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Telecoms and ASC 606: Revenue Recognition Under the New Standards

Posted by Martin Sachs on Oct 2, 2014 10:13:00 AM

Telecommunications and the New Revenue Recognition StandardsWhen the US Financial Accounting Standard Board (FASB) released its updated revenue recognition guidelines earlier this year, it also spotlighted several industries likely to see substantial impacts from the new ASC 606 guidance. One the most notable verticals on that list: telecommunications.

The telecoms industry is one of the largest and most successful examples of a recurring revenue business, but also contains a lot of scope for complexity -- phone contracts are routinely modified, extended, and cancelled, while hardware pricing is often heavily affected by customers' choice of subscription services. That complexity translates to a whole host of questions for accountants, auditors, and managers alike as they prepare their companies for the new revenue recognition rules.

 

The New Guidance in a Nutshell

Under ASC 606/ASU 2014-09/IFRS 15, old industry-specific guidelines for revenue recognition are being consolidated into a single 5-step procedure: 

1. Identify the contract with the customer.

2. Identify the performance obligations in the contract.

3. Determine the overall transaction price for the contract.

4. Allocate the transaction price to the performance obligations. 

5. Recognize revenue when performance obligations are satisfied.  

Much of the complication created by the new guidance is centered around determining performance obligations and transaction prices. In some cases, the changes mandated by ASC 606 may actually allow companies to recognize more revenue up-front, as is the case with subsidized handsets. In others, the new guidance adds another layer of complexity to revenue recognition processes. Here are a few examples:

 

Problem Area 1: Rateable Recognition of Installation and Activation Fees

Installation and activation fees for new subscribers are are usually charged up-front, and are considered non-refundable. Typically, these will be bundled with the actual voice and data services for sales purposes -- convenient from a sales perspective, less so when it comes to recognizing revenue once the new guidance takes effect.  

Under ASC 606, revenue can only be recognized when the specific performance obligation associated with that revenue is satisfied. When up-front fees are bundled with an ongoing subscription, the performance obligation in many cases will be the delivery of the actual service. That means revenues aren't recognized when the customer first gains access, but as voice/data services are provided to them. 

Additional complications arise if the contract is renewable, or is terminated ahead of time. Given these circumstances, it may be easier to unbundle installation and activation services from the ongoing contract to both reduce complexity and increase flexibility. 

 

Problem Area 2: "Friends and Family" Plans

"Friends and family" plans are standard offerings for wireless carriers, but the way they are structured will create a few challenges under the new guidance. Since there are technically multiple users on each plan, carriers need to determine whether such offerings consist of a single blanket contract covering all users, or multiple individual contracts with their own specific performance obligations.

For allocation purposes, determining an appropriate selling price for each user's share of the overall service will also become important. 

 

Problem Area 3: Promotional Discounts and Credits

Promotional discounts and credits are widely used in the telecoms industry as both a sign-up incentive and a tool for retaining existing customers. Depending on when and where these are offered, they could be treated as either a temporary contract modification or a variable consideration under the new guidance.

In this case, the distinction is an important one: unlike the guidance it replaces, ASC 606 has specific provisions for how contract modifications are handled. Understanding how these provisions impact when and how revenue can be recognized is essential to making informed decisions during the adoption process. 

 

Preparing for the Transition

Of course, telecoms isn't the only vertical that will see challenges from the new guidance. And with US businesses expected to start using the new standard by January 2017, there's no better time than now to start planning your company's transition to ASC 606.

If you're worried about getting your existing systems up to speed, don't hesitate to contact us -- at SOFTRAX, we've been helping companies navigate the complexities of changing regulations for almost two decades now. Our revenue management solutions can help take the stress out of adoption by strategically building up your existing revenue recognition capabilities to meet the new requirements.

If you’re preparing to respond to the new revenue recognition guidelines from the FASB and IASB, a good place to start is our newly-released “Guide to ERP Augmentation for Improved Billing and Revenue Recognition.” You can download a copy by clicking on the link below.

Download Free Whitepaper
 
 

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Topics: Subscription Economy, Revenue Recognition, Revenue Management, ASC 606

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