled arrangements.

5.2.1 Allocating a discount

Requirements of the new standard

606-10-32-36 If the sum of the stand-alone selling prices of a bundle of goods or services exceeds
[IFRS 15.81] the promised consideration in a contract, then the discount is generally allocated
proportionately to all of the performance obligations in the contract. However, this
does not apply if there is observable evidence that the entire discount relates to only
one or more of the performance obligations.
606-10-32-37 This evidence exists, and a discount is allocated entirely to one or more, but not all, of
[IFRS 15.82] the performance obligations, if the following criteria are met:
– the entity regularly sells each distinct good or service, or each bundle of distinct
goods or services, in the contract on a stand-alone basis;
– the entity also regularly sells, on a stand-alone basis, a bundle (or bundles) of some
of those distinct goods or services at a discount to the stand-alone selling prices of
the goods or services in each bundle; and
– the discount attributable to each bundle of goods or services is substantially the
same as the discount in the contract, and an analysis of the goods or services in
each bundle provides observable evidence of the performance obligation(s) to
which the entire discount in the contract belongs.

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Example 43 – Bundle discount allocated to all performance

obligations in a contract

606-10-32-37 Telco B offers phone, internet and television services to residential customers, at
[IFRS 15.82] 20, 30 and 40 per month, respectively. If a customer contracts for either phone
and internet or internet and television services, a discount of 5 is given by Telco
B. If the customer takes all three services, then Telco B gives a discount of 10.
Because the discount attributable to each bundle is not the same and the analysis
of the services in each bundle does not provide observable evidence that the
discount relates to just one or two services, the discount of 10 is allocated to all
three services as shown below.

Performance Stand-alone Allocation of

obligation selling prices discount Price allocation

Phone 20 10 x 20 ÷ 90 18
Internet 30 10 x 30 ÷ 90 27
Television 40 10 x 40 ÷ 90 35

Example 44 – Discount allocated entirely to one or more, but not all,

performance obligations in a contract

606-10-55-259 – 55-264 Telco C enters into a contract with a residential customer to sell phone, internet
[IFRS 15.IE167–IE172] and television services for a total amount of 120. Telco C regularly sells the
products individually for the following prices.

Stand-alone
Product selling prices

Phone 40
Internet 55
Television 45

Total 140

Telco C also regularly sells phone and internet services together for 75.
The contract includes a discount of 20 on the overall transaction (140 - 120),
which is allocated proportionately to the three services in the contract when
applying the relative stand-alone selling price method. However, because Telco C
regularly sells phone and internet services as a bundle for 75 (at a 20 discount
compared with their total selling price of 95 (55 + 40)) and television services for
45, it has evidence that the entire discount should be allocated to the phone and
internet services.

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5.2 Allocate the transaction price |

The discount of 20 is individually allocated to those two services with reference

to their relative stand-alone selling prices as follows.

Performance Stand-alone Selling Price

obligation selling prices price ratio allocation Calculation

Phone 40 42% 32 (75 x 42%)

Internet 55 58% 43 (75 x 58%)

Total 95 100% 75

Telco C will recognize revenue of 32 for phone, 43 for internet and 45 for
television services.

Observations

Analysis required when a large number of goods or services are bundled in

various ways
Some arrangements involve several different goods or services that may be sold
in various bundles. In this case, a telecom entity may need to consider numerous
possible combinations of products to determine whether the entire discount
in the contract can be allocated to a particular bundle. This may represent a
challenge for telecom entities, given the number of marketing offers and the
frequency with which they are changed.
However, this analysis is required only if the telecom entity regularly sells
each good or service – or bundle of goods or services – on a stand-alone basis.
Therefore, if the telecom entity regularly sells only some of the goods or services
in the contract on a stand-alone basis, then the criteria for allocating the discount
entirely to one or more, but not all, of the performance obligations are not met
and further analysis is not required.

Determination of ‘regularly sells’ will be a key judgment

Under the guidance on allocating a discount entirely to one or more performance
obligations, a bundle of goods or services has to be regularly sold on a stand-
alone basis. A telecom entity may need to establish a policy to define ‘regularly
sells’. This may include considering volume and frequency.
The telecom entity will need processes and related controls to monitor sales
transactions and determine which bundles are regularly sold.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

Discounts can impact the stand-alone selling price

The telecom entity should consider the number and regularity of discounts
offered to customers to determine if some of those discounts should reduce the
stand-alone selling price of a specific product or service in the bundle.

Guidance on allocating a discount will typically apply to contracts with at

least three performance obligations
ASU 2014-09.BC283 Also, the discount in the contract has to be substantially the same as the discount
[IFRS 15.BC283] attributable to the bundle of goods or services under the guidance on allocating a
discount entirely to one or more performance obligations. As a result, a telecom
entity will typically be able to demonstrate that the discount relates to two or
more performance obligations, but it will be difficult to have sufficient evidence
to allocate the discount entirely to a single performance obligation. Therefore, this
provision is not likely to apply to arrangements with fewer than three performance
obligations.

Comparison with current IFRS

New prescriptive guidance

There is no specific guidance on allocating a discount in current IFRS. If a telecom

entity allocates consideration according to the relative fair value of components,
then it effectively allocates a discount to all components in the arrangement.
If a telecom entity uses the residual method to allocate consideration, then it
effectively allocates the discount to the delivered component. The new standard
introduces specific guidance on allocating discounts.

Comparison with current US GAAP

Discount may be allocated to undelivered items

Generally, a telecom entity cannot attribute a discount in a contract to one or

more separate deliverables, other than when the residual method is used – e.g.
in software arrangements – and the entire discount is attributed to the delivered
items. However, the allocation of a discount under the new standard is not
restricted to particular industries or circumstances – so if the criteria are met,
a discount is allocated entirely to one or more performance obligations in a
contract, regardless of whether they are delivered or undelivered items.

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5.3 Changes in the transaction price |

5.3 Changes in the transaction price

Requirements of the new standard

606-10-32-42 – 32-45 After contract inception, the transaction price may change for various reasons –
[IFRS 15.87–90] including the resolution of uncertain events or other changes in circumstances that
affect the amount of consideration to which an entity expects to be entitled.
In most cases, these changes are allocated to performance obligations on the same
basis as at contract inception; however, changes in the transaction price resulting
from a contract modification are accounted for under the new standard’s contract
modifications guidance (see Section 7 in Issues In-Depth, Edition 2016). If a change
in the transaction price occurs after a contract modification, then it is allocated to the
performance obligations in the modified contract – i.e. those that were unsatisfied or
partially unsatisfied immediately after the modification – unless the:
– change is attributable to an amount of variable consideration that was promised
before the modification; and
– modification was accounted for as a termination of the existing contract and
creation of a new contract.

606-10-32-44 A change in the transaction price is allocated to one or more distinct goods or services
[IFRS 15.89] only if specified criteria are met (see 5.4.2.2 in Issues In-Depth, Edition 2016).
606-10-32-43 Any portion of a change in transaction price that is allocated to a satisfied performance
[IFRS 15.88] obligation is recognized as revenue – or as a reduction in revenue – in the period of the
transaction price change.

Example 45 – Discretionary credit: Service quality issue

Telco F provides a customer with a credit in the current month due to a short
period of service quality issues experienced in the prior month (often referred
to as a ‘goodwill credit’). Telco F determines that this results in a change in
the transaction price, rather than variable consideration (see 4.2). Because
the goodwill credit relates to a satisfied performance obligation, the credit is
recognized in its entirety in the month in which it is granted (i.e. when Telco F
promises to pay the consideration).

Example 46 – Discretionary credit: Retention

Telco G grants a one-time credit of 50 to a customer in Month 14 of a two-year

contract. The credit is discretionary and is granted as a commercial gesture, not
in response to prior service issues (often referred to as a ‘retention credit’). The
contract includes a subsidized handset and a voice and data plan.

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| 5 Step 4: Allocate the transaction price to the performance obligations in the contract

Telco G does not regularly provide those credits and therefore customers do not
expect them to be granted. Therefore, Telco G concludes that this is a change in
the transaction price and not variable consideration (see 4.2). Because the credit
does not relate to a satisfied performance obligation, the change in transaction
price resulting from the credit is accounted for as a contract modification and
recognized over the remaining term of the contract (see Section 7 in Issues In-
Depth, Edition 2016).
If, in this example, rather than providing a one-time credit, Telco G grants a
discount of 5 per month for the remaining contract term, Telco G would also
conclude that it is a change in the transaction price. It would apply the contract
modification guidance and recognize the credit over the remaining term of the
contract (see Section 7 in Issues In-Depth, Edition 2016).

Observations

Change in transaction prices may also be assessed as variable consideration

Judgment is required at contract inception to determine if customer credits
constitute variable consideration (see 4.2). Customer credits that are not variable
consideration constitute a change to the transaction price and are accounted for
under the contract modification guidance. The accounting varies depending on
whether the credit relates to satisfied or unsatisfied performance obligations,
such as telecom services, at the time the credit is granted.

Comparison with current IFRS

Introduction of guidance on reallocation

Current IFRS is largely silent on the allocation of revenue to components, and

is therefore silent on the reallocation of revenue. Under the new standard, if
some of the performance obligations to which the transaction price was initially
allocated have already been satisfied when the change in transaction price takes
place, then this results in an adjustment to the amount of revenue recognized to
date – including revenue on completed performance obligations.

Comparison with current US GAAP

Introduction of guidance on reallocation

ASU 2014-09.BC287–BC293, 605-25-30 The allocation of arrangement consideration to delivered items is currently
limited to amounts of revenue that are not contingent on a telecom entity’s
future performance. Therefore, there is limited current guidance on changes in
contingent amounts. The new standard introduces more discipline around the
accounting for changes in transaction price.

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6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation |

6 Step 5: Recognize
revenue when or as
the entity satisfies a
performance obligation
Overview

A telecom entity recognizes revenue when or as it satisfies a performance

obligation by transferring a good or service to a customer, either at a point in time
(when) or over time (as).
Generally, a telecom entity recognizes revenue for equipment sales at a point in
time, usually at contract inception, when control of the equipment is transferred
to the customer. Service revenue is recognized over time as the services are
provided. This is not in itself a change from current practice. However, the
allocation methodology in the new standard (see Section 5) is a change in
practice. This change will often increase the amount of revenue allocated to, and
accelerate revenue recognition on, the equipment, particularly for subsidized
wireless handsets.
Options for additional services, such as usage, generally result in revenue
recognition only once the customer exercises the option (see Section 8).

Requirements of the new standard

606-10-25-24 At contract inception, an entity first evaluates whether it transfers control of the good or
[IFRS 15.32] service over time – if not, then it transfers control at a point in time.

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

Is the performance obligation satisfied over time

– i.e. is one of the criteria met? (see 6.2)

Yes No

Recognize revenue at the point in

Identify an appropriate method to
time at which control of the good
measure progress (see 6.3)
or service is transferred (see 6.4)

Apply that method to recognize

revenue over time

Comparison with current IFRS

Over-time recognition retained, but with new criteria

[IAS 11, IAS 18.21] Construction contracts, and some contracts for the rendering of services, are
currently accounted for under the stage-of-completion method – e.g. some
telecom enterprise contracts that include the construction of networks or
facilities that will be owned by the customer. The new standard may result in
a broadly similar profile of revenue to that under current stage-of-completion
accounting, but introduces new criteria to determine when revenue should be
recognized over time.
Some contracts that are currently accounted for under the stage-of-completion
method may now require revenue to be recognized on contract completion.
However, for other contracts, over-time recognition may be required for the first
time under the model.

Comparison with current US GAAP

Over-time recognition retained, but with criteria rather than guidance

based on type of activity

605-35-25-57 Currently, construction-type contracts in the scope of Subtopic 605-35 are

generally accounted for under the percentage-of-completion method and,
although service contracts do not fall in the scope of Subtopic 605‑35, revenue
from services is generally recognized under the proportional performance or
straight-line method.

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6.1 Transfer of control |

Under the new standard, a telecom entity currently applying these methods can
continue to recognize revenue over time only if one or more of three criteria are
met (see 6.2). Unlike current industry- and transaction-specific guidance, the
requirements in Step 5 of the model are not a matter of scope, but rather are
applied consistently to each performance obligation in a contract. When applying
the new criteria, some telecom entities may determine that revenue currently
recognized at a point in time should be recognized over time, or vice versa.

6.1 Transfer of control

Requirements of the new standard

606-10-25-23 – 25-24 A good or service is transferred to a customer when the customer obtains control
[IFRS 15.31–32] of it. ‘Control’ refers to the customer’s ability to direct the use of, and obtain
substantially all of the remaining benefits from, an asset. It also includes the ability to
prevent other entities from directing the use of, and obtaining the benefits from, an
asset. Potential cash flows that are obtained either directly or indirectly – e.g. from the
use, consumption, sale or exchange of an asset – are benefits of an asset.

Control is …

the ability – the customer has a present right

to direct the use – the right enables the customer to:

of
- deploy the asset in its activities
- allow another entity to deploy the asset in its activities
- prevent another entity from deploying the asset

and obtain – the right also enables the customer to obtain potential
the remaining cash flows directly or indirectly – for example, through:
benefits from
- use of the asset
- consumption of the asset
- sale or exchange of the asset
- pledging the asset
- holding the asset

… an asset.

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

Observations

Use of control concept to recognize revenue aligns with the accounting for
assets
ASU 2014-09.BC118 The new standard is a control-based model. First, a telecom entity determines
[IFRS 15.BC118] whether control of the good or service transfers to the customer over time based
on the criteria in the new standard and, if it does, the pattern of that transfer. If it
does not, then control of the good or service transfers to the customer at a point
in time, with the notion of risks and rewards being retained only as an indicator of
the transfer of control (see 6.4).
Assessing the transfer of goods or services by considering when the customer
obtains control may result in different outcomes – and therefore significant
differences in the timing of revenue recognition. The Boards believe that it can
be difficult to judge whether the risks and rewards of ownership have been
transferred to a customer, so applying a control-based model may result in more
consistent decisions about the timing of revenue recognition.
The new standard extends a control-based approach to all arrangements,
including service contracts. The Boards believe that goods and services are
assets – even if only momentarily – when they are received and used by the
customer. The new standard’s use of control to determine when a good or service
is transferred to a customer is consistent with the current definitions of an asset
under both US GAAP and IFRS, which principally use control to determine when
an asset is recognized or derecognized.

New conceptual basis for revenue recognition

The new standard takes a conceptually different approach to revenue recognition
from current US GAAP and IFRS. Although the basic accounting outcomes –
recognition of revenue at a point in time or over time – are similar, they may
apply in different circumstances. However, this change is not expected to have a
significant effect for most telecom arrangements because telecom services are
consumed as they are provided, and revenue is currently recognized when the
services are provided.

Comparison with current IFRS

Move away from a risk-and-reward approach

[IAS 11.23, IAS 18.14, 20, IFRS 15.BC118, Currently, revenue from the sale of goods that are in the scope of IAS 18 is
IFRIC 15] recognized based on when, among other criteria, the telecom entity has
transferred to the buyer the significant risks and rewards of ownership. Under this
approach, which is unlike the new standard, revenue is typically recognized at the
point in time at which risks and rewards pass, rather than control transfers.

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6.1 Transfer of control |

IFRIC 15 introduced the notion that the criteria for recognizing a sale of goods
could also be met progressively over time, resulting in the recognition of revenue
over time. However, this approach is not generally applied, except in the specific
circumstances envisaged in IFRIC 15.
For contracts for the rendering of services that meet the over-time criteria in the
new standard, revenue is recognized with reference to the stage of completion
of the transaction at the reporting date – i.e. measuring the telecom entity’s
performance in satisfying its performance obligation.
The new standard applies a control-based approach (whereby control can be
transferred either over time or at a point in time) to all arrangements, regardless
of transaction or industry type.

Comparison with current US GAAP

Move away from a risk-and-reward approach

SEC SAB Topic 13, ASU 2014-09.BC118, Unlike the new standard, revenue from the sale of goods is currently recognized
605-35-25 when the telecom entity has transferred the significant risks and rewards of
ownership to the buyer. This is evidenced by:
– persuasive evidence of an arrangement;
– the occurrence of delivery or performance;
– a fixed or determinable sales price; and
– reasonable assurance of collectibility.
Under current US GAAP, revenue from service contracts is generally recognized
under the proportional performance or straight-line method. The new standard
applies a control-based approach to all arrangements, regardless of transaction or
industry type.

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

6.2 Performance obligations satisfied over time

Requirements of the new standard

606-10-25-24, 25-27 For each performance obligation in a contract, an entity first determines whether
[IFRS 15.32, 35] the performance obligation is satisfied over time – i.e. control of the good or service
transfers to the customer over time – using the following criteria.

Criterion Example

The customer simultaneously receives and Routine or recurring telecom

1 consumes the benefits provided by the services – e.g. network
entity’s performance as the entity performs services

The entity’s performance creates or

Building a telecom network on
2 enhances an asset that the customer
a customer’s premises
controls as the asset is created or enhanced

The entity’s performance does not create

an asset with an alternative use to the entity
Building an asset to a
(see 5.5.2.1 in Issues In-Depth, Edition
customer’s specifications,
3 2016) and the entity has an enforceable right
such as a call center built on
to payment for performance completed
the telecom entity’s premises
to date (see 5.5.2.2 in Issues In-Depth,
Edition 2016)

606-10-25-27, 25-30 – 25-31 If one or more of these criteria are met, then the entity recognizes revenue over time,
[IFRS 15.35, 38–39] using a method that depicts its performance – i.e. the pattern of transfer of control
of the good or service to the customer. If none of the criteria is met, then control
transfers to the customer at a point in time and the entity recognizes revenue at that
point in time (see 6.4).

Criterion 1
606-10-55-5 – 55-6, ASU 2014-09.BC125–BC128 A customer simultaneously receives and consumes the benefits of the entity’s
[IFRS 15.B3–B4, BC125–BC128] performance as the entity performs if another entity would not need to substantially
reperform the work that the entity has completed to date.
When determining whether another party would not need to substantially reperform,
the entity also presumes that another party would not have the benefit of any asset
that the entity presently controls and would continue to control if that other party took
over the performance obligation.

Criterion 2
606-10-55-7 In evaluating whether a customer controls an asset as it is created or enhanced, an
[IFRS 15.B5] entity considers the guidance on control in the new standard, including the indicators
of the transfer of control (see 6.4).

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6.2 Performance obligations satisfied over time |

Criterion 3
606-10-25-28 In assessing whether an asset has an alternative use, at contract inception an entity
[IFRS 15.36] considers its ability to readily direct that asset in its completed state for another use,
such as selling it to a different customer.

606-10-55-6, 55-8 – 55-10, ASU 2014-09.BC127 Applying Criteria 1 and 3

[IFRS 15.B4, B6–B8, BC127]
Potential contractual restrictions or practical restrictions may prevent the entity from
transferring the remaining performance obligation to another entity (Criterion 1) or
directing the asset for another use (Criterion 3). The new standard provides guidance
on whether these facts or possible termination impact the assessment of those
criteria. It provides the following guidance on the assumptions that an entity should
make when applying Criteria 1 and 3.

Consider Consider Consider

contractual practical possible
Determining whether… restrictions? limitations? termination?

… another entity would

not need to substantially No No Yes
reperform (Criterion 1)

… the entity’s performance

does not create an asset with Yes Yes No
an alternative use (Criterion 3)

Example 47 – Assessing whether telecom network services meet the

over-time criteria

ASU 2014-09.BC126 Telco M enters into a contract to provide network services to Customer C.
[IFRS 15.BC126] Telco M needs to assess whether the network service revenue should be
recognized at a point in time or over time. Telco M first considers whether the
network services meet Criterion 1 and notes that:
– Customer C will receive and consume the benefits of the network services as
they are delivered; and
– if Customer C changed service providers, then the new service provider would
not need to reperform the work performed to date by Telco M.
Since it is necessary to meet only one of the criteria to recognize revenue over
time, Telco M concludes that it should recognize revenue for the network services
over time.

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

Observations

Telecom network services typically meet Criterion 1 and are satisfied over
time
Telecom network services, such as wireless, landline, cable or internet, typically
meet Criterion 1 because the customer simultaneously receives and consumes
the benefits provided by the telecom entity. Therefore, telecom network services
are satisfied over time.
For telecom services other than network services, a telecom entity should
consider whether another provider taking over the contract would need to
reperform past services.
Criterion 1 involves a hypothetical assessment of what another telecom
entity would need to do if it took over the remaining performance obligation.
Accordingly, contractual restrictions or practical limitations, which would
otherwise prevent the telecom entity from transferring the performance
obligation to another telecom entity, are not relevant when assessing whether
the telecom entity has transferred control of the goods or services provided
to date.

Enterprise contracts require careful assessment of all over-time criteria

Enterprise contracts are complex and a careful analysis of all over-time criteria is
required. For instance, the construction of networks or call centers for customers
will require detailed analysis to determine if either Criterion 2 or 3 are met. Once
that analysis is complete, telecom entities can determine if the performance
obligation is satisfied over time or at a point in time. Criteria 2 and 3 are not
discussed further in this publication. See 5.5.2 in Issues In-Depth, Edition 2016,
for further detail on applying Criteria 2 and 3.

Comparison with current IFRS

Applying the new criteria may alter the timing of revenue recognition

[IAS 11, IAS 18, IFRIC 15] Under current IFRS, there are three circumstances in which revenue is recognized
over time:
– the contract is a construction contract in the scope of IAS 11; this is the case
when, and only when, the contract has been specifically negotiated for the
construction of an asset or assets;
– the contract is for the sale of goods under IAS 18, and the conditions for the
recognition of a sale of goods are met progressively over time; and
– the contract is for the rendering of services.

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6.3 Measuring progress toward complete satisfaction of a performance obligation |

By contrast, the new standard introduces new concepts and uses new wording
that telecom entities need to apply to the specific facts and circumstances of
individual performance obligations. Subtle differences in contract terms could
result in different assessment outcomes – and therefore significant differences in
the timing of revenue recognition compared with current practice.

Comparison with current US GAAP

Some similarities, but new concepts to be applied

Criteria 1 and 3 of the new standard will require telecom entities to think
differently about the satisfaction of performance obligations. In general,
the impact of applying the criteria will vary depending on relevant facts and
circumstances, and subtle differences in contract terms could result in different
assessment outcomes. These different assessments could create significant
differences in the timing or pattern of revenue recognition.

6.3 Measuring progress toward complete

satisfaction of a performance obligation
Requirements of the new standard
606-10-25-31 – 25-35, 55-17 – 55-21 For each performance obligation that is satisfied over time, an entity applies a single
[IFRS 15.39–43, B15–B19] method of measuring progress toward complete satisfaction of the obligation. The
objective is to depict the transfer of control of the goods or services to the customer.
To do this, an entity selects an appropriate output or input method. It then applies that
method consistently to similar performance obligations and in similar circumstances.

Method Description Examples

Output Based on direct – Surveys of performance to

measurements of the value date
to the customer of goods or
– Appraisals of results achieved
services transferred to date,
relative to the remaining – Milestones reached
goods or services promised
– Time elapsed
under the contract

Input Based on an entity’s efforts – Resources consumed

or inputs toward satisfying
– Costs incurred
a performance obligation,
relative to the total expected – Time elapsed
inputs to the satisfaction of
– Labor hours expended
that performance obligation

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

606-10-55-18 As a practical expedient, if an entity has a right to invoice a customer at an amount

[IFRS 15.B16] that corresponds directly with its performance to date, then it can recognize revenue
at that amount. For example, in a services contract an entity may have the right
to bill a fixed amount for each unit of service provided or for each time period (e.g.
each month).

606-10-25-36 – 25-37 An entity recognizes revenue over time only if it can reasonably measure its progress
[IFRS 15.44–45] toward complete satisfaction of the performance obligation. However, if the entity
cannot reasonably measure the outcome but expects to recover the costs incurred in
satisfying the performance obligation, then it recognizes revenue to the extent of the
costs incurred.

The new standard contains guidance on measuring and adjusting measures of

progress when input methods are used – e.g. uninstalled materials. See 5.5.3.3 in
Issues In-Depth, Edition 2016 for further information.

Example 48 – Monthly prepaid wireless contract

Telco M enters into a monthly prepaid contract with wireless Customer B for
200 minutes per month of voice services. Customer B pays 30 per month in
advance. Customer B can use the minutes at any time during the month. Once
the 200 minutes are used, the handset remains connected to the network and
can accept calls. That is, incoming calls are not included in the 200 minutes
per month.
Telco M first concludes that Customer B simultaneously receives and consumes
the benefits from the services as it is provided and thus the performance
obligation is satisfied over time. Furthermore, Telco M determines that the
nature of its promise is to provide network services to Customer B throughout
the month because incoming calls are not included in the 200 minutes.
Consequently, the number of minutes used does not appear to appropriately
depict the satisfaction of that promise. Instead, the more appropriate measure
of progress appears to be time elapsed. Telco M therefore recognizes revenue of
30 evenly throughout the month.

Example 49 – Wireless service contract with rollover minutes feature

Telco N enters into a two-year wireless contract with Customer C for prepaid
voice services. The voice plan allows the Customer C to use 600 minutes each
month for incoming and outgoing calls. After the 600 minutes are used, the
handset can no longer be used to make or receive calls during that month. If
Customer C does not use all of the minutes, then Customer C is able to roll over
the unused minutes to the subsequent month. For the purposes of this example,
breakage is ignored.

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6.3 Measuring progress toward complete satisfaction of a performance obligation |

Telco N concludes that Customer C simultaneously receives and consumes the

benefits of the minutes, and thus the performance obligation is satisfied over
time. Due to the ability of the customer to roll over the unused minutes each
month, progress toward complete satisfaction of the performance obligation is
measured based on the number of minutes used each month.
Any minutes that are unused at the end of each month will be accounted for as a
contract liability because Customer C pays in advance for the following month’s
600 minutes.

Example 50 – Enterprise service contract with usage fee treated as

variable consideration

Continuing Example 31 in Step 3 (see 4.2). Fact pattern is repeated here for
convenience.
Telco A enters into a contract with enterprise Customer C to provide call center
services. These services include providing dedicated infrastructure and staff to
stand ready to answer calls. Telco A receives consideration of 0.50 per minute for
each call answered.
Telco A has separately concluded that its performance obligation is the overall
service of standing ready to provide call center services each day, rather than
each call answered. Furthermore, Telco A has concluded that the per-minute fee
is variable consideration. In assessing the appropriate pattern of transfer (i.e.
measure of progress in satisfying the performance obligation), Telco A considers
whether the variable consideration needs to be estimated at contract inception.
Because Customer C simultaneously receives and consumes the benefits of
the service of standing ready each day the service is provided, the performance
obligation is satisfied over time. Telco A also observes that the arrangement
meets the series guidance because each day (or each month) of standing ready to
provide call center services is distinct, is essentially the same and has the same
pattern of transfer.
Telco A expects its performance to be fairly consistent during the contract and
observes that the pricing in this contract is consistent with pricing in similar
contracts with similar customers. Telco A also observes that the variable
consideration for each day (i.e. the per-minute fee) relates to the entity’s effort to
satisfy the promise of standing ready each day. Furthermore, Telco A observes
that it has a right to consideration from the customer for each day of minutes
used (for practical reasons these amounts may be invoiced on a monthly basis).
In addition, Telco A concludes that the per-minute usage corresponds directly
with the value to the customer of the service provided by Telco A (i.e. the service
of standing ready). Therefore, Telco A concludes that revenue can likely be
recognized based on the contractual right to bill.

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

Observations

Determining which measure of progress to apply is not a free choice

ASU 2014-09.BC159 The new standard requires a telecom entity to select a method that is consistent
[IFRS 15.BC159] with the objective of depicting its performance. A telecom entity therefore does
not have a free choice of which method to apply to a given performance obligation
– it needs to consider the nature of the good or service that it promised to transfer
to the customer (see 3.4.2). Accordingly, judgment is required when identifying
an appropriate method of measuring progress.

Most telecom network services will be recognized using an output

measure
Output measures such as minutes, texts, amount of data consumed or time
elapsed will usually prove to be appropriate measures of progress for telecom
network services. Telecom entities need to consider carefully the nature of
the promises in the contract – e.g. those promises made in prepaid contracts
or contracts with rollover minutes. When the billing to the customer does not
directly correspond to the telecom entity’s performance in these types of plans,
the telecom entity may need to adjust any contract assets, contract liabilities or
accounts receivable related to the contract.

Some telecom network services may be recognized as they are billed

606-10-55-18 Telecom services billings are often based on output measures, as described
[IFRS 15.B16] above. However, as a practical expedient, a telecom entity may recognize
revenue using the amount that it has the right to invoice, if this amount directly
corresponds with the value that is transferred to the customer. The amount that
the telecom entity has the right to invoice does not need to be based on a fixed
amount per unit for this practical expedient to be applied.
If a contract includes fixed fees in addition to per-unit invoicing, substantive
contractual minimums or payments to the customer such as rebates, discounts
or signing bonuses, then the use of the practical expedient may be precluded
because the invoiced amounts do not correspond to the value that the customer
receives. Furthermore, to apply the practical expedient to a contract, all goods
and services in the contract will need to qualify.
When the practical expedient is used, the telecom entity is not required to
disclose the remaining transaction price to be received under the contract.
See 12.1.3 in Issues In-Depth, Edition 2016 for further details on disclosures
required by the new revenue standard.

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6.4 Performance obligations satisfied at a point in time |

Customers’ unexercised rights (breakage)

606-10-55-46 – 55-49 Telecom entities may receive a nonrefundable prepayment from a customer that
[IFRS 15.B44–B47] gives the customer the right to receive goods or services in the future. Common
telecom examples include rollover minutes (see Example 49) or prepaid phone
cards. Typically, some customers do not exercise their right – this is referred
to as ‘breakage’. The new standard contains guidance to determine the timing
of revenue related to breakage (see 10.5 in Issues In-Depth, Edition 2016 for
further discussion).

6.4 Performance obligations satisfied at a point in

time
Requirements of the new standard

606-10-25-30 If a performance obligation is not satisfied over time, then an entity recognizes revenue
[IFRS 15.38] at the point in time at which it transfers control of the good or service to the customer.
The new standard includes indicators of when the transfer of control occurs.

Indicators that control has passed include a customer having ...

... a present ... risks and

... physical ... accepted
obligation ... legal title rewards of
possession the asset
to pay ownership

Relevant considerations include the following.

– In some cases, possession of legal title is a protective right and may not coincide
with the transfer of control of the goods or services to a customer – e.g. when a
seller retains title solely as protection against the customer’s failure to pay.
– In consignment arrangements (see Section 10 and 5.5.6 in Issues In-Depth, Edition
2016) and some repurchase arrangements (see Section 11), an entity may have
transferred physical possession but still retain control. Conversely, in bill-and-hold
arrangements (see 6.5 and 5.5.7 in Issues In-Depth, Edition 2016), an entity may
have physical possession of an asset that the customer controls.
– When evaluating the risks and rewards of ownership, an entity excludes any risks
that give rise to a separate performance obligation in addition to the performance
obligation to transfer the asset.
– An entity needs to assess whether it can objectively determine that a good or
service provided to a customer conforms to the specifications agreed in a contract
(see 6.5 and 5.5.8 in Issues In-Depth, Edition 2016).

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| 6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation

Example 51 – Determining when control transfers

On the last day of Month 1, Customer L enters into a two-year contract with
Telco M for internet protocol television (IPTV) service. Customer L also purchases
a set-top box and installation services from Telco M. Telco M has determined
that the IPTV service, the set-top box and the installation are three separate
performance obligations (see Section 3).
The installation will be performed in Month 2, and IPTV service will commence on
that date. Customer L pays for and takes the set-top box on the day on which he
entered into the arrangement (i.e. on the last day of Month 1).
Revenue for the set-top box is recognized in Month 1 because Customer L has
obtained control of the box on the day the arrangement is agreed to by both
parties. Telco M would consider whether there are any rights of return when
determining the amount of revenue to be recognized for the set-top box. Revenue
from the installation service is recognized in Month 2 and revenue from the
IPTV service is recognized over the two-year period commencing in Month 2
(assuming the services are provided) because that is when the performance
obligation is satisfied.

Observations

Judgment may be required to determine the point in time at which control

transfers
The indicators of transfer of control are factors that are often present if
ASU 2014-09.BC155
a customer has control of an asset; however, they are not individually
[IFRS 15.BC155]
determinative, nor are they a list of conditions that have to be met. The new
standard does not suggest that certain indicators should be weighted more
heavily than others, nor does it establish a hierarchy that applies if only some of
the indicators are present. However, it remains possible that in some facts and
circumstances certain indicators will be more relevant than others and so carry
greater weight in the analysis.
Judgment may be required to determine the point in time at which control
transfers. This determination may be particularly challenging when there are
indicators that control has transferred alongside ‘negative’ indicators suggesting
that the telecom entity has not satisfied its performance obligation.

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6.5 Enterprise contracts – Bill-and-hold and customer acceptance |

Potential challenges may exist in determining the accounting for some

delivery arrangements
Revenue is not currently recognized if a telecom entity has not transferred to the
SEC SAB Topic 13
customer the significant risks and rewards of ownership. For product sales, the
[IAS 18.14]
risks and rewards are generally considered to be transferred when a product is
delivered to the customer’s site – i.e. if the terms of the sale are ‘free-on-board’
(FOB) destination, then legal title to the product passes to the customer when
the product is handed over to the customer. When a product is shipped to the
customer FOB shipping point, legal title passes and the risks and rewards are
generally considered to have transferred to the customer when the product is
handed over to the carrier. However, careful analysis of facts and circumstances
is required.

Indirect channels
Many telecom entities sell through distributors and resellers. These transactions
will require judgment to determine if the transfer of control occurs on delivery to
the intermediary or when the good is resold to the end customer (see Section 10).

6.5 Enterprise contracts – Bill-and-hold and

customer acceptance

Observation

606-10-55-81 Large enterprise telecom contracts often include bill-and-hold arrangements and
[IFRS 15.B79] the related issues around customer acceptance, usually for equipment sales.
Bill-and-hold arrangements occur when a telecom entity bills a customer for a
product that it transfers at a point in time, but retains physical possession of the
product until it is transferred to the customer at a future point in time – e.g. due
to a customer’s lack of available space for the product or delays in production
schedules.
606-10-55-82 – 55-83 To determine the point in time at which a customer obtains control and therefore
[IFRS 15.B80–B81] the point in time at which the performance obligation is satisfied, the telecom
entity considers several indicators of the transfer of control, including whether
the customer has accepted the goods or services (see 5.5.8 in Issues In-Depth,
Edition 2016). For further guidance on bill-and-hold criteria, see 5.5.7 in Issues
In-Depth, Edition 2016).

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| 7 Contract costs

7 Contract costs
Overview

The new standard does not seek to provide comprehensive guidance on the
accounting for contract costs. In many cases, telecom entities continue to apply
existing cost guidance under US GAAP and IFRS. The new standard includes
specific guidance in the following areas.

Costs of obtaining a contract Costs of fulfilling a contract

(see 7.1) (see 7.2)

Contract
costs
Amortization of assets Impairment of assets
arising from costs to obtain arising from costs to obtain
or fulfill a contract or fulfill a contract
(see 7.3) (see 7.4)

Telecom entities incur a number of different customer acquisition costs when a

customer enters into a contract. Some of these costs – e.g. sales commissions –
meet the criteria for recognition as an asset as a cost to obtain a contract.
For costs capitalized under the new standard, telecom entities are also
required to determine the appropriate amortization period, taking into account
expectations about the renewal of contracts.

7.1 Costs of obtaining a contract

Requirements of the new standard

340-40-25-1 – 25-2 An entity capitalizes incremental costs to obtain a contract with a customer – e.g.
[IFRS 15.91–92] sales commissions – if it expects to recover those costs.
340-40-25-4 However, as a practical expedient, an entity is not required to capitalize the
[IFRS 15.94] incremental costs to obtain a contract if the amortization period for the asset is one
year or less. The costs of fulfilling a contract that meet the capitalization criteria are
not eligible for the practical expedient, which can only be applied to the costs of
obtaining a contract.

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7.1 Costs of obtaining a contract |

340-40-25-3 Costs that will be incurred regardless of whether the contract is obtained – including
[IFRS 15.93] costs that are incremental to trying to obtain a contract, are expensed as they are
incurred, unless they meet the criteria to be capitalized as fulfillment costs (see 7.2).
An example of such costs are costs to prepare a bid, which are incurred even if the
entity does not obtain the contract.

Would costs be incurred No Are the incremental costs

regardless of whether the expected to be recovered?
contract is obtained?

Yes
Yes

Do they meet the criteria Yes

to be capitalized as Capitalize costs
fulfillment costs?

No

Expense costs as they are No

incurred

Example 52 – Costs incurred to obtain a contract

Telco E enters into a two-year wireless contract with Customer C that includes
voice and data services. The contract is signed at one of Telco E’s stores and
the sales employee receives a commission of 30 when the customer signs
the contract. Telco E has also incurred costs related to a two-week advertising
campaign. On signing the contract, the customer indicates that he came into the
store in response to this advertising campaign.
The commission paid to the sales employee is an incremental cost to obtain the
contract with the customer because it is payable only on successfully obtaining
the contract. Because the contract term is more than 12 months, the practical
expedient does not apply. Telco E therefore capitalizes the sales commission of
30 as a cost of obtaining the contract. For discussion of the amortization period,
see 7.3.
In contrast, the advertising costs, although they are associated with trying to
obtain the contract, are not incremental costs of obtaining the contract. That
is, the advertising costs would have been incurred even if no new customer
contracts were acquired. Consequently, Telco E expenses the advertising costs as
they are incurred.

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| 7 Contract costs

Example 53 – Dealer commission with clawback provision

Telco E enters into a month-to-month wireless contract with Customer C that

includes voice and data services. The contract is obtained through Dealer D, who
is entitled to a commission of 20 from Telco E. The commission is paid on contract
commencement but is clawed back and refunded to Telco E if the customer
cancels the service within the first three months.
Telco E concludes that Dealer D has completed its obligation, which is to sign
the customer up for the service, even though the customer must continue
to receive the service until the end of Month 3 for the commission to be fully
earned. Dealer D’s commission is an incremental cost to obtain the contract with
Customer C. Therefore, Telco E recognizes the commission of 20 as an asset at
contract inception. For discussion of the amortization period and the application
of practical expedient, see 7.3.
Telco E assesses the contract cost asset for impairment together with its right to
a refund on the commission paid to Dealer D.

Example 54 – Commission paid on renewals after the initial contract

is obtained

Telco A pays its sales employees a commission of 30 for each new two-year
wireless contract entered into with a customer. Telco A also pays 10 to sales
employees each time the customer renews a contract for an additional two years.
Telco A needs to assess if and when these commissions should be capitalized as
costs to obtain a contract.
At contract inception, Telco A concludes that the commission of 30 is an
incremental cost of obtaining the initial contract because the cost would not have
been incurred if the contract had not been obtained. The contract between Telco A
and the customer creates no enforceable rights and obligations beyond the initial
two-year period. Because there is no contract beyond the two-year period, Telco A
does not capitalize at contract inception future commissions that may be payable
on renewal (i.e. the renewal commission of 10).
On contract renewal, Telco A incurs an additional commission of 10. This
commission of 10 is an incremental cost of obtaining the second contract
because the cost would not have been incurred if the contract had not been
renewed.
Telco A therefore capitalizes both commissions when they are incurred. For
discussion of the amortization period, see 7.3 and Example 57.

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7.1 Costs of obtaining a contract |

Observations

New requirement to capitalize costs of obtaining a contract creates a

change in practice
The requirement to capitalize the incremental costs of obtaining a contract, such
as employee and dealer commissions, will be a change in practice for many
telecom entities that currently expense those costs as they are incurred.
Similarly, telecom entities that currently capitalize the costs to obtain a contract
will need to assess whether their current capitalization policy is consistent with
the new requirements, particularly for enterprise contracts.
Costs incurred before or at contract inception that do not qualify as costs to
obtain a contract may, however, meet the criteria to be capitalized as fulfillment
costs (see 7.2).

Not all subscriber acquisition and retention costs qualify for capitalization
Although many telecom entities track subscriber acquisition and retention costs,
not all of these costs will qualify for capitalization as costs to obtain a contract.
Costs to obtain a contract must be incremental. This is the case if those costs
would not have been incurred unless the contract was obtained. Costs incurred in
trying to obtain the contract should be expensed. For example, a telecom entity
will need to identify bid costs that are incremental to obtaining the contract and
exclude bid costs that are incurred regardless of whether the contract is obtained.
Likewise, a telecom entity that capitalizes both incremental and allocable costs of
obtaining a contract will need to revise its accounting policy to capitalize only the
incremental costs of obtaining a contract.
Discounts or other items provided to the customer in obtaining a contract are
not capitalized under the cost guidance. For example, handset subsidies or free
goods and services provided to the customer should be accounted for as either
a reduction of the transaction price (see Section 4) or a separate performance
obligation (see Section 3).

Limited use of the practical expedient in the telecom sector

The capitalization of costs to obtain a contract is required under the new standard
unless the amortization period of the asset is one year or less. Because the
amortization period typically includes specific anticipated renewals (see 7.3), it
is likely that telecom entities will not be able to apply the practical expedient to
expense costs of obtaining a contract as they are incurred.

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| 7 Contract costs

Capitalizing commission when associated liability is accrued

In some cases, an additional commission may be payable, or the original
commission amount adjusted, at a future date. Examples include commissions:
– paid for renewal of the contract;
– earned on contract modifications;
– contingent on future events;
– subject to clawback; and
– that are tiered, subject to a threshold.
In these cases, a telecom entity considers the enforceable rights and obligations
created by the arrangement to determine when the liability is accrued and
whether to capitalize a commission, and in what amount.
In more complex scenarios, a telecom entity focuses on whether its obligation to
pay a commission meets the definition of a liability. This is particularly important
when considering commission structures that include thresholds – e.g. a
commission amount is payable only if cumulative sales within a given period
exceed a specified amount, or the commission rate varies with cumulative sales.
In general, if a telecom entity recognizes a liability to pay commission that
qualifies for recognition as the cost of obtaining a contract, then the entity
recognizes an asset at the same time.
270-10-45 This focus on whether the obligation to pay commission meets the definition of a
[IAS 34.29, IFRIC 21.12, 13(a)] liability may result in differences between IFRS and US GAAP, due to underlying
differences in liability accounting in the two frameworks. Differences may also
occur in interim financial statements because IFRS generally takes a discrete
approach to interim reporting (with some exceptions). However, US GAAP views
the interim period as a portion of the annual period. This can potentially result in
different liability recognition and measurement at interim reporting dates.
For example, a commission payable on reaching a specified threshold for which
the threshold is expected to be met only in the third quarter is not recognized
at the end of the first quarter under IFRS, because the entity does not have a
present obligation at that date. Conversely, under US GAAP a portion of the
expected commission is recognized as an expense in the first quarter to reflect
the portion of the expense that relates to that period.

Judgment required for multiple-tier commissions

Some telecom entities pay sales commissions on a multiple-tier system,
whereby the salespersons receive commission on all contracts executed with
customers, and their direct supervisor receives commission based on the sales
of the employees that report to them. Alternatively, commission structures may
have thresholds, where the commission increases depending on the number
or dollar value of contracts signed. Telecom entities should use judgment when
determining whether the supervisor’s commission is incremental to obtaining a
specific contract or contracts. The incremental cost is the amount of acquisition
cost that can be directly attributable to an identified contract or contracts.

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7.1 Costs of obtaining a contract |

Many sales commission models are based on multiple criteria, not just the
acquisition of an individual contract – e.g. overall contract performance. It will
require careful analysis to determine what portion of the supervisor’s commission
is an acquisition cost that is directly related to a specific contract or contracts.

Benefits paid on employee commissions require analysis

To the extent that commissions generate fringe benefits, such as pension
benefits or other bonuses, telecom entities need to determine if these costs
should be capitalized as part of the commission cost. Some fringe benefits
cannot be capitalized because they are not incremental – e.g. car allowances –
because they are incurred regardless of the contracts obtained. However, to the
extent that fringe benefits are incremental – e.g. employer pension contributions
or payroll taxes calculated on the employee’s commission – that amount is
included in the capitalized cost.

Portfolio approach may be useful in accounting for contract acquisition

costs
Many telecom entities have a high volume of low-value commission costs that
may be difficult to account for on an individual basis. In those situations, it may be
helpful to adopt a portfolio approach for those costs if the criteria for the portfolio
approach are met (see 1.4). A telecom entity needs to consider the guidance on
amortization of those costs when defining the portfolios.

Comparison with current IFRS

Capitalizing costs to obtain a contract

[IAS 38, IU 05-09] There is no specific guidance on the accounting for the costs to obtain a contract
with a customer in current IFRS. The IFRS Interpretations Committee discussed
the treatment of selling costs and noted that only in limited circumstances will
direct and incremental recoverable costs to obtain a specifically identifiable
contract with a customer qualify for recognition as an intangible asset in the
scope of IAS 38.
[IAS 11.21] In addition, when a contract is in the scope of IAS 11, costs that relate directly
to the contract and are incurred in securing it are included as part of the contract
costs if they can be separately identified and reliably measured, and it is probable
that the contract will be obtained.

[IAS 38] The new standard therefore brings clarity to this topic. It also introduces a new
cost category – an asset arising from the capitalization of the incremental costs to
obtain a contract – which is in the scope of the new standard and not in the scope
of IAS 38.

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| 7 Contract costs

Comparison with current US GAAP

Policy election
SEC SAB Topic 13 Under current SEC guidance, a telecom entity can elect to capitalize direct and
incremental contract acquisition costs – e.g. sales commissions – in certain
circumstances. Under the new standard, a telecom entity capitalizes costs that
are incremental to obtaining a contract if it expects to recover them – unless it
elects the practical expedient for costs with amortization periods of one year
or less. This may affect those telecom entities that currently elect to expense
contract acquisition costs, because they will now be required to capitalize them if
the anticipated amortization period for such costs is greater than one year.
310-20-25-6 – 25-7 Currently, some telecom entities capitalize a portion of an employee’s
compensation directly relating to origination activities by analogy to current US
GAAP on loan origination fees. This is not permitted under the new standard,
because these costs are not incremental to a specific contract – i.e. an employee’s
salary and benefits are paid whether or not they successfully solicit a sale.

Direct-response advertising costs

340-20-25-4, 720-35-25-5, 944-30-25-1AA The new standard amends existing cost-capitalization guidance to require the
costs of direct-response advertising (except for insurance contracts) to be
expensed as they are incurred, because they are not incremental costs to obtain a
specific contract.

7.2 Costs of fulfilling a contract

Requirements of the new standard
340-40-25-5, ASU 2014-09.BC308 If the costs incurred in fulfilling a contract with a customer are not in the scope of
[IFRS 15.95, BC308] other guidance – e.g. inventory, intangibles or property, plant and equipment – then
an entity recognizes an asset only if the fulfillment costs meet the following criteria:
– relate directly to an existing contract or specific anticipated contract;
– generate or enhance resources of the entity that will be used to satisfy
performance obligations in the future; and
– are expected to be recovered.
340-40-25-6 If the costs incurred to fulfill a contract are in the scope of other guidance, then the
[IFRS 15.96] entity accounts for them using the other guidance.

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7.2 Costs of fulfilling a contract |

Are the costs incurred in fulfilling

Yes
the contract in the scope of other Apply that other guidance
guidance?

No

Do they meet the criteria Yes

to be capitalized as Capitalize costs
fulfillment costs?

No

Expense costs as they are incurred

340-40-25-7 – 25-8 The following are examples of costs that are capitalized when the specified criteria
[IFRS 15.97–98] are met and of costs that cannot be capitalized.

Direct costs that are eligible Costs required to be

for capitalization if other
criteria are met
 expensed when they are
incurred

– Direct labor – e.g. employee wages – General and administrative costs
– unless explicitly chargeable under
– Direct materials – e.g. supplies
the contract
– Allocation of costs that relate
– Costs that relate to satisfied
directly to the contract – e.g.
performance obligations
depreciation and amortization
– Costs of wasted materials, labor
– Costs that are explicitly
or other contract costs
chargeable to the customer under
the contract – Costs that do not clearly relate to
unsatisfied or partially satisfied
– Other costs that were incurred
performance obligations
only because the entity
entered into the contract – e.g.
subcontractor costs

Example 55 – Set-up costs incurred to fulfill a contract

340-40-55-5 – 55-9 Telco M enters into a contract to manage Customer Y’s IT data center for
[IFRS 15.IE192–IE196] five years, for a fixed monthly fee. Before providing the services, Telco M designs
and builds a technology platform to migrate and test Customer Y’s data. This
platform is not transferred to Customer Y and is not considered a separate
performance obligation. The initial costs incurred to set up the platform are
as follows.

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Design services 40
Hardware and software 210
Migration and testing 100

Total 350

These set-up costs relate primarily to activities to fulfill the contract, but do not
transfer goods or services to Customer Y. Telco M accounts for them as follows.

Type of cost Accounting treatment

Hardware Accounted for under guidance for property, plant and

equipment

Software Accounted for under guidance for internal-use

software development/intangible assets

Design, migration and Capitalized under the new standard because these
testing of the data costs:
center
– relate directly to the contract
– generate or enhance resources of Telco M that will
be used to satisfy performance obligations in the
future
– are expected to be recovered over the five-year
contract period

The capitalized hardware and software costs are subsequently measured in

accordance with other applicable guidance. The costs capitalized under the new
standard are subject to its amortization and impairment requirements (see 7.3
and 7.4).

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7.2 Costs of fulfilling a contract |

Observations

Contract fulfillment costs will require careful analysis

340-40-25-5 The new standard provides additional guidance that may require telecom entities
[IFRS 15.95] to capitalize some costs incurred in relation to a contract with the customer, if
those costs create a resource for the telecom entity and are not covered by other
guidance. Therefore, telecom entities should carefully consider costs incurred
in relation to a contract, in particular those incurred at the inception of a contract
as follows.
– Do the costs relate to a good or service that has been transferred to the
customer (see Section 3)? If so, these costs are expensed as they are incurred.
– Does other guidance in IFRS or US GAAP apply? If so, that guidance applies. In
particular, if other guidance specifically requires that certain costs be expensed
as they are incurred (e.g. advertising costs), then costs in the scope of that
guidance continue to be expensed.
– Does the cost guidance in the new standard apply? To the extent that any costs
remaining meet the capitalization criteria, they are capitalized as costs to fulfill
a contract.

Capitalization is not an accounting policy choice

The new standard requires the capitalization of costs to fulfill a contract that meet
the specified criteria. Additionally, unlike the costs to obtain a contract, there is
no practical expedient permitting these costs to be expensed if the amortization
period would be less than one year. Current GAAP is not specific about the
accounting for those costs and telecom entities have made an accounting policy
choice to capitalize or expense. The new standard may therefore result in a
change in practice.
Telecom entities will need to analyze costs carefully to determine which are now
subject to capitalization. Telecom entities that capitalized costs previously also
need to determine if their accounting policy complies with the new requirements.

Comparison with current IFRS

Capitalizing costs to fulfill an anticipated contract

[IAS 11] The new standard requires a telecom entity to capitalize the costs of fulfilling an
anticipated contract, if the other conditions are met. This is similar to the notion in
IAS 11 that costs incurred before a contract is obtained are recognized as contract
costs if it is ‘probable’ that the contract will be obtained. It is not clear whether
the Boards intend ‘anticipated’ to imply the same degree of confidence that a
contract will be obtained as ‘probable’.
[IAS 2, IAS 18] IAS 2 will remain relevant for many contracts for the sale of goods that are
currently accounted for under IAS 18.

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| 7 Contract costs

Comparison with current US GAAP

Policy election
SEC SAB Topic 13 Although there is no specific authoritative guidance under current US GAAP,
fulfillment costs are generally expensed as they are incurred. For certain set-up
costs, however, telecom entities may make an accounting policy election under
current SEC guidance to either expense or capitalize these costs. Telecom entities
that currently expense these costs will be required to capitalize them under the
new standard if certain criteria are met.

Costs in excess of transaction price

In limited circumstances under current US GAAP, the SEC concluded that an

entity should not necessarily recognize a loss on a delivered item in a multiple-
element revenue arrangement – i.e. not recognize the full costs of a delivered
good or service.
Under the new standard, a telecom entity may similarly deliver a good or provide
a service, and all or a portion of the transaction price relating to that good or
service may be constrained from revenue recognition otherwise the amount of
transaction price allocated to the performance obligation may not exceed the
cost. There is no provision in the new standard that is similar to the current SEC
guidance for situations in which applying the variable consideration constraint or
the new standard’s allocation guidance results in an up-front loss on the delivered
good or service. As a result, in certain circumstances a telecom entity may be
required to recognize costs before recognizing expected revenue on satisfied
performance obligations.

Cable-specific guidance
922-360-25-7, 922-720-25-3 The general guidance on costs incurred by entities in the cable television industry
(cable entities) was not superseded by the new standard. However, we believe
that accounting for the costs of reconnections will be impacted by the new
standard’s requirement to capitalize costs to fulfill a contract.
Under current US GAAP, reconnection costs are expensed as they are incurred.
However, in practice, cable entities historically defined reconnections differently.
For example, some cable entities defined reconnections broadly to apply to
the premise, such that the costs associated with installing a new customer
at a previously connected premise are expensed as they are incurred. Other
cable entities defined reconnections narrowly to include only situations where
the same individual customer reconnected services at the same premise.
Consequently, those cable entities capitalized the cost of reconnecting any other
customer or the cost of connecting the same customer to a new service at
that premise.

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7.3 Amortization |

Outside of the industry guidance above, existing US GAAP includes a policy

choice for costs of obtaining a contract (see 7.1). That policy choice led to a
practice in the cable industry related to the costs of reconnections in that
certain of the same activities were either expensed or capitalized based on
an interpretation of the specific guidance related to reconnections. The new
standard changes US GAAP and requires costs of fulfilling a contract that meet
certain criteria are to be recognized as an asset. We believe that cable entities
that applied a broad definition of a reconnection should look to the guidance in
the new standard to account for fulfillment costs and should capitalize costs
(e.g. the costs of installing/setting up a new customer or service at a previously
connected premise) if the criteria in the new standard are met. As a result of
applying the guidance in the new standard, the diversity in this specific practice
for cable entities, resulting from the different definitions of a reconnection, should
be narrowed.
Costs that are capitalized as a cost of fulfilling a contract should be amortized to
cost of sales under the new standard.

7.3 Amortization
Requirements of the new standard
340-40-35-1 An entity amortizes the asset recognized for the costs to obtain and/or fulfill a contract
[IFRS 15.99] on a systematic basis, consistent with the pattern of transfer of the good or service to
which the asset relates. This can include the goods or services in an existing contract,
as well as those to be transferred under a specific anticipated contract – e.g. goods or
services to be provided following the renewal of an existing contract.

Example 56 – Amortization of acquisition costs for month-to-month

contracts

Telco E enters into a month-to-month wireless contract with Customer C that

includes voice and data services. The dealer is paid a commission of 20 at the
time of sale. Telco E does not pay commissions on renewals of month-to-month
contracts. Based on historical experience and customer analysis, Telco E expects
Customer C to renew the contract for 36 months (i.e. three years).
Telco E recognizes an asset of 20 for the commission paid and amortizes that
asset over the three-year period – i.e. on a systematic basis consistent with the
pattern of satisfaction of the performance obligation, and including specifically
anticipated renewals.

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| 7 Contract costs

Example 57 – Commission paid on renewals after the initial contract

is obtained

Continuing Example 54 (see 7.1). Fact pattern is repeated here for convenience.
Telco A pays its sales employees a commission of 30 for each new two-year
wireless contract entered into with a customer. Telco A also pays 10 to sales
employees each time a customer renews a contract for an additional two years.
Telco A previously concluded that both commissions qualify as a cost to obtain a
contract and are capitalized when they are incurred.
Based on historical experience and customer analysis, Telco A expects the
customer to renew for an additional two years for a total of four years. Telco A
further observes that the 10 renewal commission is not commensurate with the
30 paid at the inception of the contract.
Telco A concludes that the first commission relates to a longer period than the
initial two-year contract term. The commission should therefore be amortized over
four years – i.e. on a systematic basis consistent with the pattern of satisfaction
of the performance obligation, and including the specifically anticipated renewal
period. The renewal commission, however, is amortized over two years, being
the period to which the commission relates. In this fact pattern, the amortization
expense would therefore be higher during the renewal period than during the
initial contract period.

Observations

Amortization period may need to include anticipated contracts

Under the new standard, a capitalized contract cost asset is amortized based on the
transfer of goods or services to which the asset relates. In making this determination,
the new standard notes that those goods or services could be provided under an
anticipated contract that the telecom entity can specifically identify.
The new standard does not prescribe how a telecom entity should determine
whether one or more anticipated contracts are specifically identifiable, so practice
is likely to develop over time. Relevant factors to consider may include the
telecom entity’s history with that customer class, and predictive evidence derived
from substantially similar contracts. In addition, a telecom entity may consider
the available information about the market for its goods or services beyond the
initial contract term – e.g. whether it expects the service still to be in demand
when renewal would otherwise be anticipated. Judgment will be involved in
determining the amortization period of contract cost assets, but telecom entities
should apply consistent estimates and judgments across similar contracts, based
on relevant experience and other objective evidence.

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7.3 Amortization |

Anticipated contracts included when determining whether practical

expedient applies
Under the new standard, a telecom entity assesses the amortization period to
determine whether it is eligible to apply the practical expedient not to recognize
an asset for the incremental costs to obtain a contract (costs to fulfill a contract
are not eligible for the practical expedient). For example, a cable television
company incurs incremental costs to obtain contracts with customers that have
an initial term of one year. However, a significant proportion of customers renew
the contracts at the end of the initial term. In this case, the company cannot
assume that it is eligible for the practical expedient, but instead has to determine
the amortization period.

Judgment is required when contracts include recurring commissions

Many telecom entities pay sales commissions on all contracts executed with
customers, including new contracts – i.e. new services and/or new customers –
and renewal or extension contracts. If the commission paid by a telecom entity on
a new contract will be followed by corresponding commissions for each renewal
period – i.e. the salesperson will receive an incremental commission each time
the customer renews the contract, or does not cancel it – then the telecom
entity applies judgment to determine whether the original commission on the
new contract should be amortized only over the initial contract term, or over a
longer period.
The capitalized asset is generally recognized over the period covered by the
commission. If the renewal commission is commensurate with the initial
commission, then the initial commission is amortized over the original contract
term and the renewal commission is amortized over the renewal period.
Commissions are generally considered commensurate with each other when
they are reasonably proportional to the respective contract value.

Systematic amortization for contract assets related to multiple

performance obligations
The new standard requires the asset to be amortized on a systematic basis
(which might not be on a straight-line basis) that is consistent with the transfer
to the customer of the goods or services to which the asset relates. When the
contract contains multiple performance obligations satisfied at different points in
time – e.g. in complex enterprise arrangements – the telecom entity takes this
into account when determining the appropriate amortization period and pattern.

No correlation with the accounting for nonrefundable up-front fees

The amortization pattern for capitalized contract costs (i.e. including the term
of specific anticipated contracts) and the revenue recognition pattern for
nonrefundable up-front fees (i.e. the existing contract plus any renewals for which
the initial payment of the up-front fee provides a material right to the customer)
are not symmetrical under the new standard (see 9.1). Therefore, there is no
requirement under the new standard for the recognition pattern of these two
periods to align, even if contract costs and nonrefundable up-front fees on the
same contract are both deferred.

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| 7 Contract costs

Presentation of amortization costs

If a telecom entity chooses to present its expenses by nature, then judgment will
be required to determine the nature of the expenses arising from the amortization
of capitalized contract costs. In all cases, a telecom entity is subject to the general
requirement to ensure that its presentation is not misleading and is relevant to an
understanding of its financial statements.

Comparison with current US GAAP

No correlation with the accounting for nonrefundable up-front fees

SEC SAB Topic 13 Current SEC guidance on revenue recognition indicates that registrants are
required to defer nonrefundable up-front fees if they are not in exchange for
goods delivered or services performed that represent the culmination of a
separate earnings process. These fees are deferred and recognized as revenue
over the expected period of performance, which may include expected renewal
periods if the expected life of the contract extends beyond the initial period.
Similarly, the guidance states that a telecom entity may elect an accounting policy
of deferring certain set-up costs or customer acquisition costs.
If the amount of deferred up-front fees exceeds the deferred costs, then these
two amounts are recognized over the same period and in the same manner.
However, if the amount of deferred costs exceeds the deferred revenue from
any up-front fees, then current practice is somewhat mixed and some telecom
entities may amortize the net deferred costs over the shorter of the estimated
customer life and the stated contract period.
The new standard effectively decouples the amortization of contract fulfillment
costs from that for any nonrefundable up-front fees in the contract (see 9.1).
The capitalization of qualifying fulfillment costs is not a policy election (see 7.2).
The amortization period for contract cost assets is determined in a manner
substantially similar to that under current guidance when up-front fees result in an
equal or greater amount of deferred revenue – i.e. the existing contract plus any
anticipated renewals that the telecom entity can specifically identify. However,
contract costs that were previously deferred without any corresponding deferred
revenue may be amortized over a longer period under the new standard than
under current US GAAP.

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7.4 Impairment |

Presentation of costs similar to current SEC guidance

S-X Rule 5-03(b) SEC guidance on income statement classification requires costs and expenses
applicable to sales and revenues to be separately stated from selling, general
and administrative expenses. The new standard does not change this guidance.
A telecom entity may have costs that are required to be capitalized under the
new standard that are expensed as they are incurred under current US GAAP.
The classification of the amortization cost will be treated the same as the current
classification of the expense. Amortization of costs to obtain a contract will
generally be classified as selling, general and administrative expenses. A telecom
entity will determine the appropriate costs of sales category in which to classify
amortization of its costs to fulfill a contract.

7.4 Impairment
Requirements of the new standard
340-40-35-3 An entity recognizes an impairment loss to the extent that the carrying amount of the
[IFRS 15.101] asset exceeds the recoverable amount. The ‘recoverable amount’ is defined as:
– the remaining expected amount of consideration to be received in exchange for the
goods or services to which the asset relates; less
– the costs that relate directly to providing those goods or services and that have not
been recognized as expenses.
340-40-35-4 When assessing an asset for impairment, the amount of consideration included in
[IFRS 15.102] the impairment test is based on an estimate of the amounts that the entity expects
to receive. To estimate this amount, the entity uses the principles for determining the
transaction price, with two key differences:
– it does not constrain its estimate of variable consideration – i.e. it includes its
estimate of variable consideration, regardless of whether the inclusion of this
amount could result in a significant revenue reversal if it is adjusted; and
– it adjusts the amount to reflect the effects of the customer’s credit risk.

Observations

New impairment model for capitalized contract costs

Topics 330, 360 The new standard introduces a new impairment model that applies specifically
[IAS 2, IAS 36] to assets that are recognized for the costs to obtain and/or fulfill a contract. The
Boards chose not to apply the existing impairment models in US GAAP or IFRS, in
order to have an impairment model that focuses on contracts with customers. A
telecom entity applies this model in addition to the existing impairment models.

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| 7 Contract costs

350-20-35-31 – 35-32, Topics 350, 360 The telecom entity applies, in the following order:
[IAS 36.22]
– any existing asset-specific impairment guidance (e.g. for inventory);
– the impairment guidance on contract costs under the new standard; and
– the impairment model for cash-generating units (IFRS) or for asset groups or
reporting units (US GAAP).
For example, if a telecom entity recognizes an impairment loss under the new
standard, then it is still required to include the impaired amount of the asset in
the carrying amount of the relevant cash-generating unit or asset group/reporting
unit if it also performs an impairment test under IAS 36, or in applying current
property, plant and equipment, intangibles or goodwill impairment guidance
under US GAAP.

Specific anticipated contracts are considered in impairment test

The new standard specifies that an asset is impaired if its carrying amount
exceeds the remaining amount of consideration that a telecom entity expects to
receive, less the costs that relate directly to providing those goods or services
that have not been recognized as expenses.
Under the new standard, a telecom entity considers specific anticipated
contracts when capitalizing contract costs. Consequently, the telecom entity
includes cash flows from both existing contracts and specific anticipated
contracts when determining the consideration expected to be received in the
contract costs impairment analysis. However, the telecom entity excludes from
the amount of consideration the portion that it does not expect to collect, based
on an assessment of the customer’s credit risk.

Future development in US GAAP

Consideration received but not recognized as revenue

340-40-35-4 When assessing a contract asset for impairment, a telecom entity determines the
consideration that it expects to receive. This amount includes both the amount
of consideration that it has already received, but has not recognized as revenue,
and the amount that it expects to receive in exchange for the goods or services to
which the contract asset relates. The FASB proposes to clarify this point. As of the
date of this publication, the FASB has not finalized this proposal.

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7.4 Impairment |

Differences between IFRS and US GAAP

Reversal of an impairment loss

340-40-35-6 The requirements on a reversal of an impairment loss are different under the
[IFRS 15.104] US GAAP and IFRS versions of the new standard, to maintain consistency with
the existing models. Under US GAAP, a telecom entity does not recognize a
reversal of an impairment loss that has previously been recognized.
By contrast, under IFRS a telecom entity recognizes a reversal of an impairment
loss that has previously been recognized when the impairment conditions cease
to exist. Any reversal of the impairment loss is limited to the carrying amount,
net of amortization, that would have been determined if no impairment loss had
been recognized.

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| 8 Customer options for additional goods or services

8 Customer options for

additional goods or
services
Overview

Customer options to acquire additional goods or services come in many forms,

including sales incentives, customer credits, contract renewal options or other
discounts on future goods or services. A telecom entity accounts for a customer
option to acquire additional goods or services as a performance obligation if the
option provides the customer with a material right. Telecom customers often
have the ability to acquire additional goods or services (add-ons), and are offered
a wide range of significant discounts and other marketing offers. Consequently,
identifying customer options and whether they provide a material right to the
customer may be particularly challenging for telecom entities and will often require
significant judgment.
Nonrefundable up-front fees that may convey material rights are addressed in
Section 9.

8.1 Determining if a material right is created by

contract options
Requirements of the new standard

606-10-55-42 When an entity grants the customer an option to acquire additional goods or services,
[IFRS 15.B40] the option is a performance obligation under the contract if it provides a material right
that the customer would not receive without entering into that contract.

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8.1 Determining if a material right is created by contract options |

606-10-55-42 -- 55-43 The following flow chart helps analyze whether a customer option is a performance
[IFRS 15.B40–B41] obligation.

The entity grants the customer an option

to acquire additional goods or services

Could the customer obtain the

right to acquire the additional goods or
services without entering into the
sale agreement?
No Yes

Does the option give the customer

the right to acquire additional goods
or services at a price that reflects the
stand-alone selling price for those
goods or services?
No Yes

The option may be a material right,

The option does not give rise to
and if so, it gives rise to a
a performance obligation
performance obligation

Example 58 – Cable television service and additional premium

channels

Cable B contracts with Customer D to provide television services for a fixed

monthly fee for 24 months. The base television services package gives
Customer D the right to purchase additional premium channels. In Month 3,
Customer D adds a premium sports channel for an additional 5 per month, which
is the price that all customers pay for the premium sports channel (i.e. it is priced
at its stand-alone selling price).
The premium channel can be added or dropped by the customer without affecting
the base cable television service. Therefore, the premium channel represents an
option to purchase additional goods or services.
At contract inception, Cable B concludes that because the option to purchase
the premium channel is priced at its stand-alone selling price, the option is not a
material right. Therefore, the option is not identified as a performance obligation
at contract inception. Cable B will recognize revenue for the premium channel in
Month 3 when it provides the services.

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| 8 Customer options for additional goods or services

Example 59 – Wireless contract with option for data

Telco B contracts with Customer C to provide wireless voice, text messaging and
data services for 24 months for a monthly fee of 100. The customer can purchase
additional data for 2 per megabyte, which is the price for all additional data (i.e. it
is the stand-alone selling price).

The additional data can be added or dropped by the customer without affecting
the wireless service. Therefore, the additional data represent an option to
purchase additional goods or services.

Telco B concludes that because the option to purchase additional data is priced at
its stand-alone selling price, it is not a material right. Therefore, the option is not
identified as a performance obligation at contract inception. Telco B will recognize
revenue for the additional data when it provides the services.

Example 60 – Optional added shared wireless lines

Telco C contracts with Customer D for a wireless plan that provides unlimited
voice and 10GB of data for 80 per month. Telco C permits Customer D to add up
to three additional lines of service and share the 10GB of data included in the
first wireless plan. Telco C sells each additional line for 30 per month, which is the
price for all individual unlimited voice plans with access to shared data (i.e. it is the
stand-alone selling price).

Each additional line is priced at a lower amount than the first individual line as the
addition of each line provides unlimited voice and the ability to share the same
data, rather than conveying another 10GB of data.

The additional lines represent an option to purchase additional goods or services.

Telco C concludes that because the option to purchase additional lines is priced at
its stand-alone selling price, it is not a material right. Therefore, the option is not
identified as a performance obligation at contract inception. Telco C will recognize
revenue for the additional lines when it provides the services.

Example 61 – Wireless with global add-on

Customer C signs an agreement with Telco D for voice, text and data services
for 24 months. All services are unlimited and are provided on a monthly basis.
During Month 6 of the contract, the customer adds an optional global rate plan
for 25 a month, which is the price for all global rate plans (i.e. it is the stand-alone
selling price).

The customer can remove or add the global rate plan as needed, without affecting
the wireless service. Therefore, the global rate plan represents an option to
purchase additional goods or services.

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8.1 Determining if a material right is created by contract options |

Telco D concludes that because the option to purchase the global rate plan is
priced at its stand-alone selling price, it is not a material right. Therefore, the
option is not identified as a performance obligation at contract inception. Telco D
will recognize revenue for the global rate plan when it provides the services.

Observations

Determining whether a material right exists requires an evaluation of both

quantitative and qualitative factors
A telecom entity considers whether a customer option for additional goods or
services is a material right at contract inception based on both quantitative and
qualitative factors. Although that evaluation is judgmental and no specific criteria
exist for an evaluation, the telecom entity considers whether it would likely
impact the customer’s decision on whether to exercise the option to continue
buying the telecom entity’s product or service. This is consistent with the notion
that an entity considers valid expectations of the customer when identifying
promised goods or services. For example, an arrangement that allows the
customer to renew services at a significant discount that is incremental to other
discounts typically provided and in which the telecom entity expects customers
to renew primarily as a result of the discount itself would generally be considered
a material right.
A telecom entity will need to carefully evaluate the specifics of its contracts to
determine whether the terms convey rights that are significant to the customer.
Material rights are separate performance obligations to which a portion of the
contract’s transaction price is allocated at contract inception (see 8.2).

Options available only because a contract was previously entered into are
not always material rights
606-10-55-43 A customer may be able to exercise an option in a contract solely as a result of
[IFRS 15.B41] having entered into a contract. An option exercisable at its stand-alone selling
price does not convey a material right, but rather is a marketing offer that does
not constitute a separate performance obligation. Commonly, additional services
or features offered by a telecom entity will not be material rights because the
additional services or features are priced at their stand-alone selling prices.

Upgrade rights require careful evaluation

A telecom entity often sells a handset for less than the stand-alone selling price
when it is bundled with a term (e.g. 24 months) service plan. Some telecom
entities also include in the contract, or have a customary business practice of
providing, a promise that after a certain period of time the customer can upgrade
its handset by entering into another term plan at the current stand-alone selling
price. In these cases, rights to the remaining consideration under the initial
contract, including any early termination penalties, are waived.

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| 8 Customer options for additional goods or services

These promises require careful analysis of the terms and conditions to determine
the appropriate accounting. Because the waiver is provided on the condition
that the customer enters into a new contract, some view the waiver as an
incentive (akin to a discount) offered as part of the new contract. Therefore, the
promise or right to upgrade at a discount could be accounted for as a material
right. However, others believe that the waiver of the early termination penalties
affects the transaction price of the initial contract. In these cases, the promise
or right to early upgrade with some waived fees would result in less expected
consideration on the first handset and thus would require an estimate of the
variable consideration. However, the consideration of the contract only would
vary if the renewal option is exercised and an additional service plan is agreed to.
Accordingly, the exercise of the early upgrade option also affects both the scope
of the goods and services, as well as the price, and therefore some believe the
option is not variable consideration. Whether the promise or right is accounted for
as a material right or variable consideration, the amount and timing of the revenue
recognized for the handset and service may be similar.
When the contract does not explicitly include the promise to upgrade and this
is not implied by customary business practices, a contract asset would remain
at the time of early upgrade. If the telecom entity concludes that the contract
modification guidance applies, then the contract asset may be rolled into the new
contract and derecognized prospectively as a reduction of the revenue recognized
under the new contract.

Determining the class of customer when assessing options requires careful

consideration
When assessing whether an option grants a material right to the customer, a
telecom entity assesses whether the discount provided is incremental to the
range of discounts typically given for those goods or services to that class of
customer. In determining the appropriate class of customer, a telecom entity
considers a number of factors, such as geography or market. For example,
enterprise customers may be a different class of customer from individual
consumers.
However, a class of customer is not determined by the customer’s prior
purchasing history. For example, a customer who has already purchased goods
or services from the telecom entity (i.e. an ‘existing’ customer) is not necessarily
(if all other factors are the same) in a different class from those customers who
have not already purchased goods or services from the telecom entity (i.e.
‘new’ customers).

Customer loyalty arrangements may convey material rights

Customer loyalty arrangements that allow customers to accrue points, or similar
benefits, through purchases over time may convey material rights. See 10.4 in
Issues In-Depth, Edition 2016 for additional guidance.

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8.2 Measuring and accounting for material rights |

8.2 Measuring and accounting for material rights

Requirements of the new standard

606-10-55-44 If the stand-alone selling price of a customer’s option to acquire additional goods or
[IFRS 15.B42] services that is a material right is not directly observable, then an entity needs to
estimate it. This estimate reflects the discount that the customer would obtain when
exercising the option, adjusted for:
– any discount that the customer would receive without exercising the option; and
– the likelihood that the option will be exercised.
606-10-55-45 If the goods or services that the customer has a material right to acquire are similar
[IFRS 15.B43] to the original goods or services in the contract – e.g. when the customer has an
option to renew the contract – then an entity may allocate the transaction price to
the optional goods or services by reference to the goods or services expected to be
provided and the corresponding consideration expected to be received.

Example 62 – Fixed price guarantee on renewal of service

A customer enters into a one-year service contract with Telco B. The customer
agrees to pay 50 per month. The contract gives the customer the right to renew
the contract for an additional year for 50 monthly. Telco B estimates that prices
charged to customers in the same class will increase to 56 per month in the next
year and that 75% of customers will renew.
In these specific circumstances, based on quantitative and qualitative factors,
Telco B concludes that the renewal option is a material right because the
expected discount on renewal is sufficient to influence the customer’s behavior,
and the customer is likely to renew. Therefore, there are two performance
obligations in the contract: the first year of service and the material right to renew
the contract at a discount.
Telco B allocates the transaction price of 600 (12 x 50) to the performance
obligations based on their relative stand-alone selling prices. Telco B determines
that the stand-alone selling price of the current-year service is 600.
Telco B estimates the stand-alone selling price of the material right at 54 by
multiplying the estimated monthly discount by the expected likelihood of exercise
((56 less 50) x 12 months x 75%).

Telco B allocates the transaction price as follows.

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| 8 Customer options for additional goods or services

Stand-alone
selling prices Relative % Allocation

Service 600 92% 552

Material right 54 8% 48

654 100% 600

In Year 1, Telco B recognizes revenue of 46 per month (552 ÷ 12 months). In

Year 2, assuming exercise of the option to renew, Telco B recognizes revenue
of 54 per month ((48 allocated to the material right + 50 per month x 12) ÷
12 months). If the customer does not renew the contract, then Telco B recognizes
the 48 allocated to the material right as revenue when the right expires – i.e. at
the end of the first year of service, in this example.

Example 63 – Fixed price guarantee on renewal of service: Applying

the practical alternative

Using the same facts as Example 62, Telco B determines that instead of
estimating the stand-alone selling price of the material right, it could use a
practical alternative to allocate the transaction price. The practical alternative can
be used in this case because the customer has a material right to acquire goods
or services that are similar to the original goods or services. Therefore, Telco B
allocates the transaction price to the optional goods and services with reference
to the goods or services expected to be provided and the expected consideration
as follows.
Expected consideration: 50 x 12 (Year 1) + 75% x 50 x 12 (Year 2) = 1,050
Goods or services expected to be provided: 50 x 12 (Year 1) + 75% x 56 x 12
(Year 2) = 1,104
In Year 1, Telco B recognizes revenue of approximately 47 for each month in the
first year (600 ÷ 1,104 x 1,050 ÷ 12 = 47). Consequently, Telco B allocates 36
(600 - (47 x 12)) to the option to renew at the end of Year 1. Therefore, Telco B
recognizes approximately 53 in each month during Year 2 (600 + 36 allocated to
the material right) if the option is exercised.
If the option is not exercised, then the remaining 36 would be recognized when
the option expires. The outcome of this approach results in the effective discount
on renewal being allocated to the periods consistent with Telco B’s expectation
that prices will increase.

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8.2 Measuring and accounting for material rights |

Observations

Options to purchase additional goods and services at their stand-alone

selling prices do not represent a material right
606-10-55-43 Generally, options to purchase goods or services at their stand-alone selling
[IFRS 15.B41] prices do not represent a material right and are not accounted for as a
performance obligation at contract inception. This is an important distinction that
will impact the allocation of the transaction price.

Telecom entities need to estimate the stand-alone selling price of an option

that represents a material right
606-10-55-44 – 55-45 Telecom entities typically do not sell ‘options’ that represent a material right
[IFRS 15.B42–B43] separately. Therefore, the stand-alone selling prices of these types of options may
not be readily observable and may need to be estimated. That estimate should
reflect the discount that the customer would obtain when exercising the option,
adjusted for any discount that the customer could receive without exercising the
option, and the likelihood that the option will be exercised.
If the material right is to acquire future goods or services that are similar
to the original goods or services in the contract and are provided based on
the terms of the original contract, then a telecom entity may use a practical
alternative to estimating the stand-alone selling price of the option. Under this
practical alternative, the telecom entity allocates the transaction price to the
optional goods or services with reference to the goods or services expected
to be provided and the expected consideration. A telecom entity needs to
evaluate its specific facts, and the potential impact of the likelihood that the
option will be exercised, to determine the proper accounting and apply the
approach consistently.

Estimate of the likelihood of exercise of an option is not revised

606-10-32-43 When determining the stand-alone selling price of a customer option for
[IFRS 15.88] additional goods or services a telecom entity estimates the likelihood that the
customer will exercise the option. This initial estimate is not subsequently
revised because it is an input into the estimate of the stand-alone selling price
of the option. Under the new standard, a telecom entity does not reallocate
the transaction price to reflect changes in stand-alone selling prices after
contract inception.
The customer’s decision to exercise the option or allow the option to expire
affects the timing of recognition of the amount allocated to the option but it does
not result in reallocation of the transaction price.

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| 8 Customer options for additional goods or services

Exercise of a material right

When a customer exercises a material right for additional goods and services, a
telecom entity may account for it using one of the following approaches.
– Continuation of the original contract: Under this approach, a telecom entity
treats the consideration allocated to the material right as an addition to the
consideration for the goods or services under the contract option – i.e. as a
change in the transaction price.
– Contract modification: Under this approach, a telecom entity applies the
contract modification guidance to evaluate whether the goods or services
transferred on exercise of the option are distinct from the other goods or
services in the contract. The outcome of this evaluation will determine whether
the modification is accounted for prospectively or with a cumulative catch-up
adjustment.
In telecom consumer contracts, the optional goods or services would typically
be distinct from those promised in the original contract. Therefore, the outcome
under either approach will be similar and prospective.

Material rights do not extend the term of a contract

A right to renew a contract may create a material right (i.e. because there is an
incentive for the customer to renew the contract). This material right may be
recognized in a period beyond the contract’s initial term. However, the existence
of a material right does not extend the term of the contract, which is defined by
the enforceable rights and obligations (see Section 2).

Comparison with current IFRS

Treatment of customer loyalty programs broadly similar to current practice

[IFRIC 13] The current IFRS guidance on customer loyalty programs is broadly similar to the
guidance in the new standard.

However, a telecom entity needs to consider whether the allocation method that
it currently applies remains acceptable under the new standard. Under current
IFRS, a telecom entity can choose which method it wants to use to allocate the
consideration between the sales transaction and the award credits, and many use
the residual method to estimate the stand-alone selling price of award credits.
By contrast, under the new standard the residual approach can only be applied if
certain criteria are met.

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8.2 Measuring and accounting for material rights |

Comparison with current US GAAP

Stand-alone selling price of a customer option

605-25, 985-605-55-82 – 55-85 The new revenue standard requires an entity to establish either an observable
or an estimated stand-alone selling price for a customer option that provides the
customer with a material right. This is not a requirement under current US GAAP.
There are two approaches to accounting for a significant incremental discount
under current US GAAP.
– Apply general multiple element accounting guidance: An entity may account
for the option as a separate deliverable under general multiple element
accounting guidance. This practice is similar to the accounting required under
the new standard.
– Apply software revenue recognition guidance: Although this guidance applies
to software arrangements, it is sometimes analogized to in the accounting for
significant incremental discounts in non-software arrangements. This approach
generally results in accounting that is different from the new standard and
typically results in a greater amount allocated to the future discount than under
the new standard.
Under the software guidance, if an arrangement includes a right to a significant
incremental discount on a customer’s future purchase of products or services,
then a proportionate amount of that significant incremental discount is applied
to each element based on its fair value (selling price) without regard to the
significant incremental discount. For example, a 35% discount on future
purchases would result in each element in the arrangement being recognized
at a 35% discount to its fair value (selling price). This approach does not require
an estimate of the selling price for that customer option. This is different from
the new revenue standard’s requirement to establish either an observable or an
estimated stand-alone selling price for a customer option that is a material right.
In addition, if the products to which the discount applies are not specified or
the fair value of the future purchases cannot be determined but the maximum
discount is quantifiable, then under current guidance it is allocated to the
elements assuming that the customer will purchase the minimum amount
necessary to receive the maximum discount. This approach is inconsistent with
the new standard’s guidance on estimating the selling price of an option, which
inherently includes an estimate of breakage.
These changes may increase the need to establish estimates, and related internal
processes and controls, when customer options for the future purchase of goods
or services are included in contracts.

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| 9 Nonrefundable up-front fees

9 Nonrefundable up-front
fees
Overview

Many telecom contracts include nonrefundable up-front fees that are paid at
or near contract inception – e.g. activation fees, set-up fees or other payments
made at contract inception. The new standard provides guidance on determining
the timing of recognition for these fees, which may vary depending on whether
goods or services are transferred to the customer at the beginning of the contract
and whether those goods or services are distinct, and on the nature of the
contract (month-to-month versus a term contract). Some nonrefundable up-front
fees may also convey a material right to the customer – e.g. for future renewals of
service at a discount.

Requirements of the new standard

606-10-55-42, 55-50 – 55-53 An entity assesses whether the nonrefundable up-front fee relates to the transfer of a
[IFRS 15.B40, B48–B51] promised good or service to the customer.
In many cases, even though a nonrefundable up-front fee relates to an activity that
the entity is required to undertake in order to fulfill the contract, that activity does not
result in the transfer of a promised good or service to the customer. Instead, it is an
administrative task. For further discussion on identifying performance obligations, see
Section 3.
If the up-front fee gives rise to a material right for future goods or services, then the
entity attributes all of the goods and services to be transferred, including the material
right associated with the up-front payment (see 9.1).
If the activity does not result in the transfer of a promised good or service to the
customer, then the up-front fee is an advance payment for performance obligations
to be satisfied in the future and is recognized as revenue when those future goods or
services are provided (see 9.2).

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9 Nonrefundable up-front fees |

Does the fee relate to

Yes specific goods or No
services transferred to
customer?

Account for as an
Account for as a
advance payment for
promised good or
future goods or
service
services

Recognize as revenue
Recognize allocated
when control of future
consideration as revenue on
goods or services is
transfer of promised good
transferred, which may include
or service
future contract periods

Observations

Up-front fee may need to be allocated

A nonrefundable up-front fee forms part of the transaction price of the contract
and is allocated to performance obligations, including any material right, under the
new standard.
Even when a nonrefundable up-front fee relates to a promised good or service,
the amount of the fee may not equal the relative stand-alone selling price of that
promised good or service; therefore, some of the nonrefundable up-front fee may
need to be allocated to other performance obligations (see 5.2).
Telecom entities also consider how the up-front fee affects the determination
of the stand-alone selling price of the goods or services promised in the
arrangement because, in some cases, it may be appropriate to add it to the stand-
alone selling price of just one of the performance obligations (see Example 66
in 9.2).

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| 9 Nonrefundable up-front fees

Consideration of whether a nonrefundable up-front fee gives rise to a

significant financing component
606-10-32-15 A telecom entity will need to consider whether the receipt of an up-front payment
[IFRS 15.60] gives rise to a significant financing component within the contract. An up-front
fee may not result in a significant financing component when, for example, the
fee is small or the contract term is month-to-month. This may commonly occur in
consumer contracts.
However, assessing whether a nonrefundable up-front fee gives rise to a
significant financing component may be relevant for certain enterprise and
network capacity contracts. All relevant facts and circumstances need to be
evaluated, and a telecom entity may need to apply significant judgment in
determining whether a significant financing component exists (see 4.4).

9.1 Assessing if nonrefundable up-front fees convey

a material right

Example 64 – Nonrefundable up-front fees: Annual contract

Cable A enters into a one-year contract to provide cable television to Customer C.

In addition to a monthly service fee of 100, Cable A charges a one-time up-front
fee of 50. Cable A has determined that the up-front activity does not transfer a
promised good or service to Customer C, but is instead an administrative task.
At the end of the year, Customer C can renew the contract on a month-to-month
basis at the then-current monthly rate, or can commit to another one-year contract
at the then-current annual rate. In either case, Customer C will not be charged
another fee on renewal. The average customer life for customers entering into
similar contracts is three years.
Cable A considers both quantitative and qualitative factors to determine whether
the up-front fee provides an incentive for Customer C to renew the contract
beyond the stated contract term to avoid the up-front fee. If the incentive is
important to Customer C’s decision to enter into the contract, then there is a
material right.
First, Cable A compares the up-front fee of 50 with the total transaction price of
1,250 (the up-front fee plus the service fee of 1,200 (12 x 100)). It concludes that
the nonrefundable up-front fee is not quantitatively material.
Second, Cable A considers the qualitative reasons Customer C might renew.
These include, but are not limited to, the overall quality of the service provided,
the services and related pricing provided by competitors, and the inconvenience
to Customer C of changing service providers (e.g. returning equipment to Cable A,
scheduling installation by the new provider).

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9.1 Assessing if nonrefundable up-front fees convey a material right |

Cable A concludes that, although the avoidance of the up-front fee on renewal is
a consideration to Customer C, this factor alone does not influence Customer C’s
decision whether to renew the service. Cable A concludes based on its customer
satisfaction research data that the quality of service provided and its competitive
pricing are the key factors underpinning the average customer life of three years.
Overall, Cable A concludes that the up-front fee of 50 does not convey a material
right to Customer C.
As a result, the up-front fee is treated as an advance payment on the contracted
one-year cable services and is recognized as revenue over the one-year contract
term. This results in monthly revenue of 104 (1,250 ÷ 12) for the one-year
contract.
Conversely, if Cable A determined that the up-front fee results in a contract that
includes a customer option that is a material right, then it would allocate the total
transaction price including the up-front fee between the one-year cable service
and the material right to renew the contract. The consideration allocated to the
material right would be recognized as revenue when that right is exercised or
expires (see 8.2).

Example 65 – Activation fee in a month-to-month wireless contract

Telco B charges a one-time activation fee of 25 when Customer D enters into

a month-to-month contract for a voice and data plan that costs 50 per month.
Customer D has no obligation to renew the contract in the subsequent month.
If Customer D does renew, then no activation fee will be charged in the second
or subsequent months. Telco B’s average customer life for month-to-month
contracts is two years.

606-10-55-51 Telco B concludes that there are no goods or services transferred to Customer D
[IFRS 15.B49] on activation. Therefore, the up-front fee does not relate to a good or service and
the only performance obligation in the arrangement is the voice and data plan. The
activation is merely an administrative activity that Telco B must perform to allow
Customer D to access its network.
The activation fee is considered an advance payment for future goods or services
and included in the transaction price in Month 1.

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| 9 Nonrefundable up-front fees

606-10-55-42 Telco B then assesses whether the option to renew the contract without paying
[IFRS 15.B40] the activation fee on renewal represents a material right for Customer D. Telco
B considers both qualitative and quantitative factors in determining whether
Customer D has a material right to renew at a discount.
Customer D pays 75 in Month 1 and would pay 50 in each subsequent month
for which renewal occurs. Therefore, the ‘discount’ on the renewal rate is
quantitatively material. Telco B also notes that Customer D is likely to renew
the contract beyond the first month, and that his decision to renew is affected
significantly by the up-front fee.
Therefore, Telco B concludes that the activation fee is a prepayment for future
goods and services and represents a material right. The activation fee will be
recognized over the period for which Customer D consumes the services that
give rise to the material right. This period is often shorter than the average
customer life.

Observations

The activation fee does not always convey a material right to the
customer
In some cases, the activation fee may not convey a material right to the customer.
This would occur when, after considering both qualitative and quantitative factors,
a telecom entity concludes that a customer’s decision to renew a contract is
not significantly affected by the up-front fee. Qualitative factors could include
the quality of the service provided, increasing ease associated with changing
service providers or promotional offers by competitors that do not include an
activation fee.
However, this assessment may be different for longer-term contracts, where
the qualitative factors may be very uncertain. For example, in a 10-year service
contract, it may be difficult to know what may influence the customer’s decision
to renew when the contract is completed. In these cases, an assessment of
quantitative factors may be more relevant.
Judgment will be required when assessing the qualitative and quantitative factors
to determine whether an up-front fee gives rise to a material right.

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9.2 Accounting for nonrefundable up-front fees that do not convey a material right |

Determining the period of recognition of the material right requires

judgment
If the payment of an up-front fee provides a material right to the customer,
then the fee is recognized over the period for which the payment provides the
customer with a material right. Determining that period will require significant
judgment, because it may not align with the stated contractual term or other
information historically maintained by the entity – e.g. the average customer
relationship period.
A telecom entity should also consider quantitative and qualitative factors in the
assessment of whether there is a material right. These additional factors may
often result in the recognition of the material right over a period that is shorter
than the average customer life.

9.2 Accounting for nonrefundable up-front fees that

do not convey a material right

Example 66 – Allocation of the transaction price, including a

nonrefundable up-front fee

Telco T enters into a one-year wireless contract to provide Customer E with a

handset and a voice and data plan (the wireless plan) for a price of 35 per month.
Telco T charges an activation fee of 25, which represents an administrative
activity and not a performance obligation. This fee is waived only in unusual
circumstances. Telco T has identified the handset and the wireless plan as
separate performance obligations. Telco T considered quantitative and qualitative
factors and concluded that the activation fee does not convey a material right to
Customer E.
Telco T sells the handset separately for a price of 200, which provides observable
evidence of a stand-alone selling price. Telco T also offers a one-year plan without
a phone that includes the same level of data/calls/texts for a price of 25 per
month, with an activation fee of 25 (also concluded not to include a material
right). This pricing, including the activation fee, is used to determine the stand-
alone selling price of the wireless plan of 325 (25 x 12 months + 25).

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The transaction price of 445 (35 x 12 months + activation fee of 25)(a) is allocated
to the performance obligations based on their relative stand-alone selling prices
as follows.

Performance Stand-alone Transaction Price

obligation selling prices price allocation Calculation

Handset 200 - 170 (445 x 38%)

Wireless plan 325 420 275 (445 x 62%)

Activation fee - 25
Total 525 445 445

Note

a. For purposes of this example, Telco T did not adjust the consideration to reflect the time
value of money because Telco T applied the practical expedient. See 4.4 for details on
accounting for a significant financing component.

Observations

Nonrefundable up-front fees can affect the stand-alone selling price of the
performance obligations
An up-front fee may affect the determination of the stand-alone selling price of
the goods or services promised in the arrangement. For example, if a telecom
entity regularly requires a customer to pay an activation fee with a wireless
service plan, then this activation fee may be considered when determining the
stand-alone selling price for that wireless service plan. The fact that the activation
fee is separately itemized on the customer bill does not affect the conclusion of
whether the fee relates solely to one or more but not all goods and services sold
to the customer.
However, if a telecom entity regularly waives activation or other up-front fees for a
significant proportion of its customers, then it may not be included in the stand-
alone selling price of the ongoing service.
Ultimately, the inclusion of the up-front fee in the stand-alone selling price of a
good or service in the arrangement may affect the allocation of the transaction
price that will include that up-front fee.

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9.2 Accounting for nonrefundable up-front fees that do not convey a material right |

Comparison with current IFRS

Accounting for nonrefundable up-front fees

[IAS 18.IE17] Under current IFRS, any initial or entrance fee (e.g. an activation fee in the
telecom industry) is recognized as revenue when there is no significant
uncertainty over its collection and the entity has no further obligation to perform
any continuing services. It is recognized on a basis that reflects the timing,
nature and value of the benefits provided. In our experience, such fees may
be recognized totally or partially up front or over the contractual or customer
relationship period, depending on the facts and circumstances. Under the
new standard, a telecom entity needs to assess whether a nonrefundable,
up-front fee relates to a specific good or service transferred to the customer
– and if not, whether it gives rise to a material right to determine the timing of
revenue recognition.

Comparison with current US GAAP

Accounting for nonrefundable up-front fees as a separate performance

obligation
SEC SAB Topic 13 Concluding whether a nonrefundable up-front fee represents a payment for
a promised good or service under the new standard may involve an analysis
similar to current US GAAP to determine whether the up-front fee is payment
for delivery of a good or service that represents the culmination of a separate
earnings process. In practice, outside of specific guidance for the cable industry
(see below), these fees are rarely recognized when they are invoiced. When
performing the analysis under the new standard, a telecom entity considers the
integration guidance in Step 2 of the model, which is not necessarily the same as
current US GAAP.

Initial hookup fees in the cable television industry

922-430, 922-605 Under current industry-specific US GAAP, initial hookup fees in the cable television
industry are recognized as revenue to the extent of the direct selling costs
incurred. The new standard has no industry-specific revenue recognition guidance,
and so hookup fees are treated like any other nonrefundable up-front fees.
In addition, the costs associated with the hookup activity need to be evaluated
separately under the new standard’s cost guidance. For further discussion on
contract costs, see Section 7.

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Deferral period when nonrefundable up-front fee is recognized as advance

payment
SEC SAB Topic 13 Under current SEC guidance, the up-front fee is deferred and recognized over
the expected period of performance, which can extend beyond the initial
contract period. In our experience, this has often resulted in an entity recognizing
nonrefundable up-front fees over the average customer relationship period.
Under the new standard, an entity assesses the up-front fee to determine
whether it provides the customer with a material right – and, if so, for how long.
This means that an entity no longer defaults to an average customer relationship
period, which may be driven by factors other than the payment of an initial up-
front fee. These factors may include the availability of viable alternatives, the
entity’s customer service, the inconvenience of changing service providers or the
quality of the product or service offering.

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10.1 Determining who the customer is and when control transfers |

10 Indirect channel sales

Overview

Telecom entities sell goods and services to end customers through various
distribution networks that typically include corporate-owned stores (the ‘direct
channel’) and third-party resellers (the ‘indirect channel’). The resellers are
independent dealers (referred to as the ‘dealer’ throughout this section).
Accounting for sales through indirect channels requires the telecom entity to
carefully analyze the specific facts of the dealer arrangement and common
business practices. Contractual arrangements can vary significantly between
dealers and telecom entities.
Because the telecom entity typically transfers equipment – e.g. handsets – to the
dealer, the telecom entity needs to determine who its customer is (the dealer or
the end customer) in the equipment sale and whether the dealer obtains control
of the equipment before the equipment is transferred to the end customer. This
involves assessing whether the arrangement is a consignment sale and whether
the dealer is acting as an agent or a principal.
Telecom entities also need to analyze the sale of network service arrangements
through the dealer, which will also include a principal versus agent analysis.
Furthermore, telecom entities will need to assess the payments related to
these arrangements to determine if they are a cost of obtaining a contract or
consideration payable to a customer.
The ultimate conclusions on these issues will affect the timing and amount of
revenue recognized for goods and services sold through the indirect channel.
These conclusions may also create differences in the accounting for revenues and
costs, depending on whether the sale is made by a direct or indirect channel.

10.1 Determining who the customer is and when

control transfers
Requirements of the new standard

When providing goods or services that will be sold through an indirect channel, an
entity first determines who the customer is in the arrangement – i.e. the dealer or
the end customer. It then determines when control of those goods or services is
transferred to that customer.

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606-10-25-25 Section 6 illustrates the requirements of the new standard related to the transfer of
[IFRS 15.33] control. ‘Control’ is the ability to direct the use of, and obtain substantially all of the
remaining benefits from, the goods or services (including preventing others from
doing so).
In addition to the general guidance on determining when control transfers to
customers in the distribution channel, entities also need to consider the application
guidance on:
– consignment arrangements; and
– principal versus agent considerations (from the dealer’s perspective) to determine
who is the customer.

Observations

Determining who the customer is for each dealer arrangement is key

Indirect channel arrangements will need to be analyzed carefully to determine
whether the dealer or the end customer is the customer of the telecom entity
for the relevant goods or services (i.e. the handset and the network service).
That analysis can be performed using either the principal versus agent or the
consignment arrangement guidance, depending on the specific facts and
circumstances of the agreement with the indirect channel. Regardless of which
guidance is used, we expect that the accounting outcome would generally be
the same.

10.1.1 Consignment arrangements

Requirements of the new standard

606-10-55-79 An entity may deliver goods to another party but retain control of those goods – e.g.
[IFRS 15.B77] it may deliver a product to a dealer or distributor for sale to an end customer. These
types of arrangements are called ‘consignment arrangements’ and do not allow the
entity to recognize revenue on delivery of the products to the intermediary.

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10.1 Determining who the customer is and when control transfers |

606-10-55-80 The new standard provides indicators that an arrangement is a consignment

[IFRS 15.B78] arrangement, as follows.

Indicators of a consignment arrangement

The entity controls

the product until a The entity is able The dealer does not
specified event occurs, to require the return of have an unconditional
such as the sale the product or transfer obligation to pay for
of the product to a the product to a third the products, although
customer of the dealer, party, such as another it might be required to
or until a specified dealer pay a deposit
period expires

When is revenue recognized?

While the entity retains

control of the product...

Performance obligation is not satisfied
and revenue is not recognized


When control transfers to the Performance obligation is satisfied
intermediary or end customer... and revenue is recognized

Example 67 – Consignment arrangement

Telco C enters into a contract with Retail Store T, an independent dealer.

Specifically, Telco C agrees to deliver handsets to Retail Store T. The terms of the
arrangement are as follows.
– Retail Store T pays Telco C only on sale of the handsets to the end customer.
– Telco C has the ability to require Retail Store T to transfer the handsets to other
dealers in the distribution network, or return the handsets to Telco C.
– Telco C has agreed to accept the return of any handsets from Retail Store T.

Telco C concludes that it does not transfer control of the handsets to Retail
Store T. Instead, Telco C has entered into a consignment arrangement with Retail
Store T. Therefore, Telco C concludes that it should recognize revenue for the sale
of the handset when it is sold to the end customer.

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Observations

Move away from a risk-and-reward approach

Under the new standard, a telecom entity typically considers contract-specific
factors to determine whether revenue should be recognized on sale into the
distribution channel or whether the telecom entity should wait until the product is
sold by the dealer to its customer.
SEC SAB Topic 13 This assessment may differ from current IFRS and US GAAP as a result of the
[IAS 18.16, IE2(c), IE6] shift from a risk-and-reward approach to a transfer of control approach. However,
consideration of whether the significant risks and rewards of ownership have
been transferred is an indicator of the transfer of control under the new standard
(see 6.1) and conclusions about when control of handsets has passed to the
dealer or the end customer are generally expected to stay the same.

10.1.2 Principal versus agent considerations

Requirements of the new standard

606-10-55-36 – 55-36A When other parties are involved in providing goods or services to an entity’s
[IFRS 15.B34–B34A] customer, the entity determines whether the nature of its promise is a performance
obligation to provide the specified goods or services itself, or to arrange for them
to be provided by another party – i.e. whether it is a principal or an agent. This
determination is made by identifying each specified good or service promised to the
customer in the contract and evaluating whether the entity obtains control of the
specified good or service before it is transferred to the customer.
Because an entity evaluates whether it is a principal or an agent for each good or
service to be transferred to the customer, it is possible for the entity to be a principal
for one or more goods or services and an agent for others in the same contract.
606-10-55-37 – 55-38 An entity is a ‘principal’ if it controls the specified good or service that is promised to
[IFRS 15.B35–B36] the customer before it is transferred to the customer.
When another party is involved, an entity that is a principal obtains control of:
– a good from another party that it then transfers to the customer;
– a right to a service that will be performed by another party, which gives the entity
the ability to direct that party to provide the service on the entity’s behalf; or
– a good or a service from another party that it combines with other goods or
services to produce the specified good or service promised to the customer.
If the entity is a principal, then revenue is recognized on a gross basis – corresponding
to the consideration to which the entity expects to be entitled. If the entity is an
agent, then revenue is recognized on a net basis – corresponding to any fee or
commission to which the entity expects to be entitled. An entity’s fee or commission
might be the net amount of consideration that the entity retains after paying other
parties (see 10.3).

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10.1 Determining who the customer is and when control transfers |

606-10-55-39 The new standard includes the indicators listed below to assist an entity in evaluating
[IFRS 15.B37] whether it controls a specified good or service before it is transferred to the customer.
These indicators may be more or less relevant to the assessment of control,
depending on the nature of the specified goods or services and the terms and
conditions of the contract. In addition, different indicators may provide more
persuasive evidence in different contracts.

Control over specified

goods or services Inventory risk
in advance of
transferring them to
the customer

Primary
Discretion to
responsibility
establish prices
to provide
for specified goods
specified goods
or services
or services

The entity is a principal Indicators that the entity is a principal in

in the transaction the transaction

If an entity does not obtain control of the goods or the right to the services in advance
of transferring them to the customer, then it is an agent for those goods or services.

Example 68 – Determining when control transfers

Telco A enters into a contract with Retail Store X, an independent dealer. The
contract requires Telco A to provide Retail Store X with handsets. The contract also
allows Retail Store X to sell Telco A’s wireless service plans to end customers.
The wireless service plans are never transferred to Retail Store X. Rather, Telco
A contracts with and provides the service to the end customer directly. Telco A
sets the price and characteristics of each service plan. Service plans can only be
sold to end customers approved by Telco A, based on credit scores. In addition,
service plans can be sold either with the handsets that Telco A has previously sold
to Retail Store X or on their own. When a service is sold with a handset, Retail
Store X has no discretion in setting the price of the handset.
Additional facts related to the arrangement are:
– Retail Store X must pay Telco A for handsets when they are delivered to
Retail Store X;
– Telco A cannot require Retail Store X to return any handsets;

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– Retail Store X does not have a right to return handsets and, further, Retail
Store X must manage and insure its own inventory and bears the risk for any
inventory obsolescence, shrinkage and overstocking; and
– Telco A is solely responsible for providing network services to the end
customer, under the wireless service plans.
Telco A first analyzes whether the dealer is agent or principal in reselling the
wireless service plans. Retail Store X does not obtain the benefits from the
service, nor does Retail Store X obtain a right to the service. Telco A contracts
with the end customer directly and is responsible for satisfying the network
service performance obligation. Therefore, Telco A concludes that the dealer
is acting as an agent. Therefore, Telco A recognizes revenue for the network
services when (or as) those services are provided.
Telco A then analyzes whether the dealer is agent or principal in reselling the
handsets. Telco A first considers whether control of the handsets transfers to
Retail Store X. If that is unclear, then Telco A considers the principal versus agent
indicators from the perspective of Retail Store X.

Consideration Assessment

Does Retail Store X control the Unclear. Retail Store X obtains legal
handset before transferring it to the title to the handsets. However,
end customer? because the answer is unclear given
the other terms and conditions of
the arrangement with the dealer,
the following indicators should be
considered.

Is Retail Store X primarily Retail Store X provides the handsets

responsible for fulfilling the promise to the end customer and can resell
to provide the handset to the end the handsets with or without
customer? service plans. Telco A cannot recall
the handsets. However, any issues
related to the handset are corrected
by the manufacturer.

Does Retail Store X have inventory Retail Store X takes legal title and
risk? insures the inventory. Retail Store X
is also responsible for maintaining
the appropriate inventory levels
and for inventory obsolescence.
Telco A does not accept returns of
handsets.

Does Retail Store X have discretion Retail Store X has no discretion in

in establishing prices? setting the prices of the handsets
when they are sold with a service. It
has pricing discretion if the handsets
are sold stand-alone.

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10.1 Determining who the customer is and when control transfers |

On balance, and after applying judgment, the analysis above indicates that Retail
Store X is acting as a principal in the sale of the handsets, primarily because
Retail Store X takes legal title and bears the inventory risk. This means that
Telco A transfers control of the handset to Retail Store X at the time of delivery.
Therefore, Telco A recognizes the sale of the handset at the time control transfers
to Retail Store X.

Observations

The agent versus principal analysis is performed from the dealer’s perspective
In distribution networks, the telecom entity will typically be acting as principal
in the transfer of goods or services to the dealer. Therefore, the principal versus
agent analysis is applied to the dealer, to determine if the dealer takes control
of the goods or services before they are resold to the end customer, and if the
dealer is the agent or the customer of the telecom entity.

606-10-55-36, ASU 2016-08.BC29 Unit of account is the specific good or service

[IFRS 15.B34, BC385Q]
The evaluation focuses on the promise to the customer, and the unit of account
is the specified good or service. A ‘specified good or service’ is a distinct good or
service (or a distinct bundle of goods or services) to be provided to the customer.
For telecom entities, the specified good or service would be the handset or
the network service. If individual goods and services are not distinct from one
another, then they represent inputs into a combined promise that is the specified
good or service that the telecom entity assesses.

Control of the good or service is the focus of the analysis

The telecom entity needs to determine if and when control of the goods and
services transfers to the dealer before transferring to the end customer. This
analysis is key for the telecom entity to identify its customer and determine the
amount and timing of its revenue. Generally, the dealer does not take control of the
telecom network services, or the right to those services; therefore, the emphasis
of the control analysis is on the equipment, such as handsets in wireless sales.
When it is clear that the dealer obtains control of the goods or services (e.g. the
handsets) before transferring them to the end customer, no further analysis is
required. However, if it is unclear if control transfers, then the telecom entity should
consider the new standard’s indicators in the agent versus principal guidance.
If the dealer obtains legal title to a good or service only momentarily before legal
title transfers to the end customer, then obtaining that legal title is not in itself
determinative. However, if the dealer has substantive inventory risk, for example,
then this may indicate that the dealer obtains control of the goods or services.
In performing the analysis of whether the dealer has substantive inventory risk,
telecom entities consider to what extent the dealer is exposed to technological
obsolescence, shrinkage and changes in market price, and whether the dealer
can return the inventory to the telecom entity (for any reason other than non-
working according to specifications).

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No specified hierarchy for the indicators

606-10-55-39 There is no specific hierarchy for the indicators and all of the indicators are
[IFRS 15.B37] considered in making the assessment. However, depending on the facts and
circumstances, one or more indicators may be more relevant to the specific
contract. Assessing the relevance of the indicators may be challenging when it is
unclear whether the telecom entity or the dealer bears the responsibility, or when
there are shared responsibilities between the telecom entity and the dealer.

Equipment financing or lease plans may add further complexity to the

analysis

ASU 2014-09.BC423 Telecom entities may offer finance or lease plans to their customers for the
[IFRS 15.BC423] purchase of handsets and other equipment. These plans are also offered
through indirect channels and may involve repurchasing the handset or the
receivable from either the dealer or the end customer. These finance offerings
do not necessarily preclude the transfer of control of the handset to the dealer.
Judgment will be required to consider the specific facts and circumstances of
the arrangement.

Comparison with current IFRS

From risks and rewards to transfer of control

[IFRS 15.BC382, IAS 18.8, IE21] There is a similar principle in current IFRS that amounts collected on behalf of a
third party are not accounted for as revenue. However, determining whether the
dealer is acting as an agent or a principal under the new standard differs from
current IFRS, as a result of the shift from the risk-and-reward approach to the
transfer of control approach. Under current IFRS, the dealer is a principal in the
transaction when it has exposure to the significant risks and rewards associated
with the sale of goods or the rendering of services. The Boards noted that the
indicators serve a different purpose from those in current IFRS, reflecting the
overall change in approach.

Comparison with current US GAAP

Less guidance under new standard

605-45 Many of the indicators in current US GAAP for assessing whether a party is
a principal or an agent are not included in the new standard – e.g. discretion
in supplier selection, involvement in determining the product or service
specifications or customer credit risk. Based on the changes to the principal
versus agent guidance introduced by the new standard, telecom entities will
need to reconsider their conclusions. Also, the new standard does not identify
any of the indicators as being more important than others, while current US GAAP
specifies that the primary obligor and general inventory risk are strong indicators.

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10.2 Combining contracts in the indirect channel |

10.2 Combining contracts in the indirect channel

Section 2.3 discusses the requirements of the new standard on when contracts
are combined. That guidance should also be applied to sales through distribution
channels.

Observations

The service and the handset sale contracts may not always be combined in
the indirect channel
When selling goods and services through a distribution channel, telecom entities
often enter into multiple contracts with multiple parties. The telecom entity needs
to assess if these contracts should be combined and therefore accounted for as
one contract. One condition for combining contracts is that the contracts are with
the same customer (or related parties of the customer). It is therefore key that a
telecom entity determines who the customer is under the contracts (see 10.1).
For example, in an indirect sale of a wireless handset and service plan, the
customer for the sale of the handset could be the dealer (i.e. when the dealer is
acting as a principal), while the customer in the network service contract is the
end customer. In this case, because the dealer and the end customer are not
related parties, these contracts (the initial sales contract for the handset to the
dealer and the subsequent network service contract with the end customer) are
not combined. These contracts are therefore treated as separate contracts for the
purposes of the remainder of the analysis under the new standard. Accounting
for these contracts separately may lead to differences in the amount and timing
of revenue recognition in the indirect and the direct channel. However, this will
depend on the specific facts and circumstances and conclusions related to the
accounting for any payments in the indirect channel (see 10.3).
Alternatively, if the dealer is the agent in the resale of the handset, then the
end customer is considered the customer for both sales and the contracts are
combined (provided the other criteria for combination are met). In this case,
combining the contracts implies that the combined transaction price, including
any discount, will be allocated to the performance obligations (handset and
network service) in the combined contract, as explained in Step 4 (see 5.2).
Therefore, the accounting for this indirect channel arrangement could be closer, if
not similar, to the accounting for the same arrangement in a direct channel sale.

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10.3 Accounting for payments in the indirect channel

Requirements of the new standard

The new standard includes guidance on the accounting for payments related to
contracts with a customer as follows:
– consideration payable to a customer (see 4.3); and
– costs of obtaining a contract (see 7.1).

Example 69 – Payments in the indirect channel: Dealer commission

versus discount to the end customer

Continuing Example 68, Retail Store X acts as a principal in the sale of handsets
to end customers.
The agreement between Telco A and Retail Store X also specifies that Telco A
will make certain payments to Retail Store X. Specifically, Telco A agrees to pay
Retail Store X a commission when Retail Store X sells a network service plan to a
customer, whether it is bundled with a handset or sold on its own.
Retail Store X has no discretion to set prices in a bundled arrangement that
includes a handset provided by Telco A and Telco A’s service plan. In addition,
Telco A will reimburse Retail Store X for discounts from the stand-alone selling
prices of the handsets provided to the end customer. The reimbursement of the
discount is payable only when the end customer activates the service plan and
is limited to the amount of the discount provided to the end customer, for which
Retail Store X must provide evidence.
Commission
Telco A concludes that the commission paid to Retail Store X is paid in Retail
Store X’s capacity as an agent in the sale of the network service plan, not as a
customer. This is because the commission is only payable when Retail Store X
sells a network service plan to an end customer (which, in the case of service
plans, is Telco A’s customer). Thus, Telco A concludes that the commission
represents an incremental cost of obtaining a contract with a customer.
Therefore, Telco A follows the guidance on accounting for costs incurred to obtain
a contract with a customer (see 7.1). Specifically, Telco A recognizes those costs
as an asset and amortizes that asset on a systematic basis (see 7.3).

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10.3 Accounting for payments in the indirect channel |

Handset discount reimbursement

Telco A observes that the reimbursement related to the handset is ultimately
a discount provided to the end customer. This is because there is a direct
correlation between the amount paid to Retail Store X and the discount provided
by Retail Store X to the end customer; the amount is only paid to Retail Store X
when the customer activates the service plan, and Retail Store X provides
evidence of the discount provided to Telco A’s customer. In this arrangement,
Retail Store X passes through a discount to the end customer that is funded by
Telco A. Consequently, Telco A concludes that the reimbursement is consideration
payable to a customer (i.e. the end customer). Telco A recognizes the
reimbursement to Retail Store X as a reduction of the service transaction price.

Example 70 – Payments in the indirect channel: When judgment is

required

Continuing Example 68, Retail Store X acts as a principal in the sale of handsets
to end customers.
The agreement between Telco A and Retail Store X also specifies that Telco A
will make certain payments to Retail Store X when Retail Store X sells a service
plan to a customer. The agreement specifies that the payment is 500 when Retail
Store X sells a service plan with a handset and 100 when Retail Store X sells the
same service plan alone.
Telco A determines that the amount paid to Retail Store X is paid in Retail
Store X’s capacity as an agent, not a customer. This is because the payment is
only payable when Retail Store X sells a service plan to an end customer which, in
the case of service plans, is Telco A’s customer.

Before concluding that the full payment of 500 should be capitalized as a cost to
obtain the service contract, Telco A observes that the difference in the amount
paid between types of contracts sold by Retail Store X may require additional
analysis. In particular, the higher amount paid to Retail Store X when it sells a
handset and a service plan suggests that the amount paid may be something
other than a commission and may represent a reimbursement of discounts
commonly provided to end customers in the purchase of handset and service
arrangements. In assessing whether the payment should be accounted for as
something other than a commission, Telco A considers the difference in the
commission payments and the typical discounts provided to end customers in
the purchase of handset when it is bundled with a service contract. Telco A also
considers other in-market offerings that provide a significant discount on the
handset when it is bundled with a service offering.

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| 10 Indirect channel sales

Observations

No specific guidance on allocating a discount when dealer is principal for

part of the arrangement and agent for the other part of the arrangement
The new standard does not include specific guidance on how a telecom entity
allocates a discount in an arrangement in which it is a principal for some goods
or services and an agent for others. This may apply to telecom entities selling
through a distribution channel when the dealer acts as a principal in the sale of the
handset and an agent in the sale of the service (see 10.1). In these arrangements,
a telecom entity needs to consider the guidance on determining and allocating
the transaction price (see Sections 4 and 5).

Payments in the indirect channel may be accounted for differently

Arrangements with dealers for sales in the indirect channel often include a
number of different payments. When the dealer is acting as a principal in the sale
of handsets, the accounting for these payments may vary, depending on the
terms and conditions related to the payments.
For example, if payments are not directly linked to the discount provided to
the end customer, then it may be difficult to conclude that the payments are
something other than a commission paid to the dealer and therefore should
be accounted for as a cost of obtaining a contract. However, in determining
the accounting for these payments, telecom entities also should consider the
guidance on consideration payable to a customer, as well as other factors, such
as a comparison of cash flows between the direct and indirect channel and
differences in payments when the dealer sells only a service plan, as compared
with when the dealer sells a handset and a service plan.
In addition, telecom entities may need to consider whether the payments to
dealers effectively represent a subsequent discount on the handset. In this
case, the discount would represent variable consideration and would need to be
estimated at the time the handset is delivered.
Determining the appropriate accounting for these payments requires judgment.

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11 Repurchase agreements |

11 Repurchase
agreements
Overview

A telecom entity has executed a repurchase agreement if it sells an asset to a

customer and promises, or has the option, to repurchase it. If the repurchase
agreement meets the definition of a financial instrument, then it is outside the
scope of the new standard. If not, then the repurchase agreement is in the
scope of the new standard and the accounting for it depends on its type – e.g. a
forward, call option or put option – and on the repurchase price.
Given the rapid change in technology, telecom entities commonly offer their
customers upgrades or trade-ins on their equipment – e.g. their wireless
handsets. Indirect channel sales may also give the telecom entity the right or
obligation to buy back the equipment from the dealer. These arrangements may
fall under the repurchase guidance and should be analyzed with care.

Requirements of the new standard

A forward or a call option

606-10-55-68 – 55-69 If an entity has an obligation (a forward) or a right (a call option) to repurchase an
[IFRS 15.B66–B67] asset, then a customer does not have control of the asset. This is because the
customer is limited in its ability to direct the use of and obtain the benefits from the
asset, despite its physical possession. If the entity expects to repurchase the asset
for less than its original sales price, then it accounts for the entire agreement as a
lease. Conversely, if the entity expects to repurchase the asset for an amount that is
greater than or equal to the original sales price, then it accounts for the transaction as
a financing arrangement. When comparing the repurchase price with the selling price,
the entity considers the time value of money.
606-10-55-70 – 55-71, 55-78 In a financing arrangement, the entity continues to recognize the asset and
[IFRS 15.B68–B69, B75] recognizes a financial liability for any consideration received. The difference between
the consideration received from the customer and the amount of consideration to
be paid to the customer is recognized as interest, and processing or holding costs if
applicable. If the option expires unexercised, then the entity derecognizes the liability
and the related asset, and recognizes revenue.

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| 11 Repurchase agreements

Forward Call option

(a seller’s obligation to repurchase (a seller’s right to repurchase
the asset) the asset)

The customer does not obtain control of the asset

Asset repurchased for less than original selling price?

Yes No

Lease arrangement* Financing arrangement

* Under US GAAP, if the contract is part of a sale-leaseback transaction then it is accounted for
as a financing arrangement.

A put option
606-10-55-72 – 55-73 If a customer has a right to require the entity to repurchase the asset (a put option) at
[IFRS 15.B70–B71] a price that is lower than the original selling price, then at contract inception the entity
assesses whether the customer has a significant economic incentive to exercise the
right. To make this assessment, an entity considers factors including the:
– relationship of the repurchase price to the expected market value of the asset at
the date of repurchase; and
– amount of time until the right expires.

606-10-55-72, 55-74 If the customer has a significant economic incentive to exercise the put option, then
[IFRS 15.B70, B72] the entity accounts for the agreement as a lease. Conversely, if the customer does
not have a significant economic incentive, then the entity accounts for the agreement
as the sale of a product with a right of return (see 10.1 in Issues In-Depth, Edition
2016).
606-10-55-75, 55-78 If the repurchase price of the asset is equal to or greater than the original selling
[IFRS 15.B73, B76] price and is more than the expected market value of the asset, then the contract
is accounted for as a financing arrangement. In this case, if the option expires
unexercised, then the entity derecognizes the liability and the related asset and
recognizes revenue at the date on which the option expires.
606-10-55-77 When comparing the repurchase price with the selling price, the entity considers the
[IFRS 15.B75] time value of money.

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11 Repurchase agreements |

Put option
(a customer’s right to require the seller to repurchase the asset)

Repurchase price equal to or greater than original

selling price?

Yes No

Repurchase price greater No Customer has significant

than expected market value economic incentive to exercise
of asset? the put option?

Yes Yes No

Financing arrangement Sale with a right

Lease*
of return

* Under US GAAP, if the contract is part of a sale-leaseback transaction then it is accounted for
as a financing arrangement.

Example 71 – Handset trade-in

Telco T enters into a 24-month wireless service contract with Customer C. At

contract inception, Telco T transfers to Customer C a handset for 600, together
with a right to trade in that handset for 100, at the end of the service contract.
The stand-alone selling price of the handset at contract inception is 600. Telco T
expects the handset market value to be 150 in 24 months.
Telco T’s obligation to repurchase the handset at the customer’s option is a
put option. Telco T assesses, at contract inception, whether Customer C has
a significant economic incentive to exercise the put option, to determine the
accounting for the transfer of the handset.
Telco T concludes that Customer C does not have a significant economic incentive
to exercise the put option because the repurchase price of 100 is lower than the
expected market value of 150. Additionally, customers usually have easy access
to the second-hand market to resell similar phones. Telco T determines that there
are no other relevant factors to consider when assessing whether Customer C
has a significant economic incentive to exercise the put option. Consequently,
Telco T concludes that control of the handset transfers to Customer C because
Customer C is not limited in its ability to direct the use of, and obtain substantially
all of the remaining benefits from, the handset.
Telco T therefore accounts for the transaction as a sale with a right of return
(see 10.1 in Issues In-Depth, Edition 2016).

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| 11 Repurchase agreements

Observations

A revised approach that focuses on the repurchase price

The new standard includes guidance on the nature of the repurchase right
or obligation and the repurchase price relative to the original selling price. In
contrast, the current accounting focuses on whether the risks and rewards
of ownership have been transferred. As a result, determining the accounting
treatment for repurchase agreements may, in some cases, be more
straightforward under the new standard, but differ from current practice.
However, judgment will be required to determine whether a customer with
a put option has a significant economic incentive to exercise its right. This
determination is made at contract inception and is not updated for subsequent
changes in asset prices. Historical customer behavior in similar arrangements will
be relevant to this determination.
It is common for telecom entities, in several jurisdictions or markets, to include
handset trade-in rights in their wireless contracts. Consequently, they will need
to analyze the contract conditions carefully to determine whether the guidance
related to repurchase agreements should be applied and, if so, whether the
arrangement is accounted for as a lease or a sale with a right of return.

Trade-in offers after contract inception

Telecom entities may make offers after contract inception that provide customers
with an option to trade in their handsets. These subsequent offers require careful
analysis to determine the nature of the offer and any accounting consequences.
Often, these offers are widely provided, made for a limited time and can be
retracted at any time. If these offers are frequently provided after contract
inception, then they may constitute customary business practices and thus
represent an implied promise at contract inception. In those cases, the telecom
entity needs to determine if the guidance on repurchase agreements or variable
consideration applies. When they are not assessed as the telecom entity’s
customary business practice, the offers may be viewed as marketing offers.

Repurchase agreements in indirect channels

In the indirect channels, there could be situations where the telecom entity
repurchases the equipment from the dealer. The telecom entity should assess
whether the repurchase guidance applies. Repurchase agreements do not
necessarily preclude transfer of control but facts and circumstances should
be considered.
Sale-leaseback transactions
The accounting for sale-leaseback transactions differs between US GAAP and
IFRS (see 5.5.5 in Issues In-Depth, Edition 2016).

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11 Repurchase agreements |

Comparison with current IFRS

Introduction of more prescriptive guidance

[IAS 18.IE5] The limited guidance on repurchase agreements in current IFRS focuses on
whether the seller has transferred the risks and rewards of ownership to the
buyer. The new standard introduces explicit guidance that requires telecom
entities to apply a conceptually different approach when accounting for
repurchase arrangements, and may result in differences from current practice.
[IAS 17, IAS 18] In addition, under current IFRS, guaranteed residual amounts offered by a
telecom entity to the customer may preclude revenue recognition if significant
risks are retained. By contrast, the specific guidance in the new standard on
repurchase arrangements focuses on whether the telecom entity retains control
of the asset.

Comparison with current US GAAP

Change in practice for guarantees of resale value

840-10-55-10 – 55-25, 460-10 Under current US GAAP, if a telecom entity guarantees the resale value of an asset,
then the arrangement is accounted for as a lease. Under the new standard, the
guarantee is evaluated to determine if it is in the scope of the revenue standard
(see Section 1) and, if so, revenue is recognized at the point in time at which the
customer obtains control of the asset, which may result in a significant change in
practice for some telecom entities.

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| Detailed contents

Detailed contents
Facing the challenges.................................................................................................................................................................... 1
Introduction................................................................................................................................................................................... 2
Key facts ................................................................................................................................................................................... 2
Broad impacts for telecom entities.............................................................................................................................................. 3

Putting the new standard into context........................................................................................................................................ 6

Organization of the text................................................................................................................................................................ 6
Guidance referenced in this publication...................................................................................................................................... 7
SEC guidance................................................................................................................................................................................. 7
Transition Resource Group for revenue recognition................................................................................................................... 8

1 Scope................................................................................................................................................................................... 9
1.1 In scope................................................................................................................................................................................ 9
1.2 Out of scope.......................................................................................................................................................................10
1.3 Partially in scope............................................................................................................................................................... 13
1.4 Portfolio approach..............................................................................................................................................................17

2 Step 1: Identify the contract with a customer................................................................................................................. 19

2.1 Criteria to determine whether a contract exists............................................................................................................. 19
2.1.1 Enforceability and contract term............................................................................................................................. 21
2.1.2 Collectibility............................................................................................................................................................ 27
2.2 Consideration received before concluding that a contract exists................................................................................. 30
2.3 Combination of contracts................................................................................................................................................. 35

3 Step 2: Identify the performance obligations in the contract........................................................................................ 38

3.1 Criteria to identify performance obligations................................................................................................................... 38
3.2 Distinct goods or services................................................................................................................................................ 42
3.3 Telecom equipment.......................................................................................................................................................... 47
3.4 Telecom services............................................................................................................................................................... 50
3.4.1 Network telecom services and add-ons................................................................................................................. 50
3.4.2 The series guidance applied to telecom services................................................................................................... 53
3.5 Installations....................................................................................................................................................................... 56
3.6 Other telecom services, fees and administrative tasks.................................................................................................. 59
3.7 Incentives and promotional giveaways........................................................................................................................... 61
3.8 Warranties......................................................................................................................................................................... 63

4 Step 3: Determine the transaction price.......................................................................................................................... 67

4.1 Contractual minimum commitment or contracted service amount?........................................................................... 70
4.2 Variable consideration (and the constraint).................................................................................................................... 73
4.2.1 Estimate the amount of variable consideration....................................................................................................... 77
4.2.2 Determine the amount for which it is probable (highly probable for IFRS) that a significant reversal will not
occur (‘the constraint’)............................................................................................................................................ 79
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Detailed contents |

4.3 Consideration payable to a customer.............................................................................................................................. 81

4.4 Significant financing component.................................................................................................................................... 87
4.5 Noncash consideration..................................................................................................................................................... 93

5 Step 4: Allocate the transaction price to the performance obligations in the contract................................................ 96
5.1 Determine stand-alone selling prices.............................................................................................................................. 97
5.2 Allocate the transaction price.........................................................................................................................................102
5.2.1 Allocating a discount.............................................................................................................................................107
5.3 Changes in the transaction price.................................................................................................................................... 111

6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation................................................113

6.1 Transfer of control............................................................................................................................................................115
6.2 Performance obligations satisfied over time.................................................................................................................118
6.3 Measuring progress toward complete satisfaction of a performance obligation....................................................... 121
6.4 Performance obligations satisfied at a point in time.................................................................................................... 125
6.5 Enterprise contracts – Bill-and-hold and customer acceptance................................................................................... 127

7 Contract costs................................................................................................................................................................. 128

7.1 Costs of obtaining a contract......................................................................................................................................... 128
7.2 Costs of fulfilling a contract........................................................................................................................................... 134
7.3 Amortization................................................................................................................................................................... 139
7.4 Impairment...................................................................................................................................................................... 143

8 Customer options for additional goods or services..................................................................................................... 146

8.1 Determining if a material right is created by contract options..................................................................................... 146
8.2 Measuring and accounting for material rights.............................................................................................................. 151

9 Nonrefundable up-front fees.......................................................................................................................................... 156

9.1 Assessing if nonrefundable up-front fees convey a material right.............................................................................. 158
9.2 Accounting for nonrefundable up-front fees that do not convey a material right...................................................... 161

10 Indirect channel sales..................................................................................................................................................... 165

10.1 Determining who the customer is and when control transfers................................................................................... 165
10.1.1 Consignment arrangements..................................................................................................................................166
10.1.2 Principal versus agent considerations...................................................................................................................168
10.2 Combining contracts in the indirect channel.................................................................................................................173
10.3 Accounting for payments in the indirect channel..........................................................................................................174

11 Repurchase agreements..................................................................................................................................................177

Detailed contents....................................................................................................................................................................... 182

Index of examples...................................................................................................................................................................... 184

Guidance referenced in this publication.................................................................................................................................. 186

Acknowledgments..................................................................................................................................................................... 189

Keeping you informed............................................................................................................................................................... 190

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| Index of examples

Index of examples
1 Scope................................................................................................................................................................................... 9
Example 1 – In-scope arrangement....................................................................................................................................... 9
Example 2 – Out-of-scope arrangement...............................................................................................................................10
Example 3 – Non-monetary exchanges................................................................................................................................11
Example 4 – Partially in scope transaction............................................................................................................................15
Example 5 – Portfolio approach applied to costs ..................................................................................................................17
2 Step 1: Identify the contract with a customer................................................................................................................. 19
Example 6 – 24-month wireless bundle contract with substantive early-termination penalties........................................... 21
Example 7 – 24-month wireless bundle contract that the customer can terminate after Month 12 without penalty............ 21
Example 8 – 24-month wireless bundle contract that the customer can terminate after Month 12 with penalty................. 22
Example 9 – Month-to-month wireless contract with device installment plan..................................................................... 22
Example 10 – Assessing collectibility for individual telecom customers.............................................................................. 27
Example 11 – Implicit price concession............................................................................................................................... 28
Example 12 – Customer ceases payment in Month 7 in a 24-month landline voice contract............................................... 31
Example 13 – Consideration received after a contract ceases to exist................................................................................. 32
Example 14 – Recognition of a deferred activation fee once a contract ceases to exist....................................................... 32
Example 15 – Combination of contracts in a wireless installment plan................................................................................ 35
3 Step 2: Identify the performance obligations in the contract........................................................................................ 38
Example 16 – Wireless contract with handset..................................................................................................................... 47
Example 17 – Purchased modem and router with internet.................................................................................................. 48
Example 18 – Residential triple-play.................................................................................................................................... 51
Example 19 – Cable television service and additional premium channel.............................................................................. 51
Example 20 – Wireless family plan with shared data........................................................................................................... 52
Example 21 – Term cable television contract with fixed fee and unlimited usage................................................................. 54
Example 22 – Term wireless service contract with fixed fee and limited usage................................................................... 55
Example 23 – Residential installation services.................................................................................................................... 57
Example 24 – Business installation services....................................................................................................................... 57
Example 25 – Activation fee in a wireless contract ............................................................................................................. 59
Example 26 – Wi-Fi hotspot access..................................................................................................................................... 60
Example 27 – Free handset case and gift card..................................................................................................................... 61
Example 28 – Wireless handset extended warranty............................................................................................................ 64
4 Step 3: Determine the transaction price.......................................................................................................................... 67
Example 29 – Determining the transaction price: Contractual minimum commitment........................................................ 71
Example 30 – Determining the transaction price: Contracted service approach.................................................................. 72
Example 31 – Enterprise service contract with usage fee treated as variable consideration.................................................74
Example 32 – Enterprise contract with SLA penalties..........................................................................................................76
Example 33 – Estimate of variable consideration: Expected value....................................................................................... 77
Example 34 – Estimate of variable consideration: Most likely amount................................................................................. 78
Example 35 – Goodwill credits............................................................................................................................................ 82
Example 36 – Credits to a new customer............................................................................................................................ 83
Example 37 – Wireless installment plan with a two-year service contract .......................................................................... 89
Example 38 – Wireless subsidized handset with a two-year service contract...................................................................... 90
Example 39 – Month-to-month wireless contract with handset installment plan................................................................ 91

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Index of examples |

5 Step 4: Allocate the transaction price to the performance obligations in the contract................................................ 96
Example 40 – Allocation of the transaction price................................................................................................................102
Example 41 – Allocation of the transaction price in a wireless contract: Minimum commitment approach........................103
Example 42 – Allocation of the transaction price in a wireless contract: Contracted service amount.................................105
Example 43 – Bundle discount allocated to all performance obligations in a contract.........................................................108
Example 44 – Discount allocated entirely to one or more, but not all, performance obligations in a contract......................108
Example 45 – Discretionary credit: Service quality issue.................................................................................................... 111
Example 46 – Discretionary credit: Retention..................................................................................................................... 111
6 Step 5: Recognize revenue when or as the entity satisfies a performance obligation................................................113
Example 47 – Assessing whether telecom network services meet the over-time criteria.................................................. 119
Example 48 – Monthly prepaid wireless contract...............................................................................................................122
Example 49 – Wireless service contract with rollover minutes feature...............................................................................122
Example 50 – Enterprise service contract with usage fee treated as variable consideration...............................................123
Example 51 – Determining when control transfers.............................................................................................................126
7 Contract costs................................................................................................................................................................. 128
Example 52 – Costs incurred to obtain a contract...............................................................................................................129
Example 53 – Dealer commission with clawback provision................................................................................................130
Example 54 – Commission paid on renewals after the initial contract is obtained..............................................................130
Example 55 – Set-up costs incurred to fulfill a contract......................................................................................................135
Example 56 – Amortization of acquisition costs for month-to-month contracts..................................................................139
Example 57 – Commission paid on renewals after the initial contract is obtained..............................................................140
8 Customer options for additional goods or services..................................................................................................... 146
Example 58 – Cable television service and additional premium channels...........................................................................147
Example 59 – Wireless contract with option for data..........................................................................................................148
Example 60 – Optional added shared wireless lines...........................................................................................................148
Example 61 – Wireless with global add-on.........................................................................................................................148
Example 62 – Fixed price guarantee on renewal of service................................................................................................151
Example 63 – Fixed price guarantee on renewal of service: Applying the practical alternative...........................................152
9 Nonrefundable up-front fees.......................................................................................................................................... 156
Example 64 – Nonrefundable up-front fees: Annual contract..............................................................................................158
Example 65 – Activation fee in a month-to-month wireless contract..................................................................................159
Example 66 – Allocation of the transaction price, including a nonrefundable up-front fee...................................................161
10 Indirect channel sales..................................................................................................................................................... 165
Example 67 – Consignment arrangement..........................................................................................................................167
Example 68 – Determining when control transfers.............................................................................................................169
Example 69 – Payments in the indirect channel: Dealer commission versus discount to the end customer....................... 174
Example 70 – Payments in the indirect channel: When judgment is required.....................................................................175
11 Repurchase agreements..................................................................................................................................................177
Example 71 – Handset trade-in...........................................................................................................................................179

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| Guidance referenced in this publication

Guidance referenced in this

publication
IFRS guidance referenced in this publication
The Conceptual Framework for Financial Reporting
IFRS 1 First-time Adoption of International Financial Reporting Standards
IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
IFRS 8 Operating Segments
IFRS 9 Financial Instruments
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 14 Regulatory Deferral Accounts
IFRS 15 Revenue from Contracts with Customers
IFRS 16 Leases
IAS 2 Inventories
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 11 Construction Contracts
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 24 Related Party Disclosures
IAS 28 Investments in Associates and Joint Ventures
IAS 32 Financial Instruments: Presentation
IAS 34 Interim Financial Reporting
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property

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Guidance referenced in this publication |

IFRS guidance referenced in this publication

IFRIC 12 Service Concession Arrangements
IFRIC 13 Customer Loyalty Programmes
IFRIC 15 Agreements for the Construction of Real Estate
IFRIC 18 Transfers of Assets from Customers
SIC-31 Revenue—Barter Transactions Involving Advertising Services

US GAAP guidance referenced in this publication

FASB Statements of Financial Accounting Concepts
Topic 250 Accounting Changes and Error Corrections
Topic 270 Interim Reporting
Topic 280 Segment Reporting
Topic 310 Receivables
Topic 330 Inventory
Topic 340 Other Assets and Deferred Costs
Topic 350 Intangibles—Goodwill and Other
Topic 360 Property, Plant, and Equipment
Topic 450 Contingencies
Topic 460 Guarantees
Topic 470 Debt
Topic 505 Equity
Topic 605 Revenue Recognition
Topic 606 Revenue from Contracts with Customers
Topic 610 Other Income
Topic 720 Other Expenses
Topic 808 Collaborative Arrangements
Topic 810 Consolidation
Topic 825 Financial Instruments
Topic 835 Interest
Topic 840 Leases
Topic 842 Leases
Topic 845 Nonmonetary Transactions
Topic 850 Related Party Disclosures
Topic 860 Transfers and Servicing
Topic 922 Entertainment—Cable Television

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| Guidance referenced in this publication

US GAAP guidance referenced in this publication

Topic 944 Financial Services—Insurance
Topic 980 Regulated Operations
SEC Staff Accounting Bulletin Topic 11.M, Miscellaneous Disclosures: Disclosure Of The Impact That Recently Issued
Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period
SEC Staff Accounting Bulletin Topic 13, Revenue Recognition
SEC Regulation S-K, Item 301, Selected Financial Data
SEC Regulation S-X, Rule 5-03(b), Income Statements

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Acknowledgments |

Acknowledgments
This publication has been produced jointly by the KPMG International Standards Group (part of KPMG IFRG Limited), KPMG LLP
US and KPMG LLP Canada.
We would like to acknowledge the efforts of the main contributors of this publication.
Valerie Boissou United States
Karyn Brooks Canada
Allison McManus Canada
Jason Waldron United States
We would also like to thank others for the time that they generously committed to this publication.
Brian K. Allen United States
Irina Ipatova International Standards Group
Prabhakar Kalavacherla (PK) United States
Paul Munter United States
Brian O’ Donovan International Standards Group
Dan Wilson Canada

KPMG Global IFRS Revenue Recognition and Provisions Topic Team

Brian K. Allen United States
Enrique Asla Garcia Spain
Phil Dowad Canada
Lise du Randt South Africa
Laura Galbiati Switzerland
Kim Heng Australia
Ramon Jubels Brazil
Prabhakar Kalavacherla (PK) United States
Reinhard Klemmer Singapore
Vijay Mathur India
Annie Mersereau France
Brian O’Donovan International Standards Group
Anne Schurbohm Germany
Sachiko Tsujino Japan

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| Keeping you informed

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Publication name: Revenue for Telecoms – Issues In-Depth

Publication number: 133745

Publication date: September 2016

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