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
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
Recognising revenue as performance obligations are
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
"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
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
"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
Audit firms, individual auditors, IFRS advisors, reporting accountants and reporting account specialists play a fundamental role in the regulation of the JSE and its listings requirements.
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