In depth IFRS 15 industry supplement

National Professional Services Group │ www.cfodirect.com In depth 1

New revenue guidance

Implementation in the communications industry

Overview

The communications industry comprises several subsectors, including wireless, fixed line,

and cable/satellite television (TV). These companies generate revenue through many

different service offerings that include access to, and usage of, network and facilities for the

provision of voice, data, internet, and television services. These services generate revenues

through subscription fees or usage charges. Some communications companies also sell or

lease equipment such as handsets, modems, dongles (a wireless broadband service

connector), customer premises equipment (CPE), and a variety of accessories.

Offerings in the communications industry have evolved as a result of consolidation,

technology changes and innovation. Examples include installment sales of wireless

devices; multi-line plans, in which customers attach more than one device to a service; and

bundled plans, with core video service, including voice and internet services, combined with

other offerings, such as home security services. Also, companies may provide services that

expand beyond traditional core offerings, including cloud and machine-to-machine services.

No. US2017-14

July 27, 2017

What’s inside:

Overview

.........................

Step 1: Identify the

contract...........................2

Step 2: Identifying

performance

obligations ......................4

Step 3: Determine the

transaction price…..........9

Step 4: Allocating the

transaction price ….......

Step 5: Recognize

revenue..........................15

Other considerations.…16

At a glance

Public companies must adopt the new revenue guidance in 2018. Almost all companies

will be affected to some extent by the new guidance, though the effect will vary

depending on industry and current accounting practices. Although originally issued as a

converged standard under US GAAP and IFRS, the FASB and IASB have made slightly

different amendments so the ultimate application of the guidance could differ under US

GAAP and IFRS.

The Revenue Recognition Transition Resource Group (TRG) and the AICPA’s

Telecommunications Entities Revenue Recognition Task Force has discussed various

implementation issues impacting companies across many industries. These discussions

may provide helpful insight into application of the guidance, and the SEC expects

registrants to consider these discussions in applying the new guidance.

This publication has been updated to reflect the implementation developments over the

past two years and to highlight certain challenges specific to companies in the

communications industry. The content in this publication should be considered together

with our Revenue guide, available at CFOdirect.com.

National Professional Services Group │ www.cfodirect.com In depth 2

The revenue standards (ASC 606 and IFRS 15, Revenue from Contracts with Customers) will impact each of these

businesses. Certain changes having the potential for the greatest impact include:

 Additional revenue may need to be allocated to discounted or free products provided at the beginning of a

service period due to the elimination of the “contingent revenue cap,” and changes to and restrictions in the

use of the “residual method” currently applied by some communications companies.

 The accounting treatment of activation fees, customer acquisition costs, and certain contract fulfillment costs

may change.

 The guidance may be applied to a portfolio of contracts or performance obligations in some circumstances,

although this approach may create additional implementation challenges and complexities.

 Free goods or services previously considered to be marketing offers may qualify under the revenue standards as

distinct goods or services.

Communications companies are continually evaluating their business models and providing new device and service

plans to customers. Assessing the accounting impact of these new services can be challenging. During the transition to

the revenue standards, management will need to consider the impact that these new offerings have under both the old

and new guidance, adding complexity to their growing list of challenges.

1. Identify the contract

A contract can be written, oral, or implied by a company’s customary business practices. Generally, any agreement with

a customer that creates legally-enforceable rights and obligations meets the definition of a contract under the new

guidance. Legal enforceability depends on the interpretation of the law and could vary across legal jurisdictions where

the rights of the parties are not enforced in the same way.

As part of identifying the contract, companies are required to assess whether collection of the consideration is

probable, which is generally interpreted as a 75-80% likelihood in US GAAP and a greater than 50% likelihood in IFRS.

This assessment is made after considering any price concessions expected to be provided to the customer. In other

words, price concessions are variable consideration (which affects the transaction price), rather than a factor to

consider in assessing collectibility. Further, the FASB clarified in an amendment of ASC 606 that companies should

consider, as part of the collectibility assessment, their ability to mitigate their exposure to credit risk, for example by

ceasing to provide goods or services in the event of nonpayment. The IASB did not amend IFRS 15 on this point, but

did include additional discussion regarding credit risk in the Basis for Conclusions of their amendments to IFRS 15.

The new guidance also eliminates the cash-basis method of revenue recognition that is often applied today if collection

is not reasonably assured (US GAAP) or probable (IFRS). Companies that conclude collection is not probable under the

new guidance cannot recognize revenue for cash received if (1) they have not collected substantially all of the

consideration and (2) continue to transfer goods or services to the customer.

Contract term

Determining the contract term is important as it impacts the determination and allocation of the transaction price

and recognition of revenue. Termination clauses should be considered when assessing contract duration – the

period over which the parties have enforceable rights and obligations. If a contract can be terminated at any time for

no compensation, the parties do not have enforceable rights and obligations, regardless of the stated term. In

contrast, a contract that can be terminated early, but requires payment of a substantive termination penalty, is likely

to have a contract term equal to the stated term. This is because enforceable rights and obligations exist throughout

the stated contract period. Judgment should be applied in determining whether a termination penalty is substantive.

There are no “bright lines” for making this assessment.

(5)

Recognize

revenue

(4) Allocate

transaction

price

(3) Determine

transaction

price

(2) Identify

performance

obligations

(1) Identify

the contract

Other

considerations

National Professional Services Group │ www.cfodirect.com In depth 3

Contract modifications

Customers of communications companies often request changes to their service plans. For example, wireless telecom

customers might change their existing service plans to upgrade or replace a device; include additional wireless

minutes; increase data usage; add incremental, or remove, existing services; or terminate service altogether.

Modifications also occur in multi-line plans when the customer adds or removes a device and/or changes the size of

the data plan being shared across devices. Companies will need to account for the changes as modifications to the

contracts when devices or services not covered under the original contract are added or removed.

Contract modifications exist when the parties to the contract approve a modification that creates or changes the

enforceable rights and obligations of the parties to the contract. A modification is accounted for as either a separate

contract or as part of the existing contract (either prospectively or through a cumulative catch-up adjustment). This

assessment is driven by whether (1) the modification adds distinct goods and services and (2) the distinct goods and

services are priced at their standalone selling prices. Companies will need to apply judgment in evaluating whether

goods or services in the modification are distinct. This may be particularly challenging when there are multiple

performance obligations in a contract.

Final guidance

Current US GAAP

Current IFRS

A contract modification is treated as

a separate contract only if it results

in the addition of a distinct

performance obligation and the price

reflects the standalone selling price

of that performance obligation.

Otherwise, the modification is

accounted for as an adjustment to

the original contract.

A company will account for a

modification prospectively if the

goods or services in the modification

are distinct from those transferred

before the modification. A company

will account for a modification

through a cumulative catch-up

adjustment if the goods or services in

the modification are not distinct and

are part of a single performance

obligation that is only partially

satisfied when the contract is

modified.

A contract modification that only

affects the transaction price should

be treated as part of the existing

contract.

Modifications to add or remove

goods or services in telecom

arrangements are typically viewed as

new arrangements with changes

accounted for prospectively.

Modifications to add or remove goods

or services in telecom arrangements

are typically viewed as new

arrangements with changes

accounted for prospectively.

Potential impact - both US GAAP and IFRS

Historically, modifications to communications contracts have typically been treated as new agreements with changes

accounted for prospectively. Going forward, companies will need to evaluate modifications under the new guidance to

determine whether they are accounted for prospectively or require a cumulative catch up adjustment. The analysis

will need to consider modifications in new types of service plans, such as multi-line plans, in which it may be more

difficult to determine whether the modification adds distinct goods or services, or modifies existing goods or services

being provided under the contract.

Contract modifications for a series

The revenue standards state that a company will account for a series of distinct goods or services that are substantially

the same as a single performance obligation if each distinct good or service meets the criteria for over-time

National Professional Services Group │ www.cfodirect.com In depth 4

recognition and the same method would be used to measure progress for each distinct good or service. This approach

will likely be used by communications companies for contracts that provide the customer with a consistent level of

services on a monthly basis over a contract period, rather than treating each month or each day of service as a

separate performance obligation.

Companies that account for a series of distinct goods or services in this manner at inception of the arrangement must

consider the distinct goods or services in the contract (not the performance obligation) for purposes of applying the

guidance on contract modifications. Therefore, when the remaining goods or services in the modified contract are

distinct from goods or services that have already been transferred to the customer, these modifications will be

accounted for prospectively.

Example 1-1 – Contract modification

Facts: A fixed-line communications company enters into a contract with a customer to provide voice and data services

for 24 months at a fixed charge of $50 per month. After six months, the customer decides to add TV services for an

incremental fee of $50 per month over the same term. This price is slightly lower than the price charged to customers

who just purchase the TV service without voice and data services, which reflects the fact that the customer acquired

the TV service as part of a bundle. In this scenario, assume there are no other fees or deliverables.

How should the company account for this modification?

Analysis: The TV services added by the customer are a distinct performance obligation. These services are being

charged at relative standalone selling price (when adjusted for the selling costs avoided by transacting with an

existing customer). The TV services are a new contractual arrangement, and there is no impact to the accounting for

the existing data and voice services.

While this example is fairly simple, further complexities could arise with contract modifications. For example, the

modification could provide the customer with a discount on new or existing services, the contract period could be

extended for all services, or additional deliverables (such as equipment) could be introduced. Communications

companies will have to assess the facts and circumstances in these more complex situations.

2. Identify performance obligations

A performance obligation is a promise to transfer a distinct good or service to a customer. Identifying the separate

performance obligations within a contract affects both when and how much revenue is recognized. Companies will

need to determine whether performance obligations within customer contracts should be accounted for separately or

bundled together. A promised good or service might be explicit in a contract, or implicit, arising from customary

business practices. Applying the separation principle might be challenging when there are multiple offerings in

bundled packages.

Communications companies regularly bundle the sale of services and equipment (e.g., handsets, modems, accessories)

and might also charge for activation or set up. Wireless companies give free or discounted equipment or promotional

rates to customers as incentives to enter into contracts.

Equipment (including handsets) transferred to customers is a separate performance obligation in most cases if the

company separately sells equipment or the customer can benefit from the handset together with other resources (for

example, the handset could operate on another communications company's network). This is true regardless of

whether the equipment is given at no cost or at a significantly discounted price. Other obligations, such as promises of

future discounted services or other material rights, will also need to be evaluated to determine if they qualify as

separate performance obligations.

(5)

Recognize

revenue

(4) Allocate

transaction

price

(3) Determine

transaction

price

(2) Identify

performance

obligations

(1) Identify

the contract

Other

considerations

National Professional Services Group │ www.cfodirect.com In depth 5

Final guidance

Current US GAAP

Current IFRS

Performance obligations

The revenue standards

require

companies

to identify all promised

goods or services in a contract and

determine whether to account for

each promised good or service as a

separate performance obligation.

A performance obligation is a

promise in a contract to transfer a

distinct good or service to a

customer.

A good or service is distinct and is

separated from other obligations in

the contract if:

 the customer can benefit from

the good or service separately or

together with other resources,

and

 the good or service is separately

identifiable from other goods or

services in the contract.

The FASB clarified that companies

are not required to identify

promised goods or services that are

immaterial in the context of the

contract. The IASB did not

incorporate similar wording;

however, IFRS reporters should

consider materiality concepts when

identifying performance obligations.

A series of distinct goods or services

that are substantially the same are

accounted for as a single

performance obligation if:

 each would be a performance

obligation satisfied over time;

and

 the same method would be used

to measure the company’s

progress toward satisfaction.

Examples of this could

include

network

access or call center

services provided continuously over

a period of time.

The following criteria are

considered to determine whether

elements included in a multiple-

element arrangement are

accounted for separately:

 The delivered item has value

to the customer on a

standalone basis.

 If a general return right exists

for the delivered item,

delivery or performance of the

undelivered item(s) is

considered

probable and

substantially in the control of

the vendor.

The revenue recognition criteria

are usually applied separately to

each transaction. In certain

circumstances, it might be

necessary to separate a

transaction into identifiable

components to reflect the

substance of the transaction.

Separation is appropriate when

identifiable components have

standalone value and their fair

value can be measured reliably.

Two or more transactions might

need to be grouped together when

they are linked in such a way that

the commercial effect cannot be

understood without reference to

the series of transactions as a

whole.

National Professional Services Group │ www.cfodirect.com In depth 6

Final guidance

Current US GAAP

Current IFRS

Options to acquire additional

goods or services

A company might grant a customer

the option to acquire additional

goods or services free of charge or at

a discount. These options might

include customer award credits or

other sales incentives and discounts.

An option gives rise to a separate

performance obligation if it provides

a material right that the customer

would not receive without entering

into the contract. The company

should recognize revenue allocated

to the option when the option

expires or when the additional goods

or services are transferred to the

customer.

An option to acquire an additional

good or service at a price that is

within the range of prices typically

charged for those goods or services

does not provide a material right,

even if the option can be exercised

only because of entering into the

previous contract.

When an option is determined to be

substantive, a company evaluates

whether that option has been offered

at a significant incremental discount.

If the discount in an arrangement is

significant, a presumption is created

that an additional deliverable is being

offered in the arrangement, requiring

a portion of the arrangement

consideration to be deferred at

inception.

The recognition criteria are usually

applied separately to each transaction

(i.e., the original purchase and the

separate purchase associated with the

option). However, in certain

circumstances, it is necessary to

apply the recognition criteria to the

separately-identifiable components

as a single transaction to reflect the

substance of the transaction.

If a company grants to its customers,

as part of a sales transaction, an

option to receive a discounted good

or service in the future, the company

accounts for that option as a separate

component of the arrangement and

therefore allocates consideration

between the initial good or service

provided and the option.

Non-refundable upfront fees

Some companies charge a customer a

nonrefundable upfront fee at or near

contract inception. Companies will

need to determine whether the

nonrefundable upfront fee relates to

the transfer of a good or service to a

customer.

The standards state that activation

services are an example of

nonrefundable upfront fees that do

not result in the transfer of a good or

service to the customer. The

payment for the activation service is

an advance payment for future

communications services.

An upfront fee should be deferred and

recognized systematically over periods

in which it is earned unless it is in

exchange for

products delivered or

services performed that represent the

culmination of an earnings process.

When an upfront fee is not related to

specific products or services, it should

be excluded from the consideration

allocated to the deliverables and

recognized over the longer of (1) the

initial contractual term of the

arrangement or (2) the estimated

period over which the customer is

expected to benefit from the payment

of the upfront fee (i.e., the customer

benefit period).

When all or a portion of an upfront

fee is related to a specific

deliverable(s) within the

arrangement, the upfront fee, or a

portion of it, should be included in

the consideration allocated to the

deliverables using the relative

selling price method.

Recognition of revenue from an

upfront fee depends on the nature of

the services provided. A company

must determine whether an upfront

fee related to installation or activation

is a separate component of the

transaction.

Generally, an activation fee for

communications services is not a

separate component, and the

activation fee is recognized over the

period that the communications

services are provided to the

customer.

National Professional Services Group │ www.cfodirect.com In depth 7

Potential impact - both US GAAP and IFRS

Companies will need financial processes and systems that identify the different performance obligations in each of their

contracts and pinpoint when and how the obligations are fulfilled. Traditionally, wireless communications companies

have identified the device and service as separate units of accounting under existing guidance, but they will need to

consider whether additional performance obligations exist under the new model. This assessment will need to extend

to all obligations under a contract, even items that are not regularly sold by the company, or that have previously been

viewed as marketing expenses (e.g., free products not related to the provision of communications services).

Companies will also need to consider separation when multiple services are provided in an arrangement, as this may

affect the allocation of the transaction price to separate performance obligations that have different patterns of

transfer. When multiple services (e.g., voice services, data services, television services) or multiple access points are

being provided that the customer can benefit from either on its own or together with readily available resources (i.e.,

the services are capable of being distinct), companies will need to evaluate whether the promise to transfer the goods

or services is separately identifiable from other promises in the contract (i.e., they are distinct in the context of the

contract) or whether some or all of the goods or services should be combined into one performance obligation. For

instance, if multiple services have the same pattern of transfer to the customer, the company may, as a practical

matter, account for the services as a single performance obligation.

Communications companies will have to consider outsourcing and network IT contracts, various types of

activation/connection services, and other upfront services (e.g., connecting customers to their networks or laying

physical line to the customers’ premises) to determine if these services meet the definition of a separate performance

obligation and if a good or service is transferred to the customer. The timing of revenue recognition for

communications companies that currently do not account for equipment separately from the telecom services will be

significantly affected if the components of their bundled offerings are separate performance obligations under the

revenue standards.

Many companies charge activation fees at the inception of a contract. The activation services are typically not a

separate performance obligation. Activation fees are typically advance payment for future goods or services and,

therefore, would be recognized as revenue when those future goods or services are provided. The recognition period

could extend beyond the initial contractual term if (1) the customer has the option to renew and (2) that option

provides the customer with a material right (e.g., an option to renew without requiring the customer to pay an

additional activation fee). Companies should consider the impact of options on all contracts, including month-to-

month service arrangements. This may result in a different pattern of revenue recognition from today's accounting

models under which activation fees are often recognized over the contract period.

Further, communications companies increasingly sell multi-line plans and will need to determine whether the option

to add additional lines is a material right that is a separate performance obligation.

Example 2-1 – Identifying performance obligations

Facts: A communications company enters into a contract with a customer to provide wireless telecom services for $50

per month and a handset for $100. It also charges an activation fee of $30. The communications company sells

handsets separately (for example, when a customer's handset is lost, stolen, or damaged).

How many separate performance obligations are in the contract?

Analysis: At least two separate performance obligations exist in this arrangement: telecom services and the handset.

The handset is a separate performance obligation because the company sells the handset separately.

The handset would be a separate performance obligation even if the company did not sell the handset separately if

the customer could use the handset to receive telecom services from another company.

Activation/connection

fees are not separate performance obligations, but are considered upfront payments for the

handset and future telecom services.

Depending on the facts and circumstances, the company may need to further assess the nature of the telecom

services to determine whether the individual services should be considered separate performance obligations. For

example, if the services consist of bundled voice, text, and data, and the customer has the right to roll over some or all

of the unused services (e.g., unused data) to the next month, the individual services may not have the same pattern of

transfer. As a result, the company would not be able, as a practical matter, to bundle all services into a single

performance obligation as different measures of progress would be applied to them.

National Professional Services Group │ www.cfodirect.com In depth 8

Example 2-2 – Options that do not provide a material right

Facts: A communications company enters into a two-year contract with a customer to provide wireless telecom services

for $50 per month. The contract requires the communications company to provide the customer with 800 voice

minutes and 100 text messages per month. The contract specifies the customer may purchase additional voice services

for $0.10 per minute and text services for $0.20 per message during the contract. These prices are typically charged

for those services regardless of the type of contract, and therefore, they reflect the standalone selling price of those

services.

Is the customer's option to purchase additional voice minutes and text messages a separate performance obligation?

Analysis: No. The option provided in the contract is not a performance obligation because it does not provide a

material right to the customer. The customer pays the same price, or price within a range, for voice minutes and text

messages as other customers. The company will recognize revenue for the additional voice minutes and text messages

if and when the customer receives those additional services.

Example 2-3 – Multi-line “family” plans

Facts: A communications company enters into a contract to provide unlimited telecom services under a multi-line

“family” plan on a monthly basis. The customer has the option to add additional lines to the plan each month for a

package price that reflects a decrease in the monthly service fee per line as additional lines are added.

Does the option to add an additional line to the plan provide the customer with a material right?

Analysis: No. The option to add additional lines to a family plan in a future month does not provide the customer with a

material right. Even though a customer may add or subtract lines within the plan, which may be capable of being distinct, the

context of the contract provides for a plan that shares the same telecom services as a bundle. Further, when customers add or

subtract lines from the plan, they are making a decision on a month-to-month basis regarding which family plan to purchase that

month (e.g., a three line plan vs. a four line plan). The pricing for the family plan is based on the number of lines purchased that

month and is consistent across customers, regardless of the plan a customer purchased in prior months. The customer is not

receiving a discount based on its prior purchases.

Example 2-4 – Installation services

Facts: A communications company enters into a contract to provide cable services (television, internet, voice, etc.) on a

monthly basis, with no contract end date. The company charges an upfront, nonrefundable installation fee of $50 to

recover the cost of laying physical line to the customer's premises. This line can be used by other communications

companies if the customer later changes service providers.

Is the installation service a separate performance obligation?

Analysis: It depends. The company will need to determine whether laying the physical line is a distinct good or

service. In this example, other communications companies can provide services on the same physical line, so the line

is separately identifiable and can be used by the customer without the company subsequently providing cable

services. Therefore, laying the physical line is a distinct performance obligation.

Example 2-5 – Cable company, activation services

Facts: A cable entity enters into a contract to provide cable services (television, internet, voice, etc.) on a monthly

basis, with an initial contract period of 12 months. The company charges an upfront, nonrefundable fee of $50 to

recover the cost of sending a technician to activate the service on the customer's premises.

Is the activation service a separate performance obligation?

Analysis: It depends. The company will need to determine whether the activation is a distinct service. In this example,

the activation service is not distinct from the provision of the cable services because the customer cannot benefit

separately from the activation service. The activation fee should be deferred and recognized over at least the contract

period.

Companies will need to determine if the activation fee relates to the services that extend beyond the initial contract

period, and should be recognized over that longer period. This could be the case if the customer has a material right to

extend the contract without paying an additional activation fee.

National Professional Services Group │ www.cfodirect.com In depth 9

3. Determine transaction price

The transaction price is the amount of consideration a company is entitled to receive in exchange for transferring goods

or services to customers. Determining the transaction price is more straightforward when the contract price is fixed; it

becomes more complex when it is not fixed. Discounts, rebates, refunds, credits, incentives, performance bonuses, and

price concessions could cause the amount of consideration to be variable. Because variable consideration is required to

be estimated and included in the transaction price subject to a constraint, communications companies may recognize

revenue earlier under the new revenue guidance.

Final guidance

Current US GAAP

Current IFRS

Variable consideration

The transaction price might include

an element of consideration that is

variable or contingent upon the

outcome of future events, such as

discounts, rebates, refunds, credits,

incentives, etc. A company should

use the expected value or most likely

outcome approach to estimate

variable consideration, depending on

which is the most predictive.

Variable consideration included in

the transaction price is subject to a

constraint. The objective of the

constraint is that a company should

recognize revenue as performance

obligations are satisfied to the extent

it is probable (US GAAP) or highly

probable (IFRS) that a significant

reversal will not occur in future

periods. Although the terminology

differs, “highly probable” under IFRS

means the same as “probable” under

US GAAP. Management should

update the assessment at each

reporting period.

If a company receives consideration

from a customer and expects to

refund some or all of that

consideration to the customer, it

recognizes a refund liability for an

amount it expects to refund.

Customers might not exercise all of

their contractual rights related to a

contract, such as mail-in rebates and

The seller's price must be fixed or

determinable for revenue to be

recognized.

Revenue related to variable

consideration generally is not

recognized until the uncertainty is

resolved. It is not appropriate to

recognize revenue based on the

probability of an uncertainty

being achieved.

Certain sales incentives entitle the

customer to receive a cash refund

(e.g., a rebate) for some of the price

charged for a product or service. The

company recognizes a liability for

those sales incentives based on the

estimated refunds or rebates that will

be claimed by customers.

The company also recognizes a

liability (or deferred revenue) for the

maximum potential amount of the

refund or rebate (i.e., no reduction is

made for expected breakage) if future

refunds or rebates cannot be

reasonably and reliably estimated.

Revenue is measured at the fair

value of the consideration received

or receivable. Fair value is the

amount for which an asset or liability

could be exchanged or settled

between knowledgeable, willing

parties in an arm's length

transaction.

Trade discounts, volume rebates,

and other incentives (such as cash

settlement discounts) are taken into

account in measuring the fair value

of the consideration to be received.

Revenue related to variable

consideration is recognized when (1)

it is probable that the economic

benefits will flow to the company

and (2) the amount is reliably

measurable, assuming all other

revenue recognition criteria are met.

The company recognizes a liability

based on the expected levels of

rebates and other incentives that will

be claimed. The liability should reflect

the maximum potential amount if no

reliable estimate can be made.

(1) Identify

the contract

(2) Identify

performance

obligations

(3) Determine

transaction

price

(4) Allocate

transaction

price

(5)

Recognize

revenue

Other

considerations

National Professional Services Group │ www.cfodirect.com In depth 10

Final guidance

Current US GAAP

Current IFRS

other incentive offers. Companies will

need to continually update their

estimates to adjust for changes in

expectations. The revenue guidance

explains several factors that

companies should consider in

assessing the amount of consideration

to which a company expects to be

entitled.

Significant financing component

The revenue guidance requires companies to adjust the promised amount of consideration to reflect the time value of

money if the contract has a significant financing component. Factors to consider when determining whether a

contract has a significant financing component include, but are not limited to: (1) the expected length of time between

when the entity transfers the promised goods or services to the customer and when the customer pays for those goods

or services, (2) whether the amount of consideration would differ substantially if the customer paid in cash promptly

in accordance with typical credit terms in the industry and jurisdiction, and (3) the interest rate in the contract and

prevailing interest rates in the relevant market (i.e., interest rates offered by financing institutions in the same

market or geography).

A significant financing component would not exist when: (1) the customer paid for the goods or services in advance

and transfer is at the discretion of the customer, (2) a substantial amount of the promised consideration is variable

and the amount or timing of consideration varies based on the occurrence or nonoccurrence of a future event that is

not substantially within the control of the customer or the company, or (3) the difference between the cash selling

price and promised consideration is for a reason other than providing financing and the difference is proportional to

that reason.

Potential impact - both US GAAP and IFRS

Some companies will recognize revenue earlier under the revenue guidance because variable consideration is included

in the transaction price prior to the date on which all contingencies are resolved. For example, a network provider

might offer a communications company (its customer) a volume discount on usage rates (voice and data access) to

access its network as part of a minimum purchase commitment arrangement. The network provider charges penalties

or the customer loses the volume discount if the customer does not meet specified usage volumes. Network providers

that offer such discounts under minimum purchase commitment arrangements and determine it is probable (US

GAAP) or highly probable (IFRS) that they will receive penalties or additional payments because customers fail to

meet the specified usage volumes could recognize revenue earlier than under current guidance.

Companies will also have to estimate amounts related to incentives and consider the guidance for variable

consideration to determine the amounts to which they expect to be entitled, considering their experience with existing

incentives, discounts, take-rates, and other external factors.

Communications companies should consider whether the transfer of a handset to a customer at the initiation

of the contract and collecting monthly payment for the handset over the contract period provides the

customer with significant financing, which would result in an adjustment to the transaction price to reflect the

financing component. A significant financing component may exist even though a contract has an interest

rate of zero.

Communications companies may offer incentives to customers to purchase handsets with payments made

over an extended period of time. The company needs to determine whether it offered a discount equal to the

financing charge that would have otherwise been charged to the customer. If a financing component exists,

the company needs to evaluate whether the financing is significant.

Example 3-1 – Discount program, revenue is not constrained

Facts: A communications company enters into contracts with its customers to provide telecom services for $50 per

month and provides Equipment X for $200. The customers will receive a discount of $100 related to the purchase of

Equipment X if they submit a proper form and proof of purchase via mail (also known as a mail-in-rebate). The

National Professional Services Group │ www.cfodirect.com In depth 11

company has predictive experience from providing similar discounts to a range of customers (refund amounts for

similar equipment with similar sales prices).

Historically, 75% of the company’s customers took advantage of the rebate and the company concludes that there

are no external economic factors that affect historical trends.

How should the company estimate the transaction price?

Analysis: The company should estimate the transaction price based on the amounts to which it expects to be entitled

using the most recent history for similar discount programs (refund amounts for similar equipment with similar sales

prices). It estimates the refund liability for each transaction using the following probabilities representing the pattern

of similar rebates.

Amount

Probability

Probability-

weighted

amount

$ 0

25%

$ 0

100

75%

$ 75

The company concludes it is probable (US GAAP)/highly probable (IFRS) that variable consideration of $25 will not

be subject to significant reversal. The company records a refund liability of $75 and reduces the transaction price by

$75. The company will update the estimated liability at each reporting period, with any adjustments recorded to

revenue.

Example 3-2 – Discount program, revenue is constrained

Facts: A communications company is launching its service in a new country; it enters into contracts with its customers

to provide telecom services for $50 per month and Equipment Y for $350. The customers receive a discount of $100

related to the purchase of the equipment if they submit a proper form and proof of purchase via mail. The company

does not have predictive experience providing similar discounts (refund amounts for similar equipment with similar

sales prices) in this country and concludes that there is no amount of the variable consideration (the potential

discount) that is probable (US GAAP)/highly probable (IFRS) of not being subject to a significant reversal.

How should the company determine the transaction price?

Analysis: The company records a full refund liability of $100 and reduces the transaction price by $100 as there is no

amount of the potential discount that is probable (US GAAP)/highly probable (IFRS) of not being subject to a

significant reversal.

The company will adjust the liability and recognize revenue as soon as management is able to conclude it is probable

(US GAAP)/highly probable (IFRS) that (1) there will be no significant reversal for some part of the consideration or

(2) the right to the discount expires. The company will update the estimated liability at each reporting period, with any

adjustments recorded to revenue.

Example 3-3 – Minimum purchase contract

Facts: A network provider enters into a contract with a communications company (its customer) to provide access to

its network over a one-year period. The contract offers a discounted usage rate of $0.05 per voice minute. The

discounted rate is contingent on the customer's minimum monthly purchase commitment of 25 million minutes of

network voice usage. If the customer is unable to meet the volume commitments, the usage rate increases to $0.08 per

voice minute, applied retroactively.

How should the network provider determine the transaction price?

Discussion: The network provider should estimate the variable consideration to determine the transaction price. The

network provider determines, based on its facts and circumstances, including the customer’s usage history, that there

is an 85% probability that the customer will meet the minimum monthly volume commitments for the contract period

and a 15% probability the customer will not meet the minimum commitments. The network provider uses the most

likely outcome method as it concludes it is the best prediction of the amount it expects to receive. It also determines

that there is no amount in excess of $0.05 per minute that is probable (US GAAP)/highly probable (IFRS) of not being

reversed. Therefore, the network provider will recognize revenue based on a transaction price of $0.05 per voice

minute.

National Professional Services Group │ www.cfodirect.com In depth 12

4. Allocate transaction price

Communications companies often provide multiple products and services to their customers as part of a bundled

offering. These arrangements usually consist of the sale of telecom services and the sale of equipment (wireless

handset, modem, etc.). Some communications companies also charge customers upfront activation fees. Under

current US GAAP, communications companies are required to apply a contingent revenue cap, while most

communications companies reporting under IFRS use either a residual method or apply a contingent revenue cap. The

contingent revenue cap limits the amount of consideration allocated to the delivered item (e.g., a handset) to the

amount that is not contingent on the delivery of additional items (e.g., the telecom services).

Under the new guidance, the transaction price in an arrangement must be allocated to each separate performance

obligation based on the relative standalone selling prices (SSP) of the goods or services being provided to the customer.

The allocation could be affected by variable consideration or discounts.

The best evidence of SSP is the price a company charges for that good or service when the company sells it separately in

similar circumstances to similar customers. However, goods or services are not always sold separately. The SSP needs

to be estimated or derived by other means if the good or service is not sold separately.

Final guidance

Current US GAAP

Current IFRS

The transaction price is allocated to

separate performance obligations in

a contract based on relative

standalone selling prices, as

determined at contract inception.

Companies will need to estimate the

selling price if a standalone selling

price is not observable. In doing so,

it should maximize the use of

observable inputs.

Possible estimation methods include:

 Expected cost plus reasonable

margin

 Assessment of market price for

similar goods or services

 Residual approach (if certain

criteria are met)

A residual approach may be used to

estimate the standalone selling price

when the selling price of a good or

service is highly variable or

uncertain. A selling price is highly

variable when a company sells the

same good or service to different

customers (at or near the same

time) for a broad range of amounts.

Arrangement consideration is

allocated to each unit of accounting

based on the relative selling price.

Third-party evidence (TPE) of fair

value is used to separate

deliverables when vendor specific

objective evidence (VSOE) of fair

value is not available. Best estimate

of selling price is used if neither

VSOE nor TPE exist. The term

"selling price" indicates that the

allocation of revenue is based on

entity-specific assumptions, rather

than assumptions of a marketplace

participant. The residual or reverse

residual methods are not allowed.

When performing the allocation

using the relative selling price

method, the amount of

consideration allocated to a

delivered item is limited to the

consideration received that is not

contingent upon the delivery of

additional goods or services. This

limitation is known as the

“contingent revenue cap.”

Communications companies

typically account for the sale of the

equipment and telecom services in a

bundled offering as separate units of

account, with telecom services

collectively accounted for as a single

unit of account, as they are generally

delivered at the same time.

Revenue is measured at the fair

value of the consideration received

or receivable. Fair value is the

amount for which an asset or

liability could be exchanged or

settled, between knowledgeable,

willing parties in an arm's length

transaction.

IFRS does not mandate how

consideration is allocated and

permits the use of the residual

method, in which the consideration

for the undelivered element of the

arrangement (normally service or

tariff) is deferred until the service is

provided, when this reflects the

economics of the transaction. Any

revenue allocated to the delivered

items is recognized at the point of

sale.

Other

considerations

(5)

Recognize

revenue

(4) Allocate

transaction

price

(3) Determine

transaction

price

(2) Identify

performance

obligations

(1) Identify

the contract

National Professional Services Group │ www.cfodirect.com In depth 13

Final guidance

Current US GAAP

Current IFRS

A selling price is uncertain when a

company has not yet established a

price for a good or service and the

good or service has not previously

been sold.

The arrangement consideration that

can be

allocated to the equipment is

generally limited to cash received

because future cash receipts are

contingent upon the company

providing telecom services.

Therefore, when the handset is

transferred, revenue is recognized at

the amount that the customer paid

for the handset at contract inception.

The remaining contractual payments

are recognized subsequently as the

company provides network services

to the customer.

Potential impact - both US GAAP and IFRS

The revenue guidance's allocation requirements will have significant implications to the telecom industry. It requires

the transaction price be allocated to each separate performance obligation in proportion to the

standa

lone selling

price of the good or service. It therefore eliminates the contingent revenue cap. The revenue guidance also

substantially reduces the circumstances when a residual approach can be applied under IFRS and permits it in

certain circumstances under US GAAP. The residual approach is different from the residual method that is used

today. Applying today’s residual method results in the entire discount in an arrangement being allocated to the first

item delivered under the contract. This will not be the case under the new

guidance

Judgment will be needed to determine the standalone selling price for each separate performance obligation (e.g.,

services, equipment, and material rights) in a customer contract. There is good visibility into the pricing of

communications equipment and the associated telecom service in some markets. However, in many markets,

communications companies charge customers little, if anything, for the equipment, and only sell equipment bundled

with the telecom services. If communications companies do not separately sell equipment, management may have to

use various estimation methods, including, but not limited to a market assessment approach or a cost plus margin

approach.

Determining the standalone selling price of certain services may also present challenges. Historically, there was a

reasonable level of consistency in the amounts charged for bundled services within operators and between operators.

Today, there is increasing variability in the amounts charged for equivalent bundles of services. For example, the

amount charged for services can vary depending on the number and mix of devices chosen by the customer, including

“SIM-only” deals in which the monthly price for service is less when the customer does not take a subsidized device,

or multi-line plans.

The revenue guidance will likely require companies to allocate more of the transaction price to the equipment than

under the current guidance, and therefore, result in earlier recognition of revenue. Recognizing more revenue than

consideration received also results in the recognition of a contract asset, which will need to be monitored for

impairment. See chapter 4 of PwC’s Revenue guide for more information.

Companies will face practical challenges in allocating the transaction price for a large volume of customer contracts

with varying configurations of equipment and service plans. The revenue guidance permits a company to apply the

guidance to a portfolio of contracts (or performance obligations) with similar characteristics if it reasonably expects

that the effects on the company’s financial statements of doing so would not differ materially from the results of

applying the guidance to individual contracts (or performance obligations). The boards acknowledged in their Bases

for Conclusions that this approach may be particularly useful to companies in the telecommunications industry. The

boards also noted that companies should be able to take a “reasonable approach” to identify portfolios for applying

this guidance, as opposed to a quantitative evaluation. Companies choosing to apply a portfolio approach should

consider the extent of variability in characteristics of portfolio groupings not only upon adoption, but also on an

ongoing basis. Companies should consider whether they need to modify existing systems or develop new systems to

gather information on customer contracts and to perform the required allocations of the transaction price between

separate performance obligations.

National Professional Services Group │ www.cfodirect.com In depth 14

Example 4-1 − Allocating the transaction price

Facts: A wireless company enters into sales arrangements with two different customers: Customer A and Customer B.

Each customer purchases or receives the same handset and selects the same monthly service plan. The standalone

selling price for the handset is $300 (it is purchased wholesale by the wireless company for $290) and the standalone

selling price of the telecom service plan is $40 per month.

Customer A purchases the handset for $300 and enters into a cancelable contract to receive telecom services for $40

per month.

Customer B enters into a 24-month service contract for $40 per month and receives a discounted handset for $50.

In summary:

Customer A

Customer B

Standalone selling price of handset

$ 300

Standalone selling price of services

960 ($40 x 24 months)

Total

$ 340

$1,260

Cost of equipment

$ 290

Customer A transaction price $ 340 ($300 handset + $40 for one month of service)

Customer B transaction price $ 1,010 ($960 services + $50 for handset)

How should the transaction price be allocated to the performance obligations in the contracts with Customer A and B?

Analysis: The company needs to identify the separate performance obligations within the customer contracts. In this

example, the sales of telecom services and handsets are separate performance obligations because they are distinct

goods and services. Revenue is recognized when a promised good or service is transferred to the customer and the

customer obtains control of that good or service. Revenue is recognized for the sale of the handset at delivery, when

the communications company transfers control of the handset to the customer. Service revenue is recognized over

the contract service period.

For simplicity, the example assumes the potential financing impact of transferring the handset to the customer at the

initiation of the contract and collecting the customer's monthly payment over the 24-month contract period is

insignificant.

The tables below compare the effect of applying the allocation guidance in the revenue guidance with that of the

current guidance.

Current guidance—existing US GAAP guidance (contingent revenue cap)

Customer

Customer A

Customer B

Total

Day

$300

(a)

$50

(

)

$350

Month

$40

(

)

$40

$80

Month

$40

$80

Month

$40

$80

(a) Recognize revenue for the sale of the handset ($300) and service ($40) based on the relative standalone selling prices.

(b) Recognize revenue for the amount of consideration received ($50) that is not contingent upon the delivery of additional items

(telecom services).

Current guidance—existing IFRS guidance (residual method)

Customer

Customer A

Customer B

Total

Day

$300

)

$50

(b)

$350

Month

$40

$80

Month

$40

$80

Month

$40

$80

(a) Under the residual method, the amount of consideration allocated to the delivered item ($300) equals the total arrangement

consideration ($340) less the aggregate fair value of the undelivered item(s) ($40).

(b) Under the residual method, the amount of consideration allocated to the delivered item ($50) equals the total arrangement

consideration ($1,010) less the aggregate fair value of the undelivered item(s) ($960).

National Professional Services Group │ www.cfodirect.com In depth 15

New guidance—revenue recognized

Customer

Customer A

Customer B

Total

Day

$300

(a)

$240

(

$540

Month

$40

(a)

$32

(c)

$72

Month

$40

$32

(c)

$72

Month

$40

$32

(c)

$72

(a) Handset: $300 = ($300 / $340) x $340; One month of service $40 = ($40 / $340) x $340.

(b) Handset: $240 = ($300 / $1,260) x $1,010.

In this example, the communications company recognizes $190 more in equipment revenue compared to current US

GAAP and IFRS. The communications company will also recognize a net contract asset of $190 under the revenue

guidance ($540 less $350 cash received), which should be amortized over the period that the related goods and

services are transferred to the customers. Management needs to monitor the contract asset for impairment each

reporting period. For example, the communications company may have to impair the asset if Customer B terminates

the contract before the end of two years, and it is unable to collect an early termination fee in excess of the contract

asset balance.

This simple example does not address other complexities that companies will have to consider. For example, the

company may charge an activation fee. The guidance states that activation services are an example of nonrefundable

upfront fees that do not result in the transfer of a good or service to the customer. Rather, the activation fee is an

advance payment for future communications services. Additionally, if the company grants the customer an option to

renew that provides a material right (e.g., an option to renew without requiring the customer to pay an additional

activation fee), the amount allocated to the material right would likely be recognized over the customer relationship

period.

5. Recognize revenue

A performance obligation is satisfied and revenue is recognized when control of the promised good or service is

transferred to the customer. A customer obtains control of a good or service if it has the ability to (1) direct its use and

(2) obtain substantially all of the remaining benefits from it. Directing the use of an asset refers to a customer’s right

to deploy the asset, allow another entity to deploy it, or restrict another company from using it.

Management should evaluate transfer of control primarily from the customer’s perspective, which reduces the risk

that revenue is recognized for activities that do not transfer control of a good or service to the customer.

Other

considerations

(5)

Recognize

revenue

(4) Allocate

transaction

price

(3) Determine

transaction

price

(2) Identify

performance

obligations

(1) Identify

the contract

National Professional Services Group │ www.cfodirect.com In depth 16

Other considerations

Costs to obtain a contract

Communications companies often pay commissions to internal sales agents and third-party dealers for connecting

new customers to their networks. Commissions paid for connecting new customers can vary depending on the length

of the service contract and the type of service plan, including any enhanced services sold. The longer the service

contract and the greater the monthly proceeds (e.g., service plans with relatively high or unlimited minutes of use),

the greater the commission costs.

Some companies that report under IFRS capitalize customer acquisition costs as an intangible asset, while other

communications companies, including most US communications companies, expense these costs as incurred. The

new guidance requires communications companies to capitalize incremental costs of obtaining a contract if the costs

are expected to be recovered. As a practical expedient, companies are permitted to expense these costs when incurred

if the amortization period would be less than one year.

Some wireless companies also provide free or heavily-discounted handsets to attract customers. Incentive programs

will not

be accounted for as costs to obtain a contract under the revenue guidance. A handset is a separate

performance obligation, and the cost of the handset is recognized as an expense when the performance obligation is

satisfied (i.e., when the handset is delivered to the customer). Communications companies offer a wide range of

discounts and subsidies, using both their own and third-party dealer networks, and will have to assess the accounting

for each different type of arrangement.

Final guidance

Current US GAAP

Current IFRS

Companies recognize as an asset the

incremental costs of obtaining a

contract with a customer if they

expect to recover them.

The incremental costs of obtaining a

contract are those costs that a

company would not have incurred if

the contract had not been obtained.

All other costs incurred regardless of

whether a contract was obtained are

recognized as an expense.

The revenue standards permit

companies to expense incremental

costs of obtaining a contract when

incurred if the amortization period

would be one year or less, as a

practical expedient.

Contract costs recognized as an asset

are amortized on a systematic basis

consistent with the pattern of

transfer of the goods or services to

which the asset relates. In some

cases, the asset might relate to goods

or services to be provided in future

US GAAP allows incremental direct

acquisition costs to be deferred and

charged to expense in proportion to

the revenue recognized. Other costs—

such as advertising expenses and

costs associated with the negotiation

of a contract that is not

consummated—are charged to

expense as incurred.

Given the lack of definitive guidance

under current IFRS, costs of

acquiring customer contracts are

capitalized by some communications

companies as intangible assets and

amortized over the customer contract

period, while other communications

companies expense the costs when

incurred.

(1) Identify

the contract

(2) Identify

performance

obligations

(3) Determine

transaction

price

(4) Allocate

transaction

price

(5)

Recognize

revenue

Other

considerations

National Professional Services Group │ www.cfodirect.com In depth 17

Final guidance

Current US GAAP

Current IFRS

anticipated contracts (e.g., service to

be provided to a customer in the

future if the customer chooses to

renew an existing contract).

An impairment loss is recognized if

the carrying amount of an asset

exceeds:

1) the amount of consideration to

which a company expects to be

entitled in exchange for the

goods or services; less

2) the remaining costs that relate

directly to providing those goods

or services.

Under IFRS, companies may reverse

impairments when costs become

recoverable; however, the reversal is

limited to an amount that does not

result in the carrying amount of the

capitalized acquisition cost

exceeding the depreciated historical

cost. Companies are not permitted

to reverse impairments under US

GAAP.

Potential impact - both US GAAP and IFRS

The revenue standards will have a significant impact on companies that do not currently capitalize costs to obtain

contracts. Companies will likely have to develop systems, processes, and controls to identify and track incremental

contract acquisition costs and to subsequently monitor the capitalized costs for impairment.

A communications company will capitalize costs to obtain a contract as an asset if they are recoverable, and amortize

them consistent with the pattern of when goods or services to which the asset relates are transferred to the customer.

Companies will need to use judgment to determine the amortization period as the revenue standards require

companies to consider periods beyond the initial contract period (e.g., the renewal of existing contracts and

anticipated contracts). Therefore, the asset recognized from the cost to obtain the initial contract may be amortized

over a period longer than the initial contract term, such as over the average customer life, which is based on the

period of expected future cash flows to be received from the customer. However, there may be circumstances when

the asset should be amortized over a period shorter than the average customer life, such as when the lifecycle of the

goods or services to which the asset relates is shorter than the average customer life.

Amortizing an asset over a longer period than the initial contract would not be appropriate when a company pays a

commission on a contract renewal that is commensurate with the commission paid on the initial contract. The FASB

staff clarified that the level of effort to obtain a contract or renewal should not be a factor in determining whether the

commission paid on a contract renewal is commensurate with the initial commission. However, it may be reasonable

for a company to conclude that a renewal commission is commensurate with an initial commission if the two

commissions are reasonably proportionate to the respective contract value.

A company also has to develop a systematic approach, considering the number of customers and contract offerings, to

test assets relating to contract acquisition costs for impairment (e.g., a portfolio approach) when the estimated

amount of consideration to be received from customers might be less than the outstanding contract asset.

Spreading these costs over the amortization period could significantly affect operating margins compared to the

current accounting model. Wireless companies, for example, often incur significant contract acquisition costs during

the holiday seasons as they sign up customers through significant promotional offers.

National Professional Services Group │ www.cfodirect.com In depth 18

Example 6-1 − Contract acquisition costs, practical expedient

Facts: A communications company enters into a contract with a customer to provide telecom services. The transaction

does not include the sale of a device. The company pays a third-party dealer a commission to connect the customer to its

network. The customer signs an enforceable contract to receive telecom services for one year.

How should the communications company account for the third-party dealer commission?

Analysis: The company identifies incremental contract acquisition costs and capitalize those costs that

are

recoverable.

The communications company may use the practical expedient and expense contract acquisition costs when incurred

if the amortization period would be one year or less. In this case, the company determines that the amortization

period is one year because no renewal is expected.

Example 6-2 − Contract acquisition costs, identifying incremental costs

Facts: A communications company sells wireless telecom service subscriptions (service plans) from a retail store in a

shopping mall. Sales agents employed at the retail store sign 120 customers to two-year telecom service contracts in a

particular month. The monthly rent for the store is $5,000. The communications company pays the sales agents’

commissions for the sale of telecom service contracts, in addition to their normal wages. Wages paid to the sales

agents during the month are $12,000 and commissions are $24,000.

The communications company also offers customers free, or significantly subsidized, handsets to create an incentive

for them to enter into two-year contracts. The net subsidy (loss) on handsets sold to the 120 customers is $36,000

(measured on the basis of the cost of the handset compared to advertised price, and not as specified in the revenue

standards). The retail store also incurs $2,000 in costs during the month to advertise in the local journals.

How much should the communications company recognize as a contract acquisition asset?

Analysis: The communications company is required to capitalize incremental costs to acquire contracts, which are

those costs it would not have incurred unless it acquired the contracts. The practical expedient is not available as the

amortization period is greater than a year. In this example, the only costs that qualify as incremental contract

acquisition costs are the $24,000 commissions paid to the sales agents.

All other costs are expensed when incurred. The store rent of $5,000, the sales agents' wages of $12,000, and

advertising expenses of $2,000 are all expenses the communications company would have incurred regardless of

acquiring the customer contracts.

Although the company might internally regard the handset losses as marketing incentives or incidental goods or

services, the sale of the handsets are performance obligations, and the costs of the handsets are recognized (as cost of

goods sold) as the goods are delivered.

Companies should be aware that subtle differences in arrangements could have a substantial impact on the

accounting for subsidies and discounts under the revenue guidance. For example, another communications company

might pay third- party dealers greater commissions to allow those dealers to offer similar incentives (i.e., offer

significantly-discounted handsets at a dealer's discretion). Payments to dealers that are in-substance commissions

should be treated as contract acquisition costs.

Example 6-3 − Contract acquisition costs, amortization period for prepaid services

Facts: A communications company sells wireless services to a customer under a prepaid, unlimited monthly plan.

The communications company pays commissions to sales agents when they activate a customer on a prepaid

wireless service plan. While the stated contract term is one month, the communications company expects the

customer, based on the customer's demographics (e.g., geography, type of plan, and age), to renew for six additional

months.

What period should the communications company use to amortize the contract acquisition costs (i.e., the

commission costs)?

Analysis: The company could use the practical expedient to expense the costs as incurred. If the company chooses to

capitalize the costs, it will use judgment to determine an amortization period that represents the period during

which

the

company transfers the telecom services. In this example, the company determines an amortization period of

seven months based on anticipated renewals.

National Professional Services Group │ www.cfodirect.com In depth 19

Fulfillment costs

Some communications companies defer the cost of activating customers to the network (i.e., labor and equipment

cost) under US GAAP. These costs can be material and are typically deferred up to the amount of related activation

revenue and amortized on a straight-line basis consistent with the related revenues.

Under IFRS, companies that provide long-term network outsourcing services sometimes defer set-up costs because

they are necessary investments to support the ongoing delivery of the contract.

Costs to fulfill contracts are capitalized in accordance with other standards (e.g., inventory, property, plant and

equipment, or intangible assets) or, if not within the scope of other guidance and they meet specific requirements, are

capitalized under the revenue guidance. Companies need to review their cost capitalization policies to understand the

potential effect of these changes.

Final guidance

Current US GAAP

Current IFRS

Direct costs incurred to fulfill a

contract are first assessed to

determine if they are within the

scope of other standards, in which

case the company accounts for

them in accordance with those

standards.

Costs that are not in the scope of

another standard are evaluated

under the revenue guidance. A

company recognizes an asset

only if the costs:

 relate directly to a contract;

 generate or enhance resources

that will be used in satisfying

future performance obligations

(i.e., they relate to future

performance); and

 are expected to be recovered.

These costs are then amortized as

control of the goods or services to

which the asset relates is

transferred to the customer.

Costs incurred to install services at the

origination of a customer contract are

either expensed as incurred or deferred

and charged to expense in proportion to

the revenue recognized.

In particular, direct, incremental, set-up

costs on long term network outsourcing

contracts may be deferred by reference to

the FASB Conceptual Framework and

analogy to ASC 310-20 and ASC 605-20-

25-4.

In addition, many of the costs of

connecting customers form part of the

operator’s network, and the costs are

capitalized as property, plant and

equipment.

Costs incurred to install services at

the origination of a customer

contract are either expensed as

incurred or recognized as an asset

and charged to expense in

proportion to the revenue

recognized, depending on the

nature of the costs.

In particular, direct, incremental,

set-up costs on long term network

outsourcing contracts may be

deferred if they are “costs that

relate to future activity on the

contract.”

In addition, many of the costs of

connecting customers form part

of the operator’s network, and

the costs are capitalized as

property, plant and equipment.

Potential impact - both US GAAP and IFRS

Communications companies that currently expense all contract fulfillment costs as incurred might be affected by

the revenue standards since costs are required to be capitalized when the criteria are met. Fulfillment costs that are

likely to be in the scope of this guidance include, among others, set-up costs for service providers.

About PwC’s Technology, Media, and Telecommunications

(TMT) practice:

PwC’s TMT practice strives to help business leaders in the Technology, Media and Telecommunications industries manage

their complex businesses and capitalize on new windows of opportunity.

With offices in 157 countries and more than 223,000 people, we help organizations and individuals create the value they’re

looking for by delivering quality in assurance, tax, and advisory services. Visit our website at: www.pwc.com/us/tmt.

For more information about the TMT practice or PwC, please contact:

Thomas Tandetzki

Global Communications Leader

Email: thomas.tandetzki@de.pwc.com

Kevin Healy

US Technology, Media and Telecom Assurance Leader

Email: kevin.healy@pwc.com

© 2017 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see

www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

To have a deeper discussion,

contact:

Ashley Wright

Partner

Email: ashley.j.wright@pwc.com

Lindsey Morris

Senior Manager

Email: lindsey.morris@pwc.com

Follow @CFOdirect on Twitter.

Jason Waldie

Partner

Email: jason.waldie@pwc.com

Dominic Wong

Senior Manager

Email: dominic.s.wong@pwc.com

Michelle Dion

Senior Manager

Email: michelle.dio[email protected]