South Africa

Details

  • Service: Audit
  • Type: Business and industry issue
  • Date: 2011/01/19

Proposed new accounting reporting standards will impact on telecoms sector 

Imminent changes to revenue recognition standards will have far-reaching cost implications for the telecommunications sector, among others. Some impacts will involve greater expenditure in recording revenues, the need to upgrade accounting and reporting systems and the need to train staff involved in reporting revenue streams in the mobile and fixed-line telephony sectors.

“These are some of the basic consequences of the proposed new accounting standard for recognising revenue in the telecoms sector,” says Johan Smith, Head of Telecommunications at KPMG. “Although not applicable yet, the proposed standard may have to be implemented retrospectively and entities in the telecommunications sector would do well to prepare for the effective date.”

 

The daily impact on the consumer will be close to nothing, however, he said. “In fact, the main beneficiaries should be customers and consumers involved in contractual arrangements with providers. It’s a principle-based accounting approach. The operational impact will directly affect the activities and approaches by Chief Financial Officers and Chief Information Officers in the telecoms sector.”

 

The new proposals suggest a five-step approach which disaggregates the component parts of a contract and focuses on distinct performance obligations, says Riaan Davel, Director in the Technical Accounting Department at KPMG in South Africa.

 

The five-step approach includes, but is not confined to, the following:

 

  • Identifying a contract with a customer
  • Identifying the performance obligations under the contract
  • Identifying the transaction price
  • Allocating the transaction prices to the various performance obligations
  • Recognising revenue as performance obligations are satisfied.

 

The proposed model stipulates that revenue should be recognised when control of goods and services are transferred to the consumer, as opposed to the current standard which refers to the transfer of risks and rewards. The transfer of control may occur at a specific point or continuously, but will require assessment on a case-by-case basis.

 

“Given the number of subscribers and the variety of contracts available, the proposed principles may require the evaluation of individual contracts. Some concern has also been raised within the telecommunications industry about their inability to approach the proposed requirements on a portfolio basis. In other words, no generalisations can be made based on the class of contracts entered into by segments of the market,” says Smith.

 

The proposed revenue recognition principles require that service providers report on both fixed and variable revenue streams. In addition, the proposed regulations require that service providers acknowledge and report on revenues raised in the fulfilment of performance obligations directed at consumers. These can range from revenue raised through the fulfilment of warranty agreements to the provision of airtime and handsets, amongst others. The proposed accounting for performance obligations will require the recognition of revenue when these obligations are satisfied.

 

The increasing convergence of technology platforms and services also means that the identification of revenue streams becomes more complex. “Large chain-stores, for example, are selling mobile handsets at attractive prices that include data bundle services sourced from outside the domains of the retailer and the manufacturer. These performance obligations will need to be analysed carefully to determine the impact on the recognition of revenue,” asserts Smith.

 

An implementation date for the draft standard is yet to be established. Existing and new entrants to the telecoms market, however, are advised to consider and perhaps keep track of the proposals of the draft standard in light of its retrospective application.

 

“The regulations will place enormous pressure on entities in terms of judgements and estimations required to evaluate their revenue contracts. It would be prudent to begin the exercise before they come into effect especially in the context of convergence, growing consumer demand for flexibility and an increasingly competitive telecoms sector,” concludes Smith.

 

Access New on the Horizon: Revenue recognition for telecoms.