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IFRS 15Revenue recognition fromContracts with CustomersWorkshops for Telecommunication companies
www.pwc.com
6 June 2016
PwC
Agenda
I. Where the industry is in terms of IFRS 15?
How is the process of IFRS 15 implementation organized?
Would an IT implementation be a big issue?
How would IFRS 15 impact operations?
II.Practical aspects of IFRS 15 application- discussion
2
Examples enclosed in this publication do not represent the official opinion of PwC regarding givenissue. We are aware of the fact that other solutions than shown below exist.
This publication has been prepared for general guidance on matters of interest only, and does notconstitute professional advice. You should not act upon the information contained in this publicationwithout obtaining specific professional advice. No representation or warranty (express or implied) isgiven as to the accuracy or completeness of the information contained in this publication.
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Where are the responses coming from?
2 2 2
1
4 4
2
6
1
3
1 1 1
0
1
2
3
4
5
6
7
Total responses
Total answers: 30
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I
Where the industry isin terms of IFRS 15?
PwC
Most of the companies would not use the optionto apply the standard earlier
5
When does the company intend to start applying IFRS 15?(first day of the financial year when the standard will be applied)
• from 1st January 2018
• from 1st January 2017
17 of 30 respondents
7 of 30 respondents
PwC
PwC
2 years after the standard issuance only 1/3of companies feel well prepared…
6
To what extent is your company prepared to implementchanges in revenue accounting?
0
7
12
4
7
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
I cannot estimate at this point
Not very good
Somewhat
Well
Very well
Number of respondents
PwC
Significant part of the market is still at the verybeginning of the route
7
At what stage of implementation process is your companyat the moment?
Preliminary work Implementation
Not started yetNot started yet AccountinganalysisAccountinganalysis
Preliminaryanalysis of ITsystems
Preliminaryanalysis of ITsystems
IT systemsrequirementsIT systemsrequirements
ImplementingIT solutionsImplementingIT solutions
78
4 5
Testing ITsolutionsTesting ITsolutions
7
3
PwC
Once initial stages are ready it should be mucheasier to complete the implementation
8
How difficult do you believe the specific stages of IFRS 15implementation to be? (1=very easy, 10=very difficult)
4,5
6,23
6,64
6,3
6,85
6,97
6,31
0 2 4 6 8
Other (please specify)
Explanations to investors
Preparing estimates
Process of procedures reorganisation
Implementation of IT system
Data sources & gathering
Accounting solutions and models
Other: Opening balance sheet accounts
PwC
How is the process of IFRS 15implementation organized?
PwC
Unlike other new standards, IFRS 15 requires notonly accounting attention
10
How many people are involved inthe process of IFRS 15implementation?
17%
10%
40%
13%
3%
17%
1-2 employees
3-4 employees
5-9 employees
10-14 employees
15-19 employees
We have not appointed a dedicated implementation team yet
Are there any externaladvisors/specialists involved?
• accounting advisors:15 companies
• information systems specialists:9 companies
• project management specialists:2 companies
• no external specialist involved:4 companies
• no decision made: 8 companies
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Which departments are involved in implementation?
* IFRS Metodology, BI, Accounting and Revenue Controlling, IFRSMethodology
Financial Reporting
IT
Controlling
Sales and marketing
Billing
Others*
27 companies
17 companies
13 companies
6 comp.
17 companies
21 companies
Companies involve many different departmentsin IFRS 15…
PwC
Would an IT implementationbe a big issue?
PwC
Complexity of IT architecture cause thatoff-the-shelf solutions are not attractive for typicaltelco
13
How the company will develop IT solutions that supportrevenue accounting according to IFRS 15 standards?
7
1
12
12
0 5 10 15
No decision made
The purchase of existing applications and systems
Mix model
Internal solutions development
Number of companies
14 of 30 respondents have already chosen IT solutions / supplierthat support revenue accounting according to IFRS 15 standard
PwC
Quality of data sources would be the biggest issuein IT implementation
14
How do you assess the following challenges facing ITsolutions regarding IFRS 15?
5,23
5,35
5,92
5,37
6,44
5,46
Maintenance of information and data of performanceobligations for contracts
Data volume to be processed
Link between different data sources
Auditability of data
Process quality of data sources
Finding a solution to calculate/allocate revenue
0 2 4 6 8
(1=easy to be solved, 10=very difficult to be solved)
PwC
Calculating revenue on individual contract basiswould be more common, although tougher
15
Which approach will you chose for revenue adjustmentsin contracts?
Nu
mb
er
of
re
sp
on
de
nts
9
7
4
10
7
5
7
11
0
1
2
3
4
5
6
7
8
9
10
11
12
Contract-by-contract Portfolio Mixed model No decision made
How the company will apply adjustments to B2C contracts?
How the company will apply adjustments to B2B contracts?
PwC
How would IFRS 15 impactoperations?
PwC
There is still a lot of uncertainty with regardto impact on business models
17
Do companies plan to perform changes in their businessmodels?
19
4
2
5
0 5 10 15 20
Not decided yet
We don't want to disclose this information
Yes
No
PwC
PwC
The industry did not yet worked out the approachto typical performance measures
18
What approach does your company intend to apply in relationsto the calculation of ARPU upon the implementation of IFRS 15?
26
0
0
1
2
3
0 10 20 30
We haven't yet decided
Based on service + hardware revenue (IFRS 15)
We intend to stop using ARPU
Other method
Based on billing
Based on service revenue (IFRS 15)
PwC
In most cases, management accounts wouldprobably follow IFRS 15 rules
19
Do companies intend to carry out the managerial/internalreporting according to IFRS 15 after implementationof standard?
16
0
2
4
10
0
0 5 10 15
We have not made the decision yet
Other approach (please specify)
Yes, but we will additionally carry it out using the currentaccounting rules
Yes, but with some adjustments (corrections)
Yes, without any exceptions
No,we will not perform allocations using IFRS 15
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II Practical aspects of IFRS 15application - discussion
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Step 2
Step 3
Step 4
Step 5
Revenue recognition according to IFRS 15standards requires application of 5 steps approach
Identificationof separate
performanceobligations
Determinationof the
transactionprice
Allocation ofthe transaction
price
Revenuerecognition
Step 1
Identificationof contract
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In case of framework contracts with B2B Customers thecompany plans to consider a contract according to IFRS 15 as:
Step 1 Step 2 Step 3 Step 4 Step 5
There is no obvious answer on what constitutesa contract in B2B framework agreements
9
3
14
2
2
0 2 4 6 8 10 12 14 16
We have not decided yet
We do not have such contracts
Depends on contract requirements
Individual contract, on each SIM
Framework contract
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Step 2
Step 1
Step 3
Step 4
Step 5
5 steps to Revenue recognition
Identification of separate performanceobligations
Identification ofseparate
performanceobligations
Identificationof contract
Determinationof the
transactionprice
Allocation ofthe
transactionprice
Revenuerecognition
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How the company will recognise additional services, that willbe provided free of charge for first months and will be chargedin following months (if a customer does not resign)?
Krok 2 Step 3 Step 4 Step 5
Accounting for freebies would not be consistent
Step 2Step 1
15
5
2
1
5
0 2 4 6 8 10 12 14 16
No decision made
Other approach (What approach?)
Both solutions will be applied - depending onthe type of company (agent versus principal)
Material right considered as an additionalperformance obligation
A component that reduce transaction price
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In case of multiplay offers:
Krok 2 Step 3 Step 4 Step 5
For simplicity reasons, multiplay offers cansometimes be accounted for as a one performanceobligation
Step 2Step 1
12
1
4
3
4
4
0 2 4 6 8 10 12
No decision made yet
We don't have such offers
Depends on the offer
All services are one performance obligation
Similar services are grouped into one performanceobligation
Each service is a separate performance obligation
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Krok 2 Step 3 Step 4 Step 5
Majority of companies would recognize at leastone type of material rights
Step 2Step 1
Right to usea budget to buy
equipmentaccording
to frameworkcontract
Rights toreduce service
price
Right to extendcontract withmore profitableconditions
Points grantedas part of loyalty
program
Not applicable
Material rights identified as a distinct performanceobligations
PwC
10 of 30 respondents have not decided on material rights yet
9companies
5companies
2companies
5companies
1company
4companies
OtherRight to extendcontract with
more profitableconditions
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Step 3
Step 1
Step 2
Step 4
Step 5
5 steps to Revenue recognition
Determination of the transaction price
Determinationof the
transactionprice
Identificationof contract
Identification ofseparate
performanceobligations
Allocation of thetransaction
price
Revenuerecognition
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Which period shall be considered on the need to estimate an amountof revenue at the signing time:
Step 2 Step 4 Step 5
5 steps to Revenue recognition
Step 1 Step 3
15
5
5
2
original contract duration
contract duration shortened – untilcontact with Customer to extend thecontractcontract duration and the mostprobable time of extension
other
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Step 2 Step 4 Step 5Step 1 Step 3
1
6
11
0
2
4
6
8
10
12
Other Contracts for the services withsubsidised equipment
Instalment payment contracts(equipment plus services)
Which type of contracts the significant financingcomponent was identified in?
32% of surveyed companies would recognizea significant financing component in theircontracts, 43% have not decided yet
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Recognition of budgets granted for Customers:
Step 2 Step 4 Step 5
There is no consistency on how to approachthe quota budgets for B2B customers
Step 1 Step 3
Separate performance obligation 44% (12 of 27 companies)
19% (5 of 27 companies)Not applicable
PwC
37% (10 of 27 companies)Reduction of the transaction price
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Step 4
Step 1
Step 2
Step 3
Step 5
5 steps to Revenue recognition
Allocation of the transaction price
Allocation ofthe transaction
price
Identificationof contract
Identification ofseparate
performanceobligations
Determinationof the
transactionprice
Revenuerecognition
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Allocation of the transaction price to separate performanceobligations (equipment)
32
Step 1 Step 2 Step 3 Step 4 Step 5
The price in separate own offer would be the bestindicator of SSP for equipment…
14
2
78
14
2
9 9
0
2
4
6
8
10
12
14
16
Based on standaloneoffer
Price in electronicequipment stores
Cost plus a margin No decision made
How does the company plan to determine SSP regarding equipment in B2C contracts?
How does the company plan to determine SSP regarding equipment in B2B contracts?
PwC
Allocation of the transaction price to separate performanceobligations (services)
33
Step 1 Step 2 Step 3 Step 4 Step 5
14
3 34
7
14
23
5
8
0
2
4
6
8
10
12
14
16
The price of servicein SIM only offer
Cost plus margin Residual value Other No decision made
How does the company plan to determine SSP regarding equipment in B2C contracts?
How does the company plan to determine SSP regarding equipment in B2B contracts?
…and for the service
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Step 1 Step 2 Step 3 Step 4 Step 5
There is no clear response on what level the SSPwould be determined in multiplay offers
With regard to multiplay offers, at whatlevel is the standalone selling pricedetermined?
26%
30%11%
33%
On the level of a single serviceincluded in the package
On the level of service package(e.g. fixed and mobile voice, data,broadband)
Other (service and equipmentseparately; mixed model)
No decision made yet
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Step 5
Step 1
Step 2
Step 3
Step 4
5 steps to Revenue recognition
Revenue recognition
Revenuerecognition
Identificationof contract
Identification ofseparate
performanceobligations
Determinationof the
transactionprice
Allocation of thetransaction
price
PwC
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Step 1 Step 2 Step 3 Step 4 Step 5
Most of telcos would not change their principalvs. agent accounting
a) Revenue recognition in agentversus principal transactions:
b) In the case of selling throughan agent (dealer) at which pointdoes your company planto recognize revenue:
3
16
9
0
2
4
6
8
10
12
14
16
We will applychanges
We will notapply changes
We have notdecided yet
10
1
5
2
9
0
1
2
3
4
5
6
7
8
9
10
At the timeof sale bydealer
At the timeof deliveryto a dealer
Both casesarepossible
Other We havenot makethedecisionyet
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Majority of telcos would capitalizeonly material costs
37
What kind of costs of obtaining and fulfilling contract is the companygoing to capitalise?
6
3
2
7
4
1
1
15
20
0 5 10 15 20 25
We haven't decided yet
None
Other
Cost of installation
Costs of subsiding equipment
Couriers costs
SIM card costs
Employees' bonuses directly related toacquisition/retention of a customer
Dealers' commissions
PwC
Analyzing EBITDA would require cautios readingof accounting policies
How EBITDA will be calculated?
14
7
8
1
0 2 4 6 8 10 12 14 16
No decision made
SAC depreciation below EBITDA
SAC depreciation above EBITDA
We would not capitalise SAC
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PwC
Contact us
39
GaborBalazs
Radomił Maślak
Partner, member of the regional globalAccounting Consulting Services (ACS) team.He is constantly providing IFRS advice toseveral large IFRS clients in the region. As partof his regional responsibilities, Gabor is alsothe reviewer of the PwC IFRS Manual ofAccounting and the representative of the CEEregion in PwC’s Telecommunication IndustryAccounting Group (TIAG).
Director in Audit and Assurance Services.Expert in IFRS with 19 years of experiencein accounting and financial reporting advisory.He has held training on IFRS for numerousentities and employees of PwC. Radomił is alsothe author of newspaper articles devoted toIFRS.
+36 306 89 54 55
+48 502 18 42 23
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Thank you!
This publication has been prepared for general guidance on matters of interest only, anddoes not constitute professional advice. You should not act upon the informationcontained in this publication without obtaining specific professional advice. Norepresentation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extentpermitted by law, PricewaterhouseCoopers LLP, its members, employees and agents donot accept or assume any liability, responsibility or duty of care for any consequences ofyou or anyone else acting, or refraining to act, in reliance on the information contained inthis publication or for any decision based on it.
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