Given the nature of their business, telecommunications companies have had a high level of success in revenue recognition processes. However, for most industries, including the telecommunications industry, billing and ASC 606 compliance became increasingly difficult with the updates to ASC 606.
The updates added new layers of complexity related to factors including performance obligations and transaction prices. In the typical telecommunications business model, phone contracts are routinely modified, extended, and canceled, while hardware pricing is often heavily affected by customers’ choice of subscription services.
These factors mean more considerations under ASC 606. There are three areas in particular that are key to combating the telecommunications industry billing and ASC 606 compliance challenges.
Read more about the considerations below and the ideal revenue recognition solution to face the complexities or get started by reviewing the leading Revenue Management System to automate billing and ASC 606 processes.
Three Key Considerations for Telecommunications Industry Billing and ASC 606 Challenges
To note, the revenue recognition standard, ASC 606 has a five-step process for revenue recognition:
- Identify the contract with the customer
- Identify the performance obligation in the contract
- Determine the overall transaction price for the contract
- Allocate the transaction price to the performance obligations
- Recognize revenue when performance obligations are satisfied
Ratable Recognition of Installation and Activation Fees
Installation and activation fees for new subscribers 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, but less so when it comes to recognizing revenue.
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 are not 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.
“Friends and Family” Plans
“Friends and family” plans are standard offerings for wireless carriers, but how they are structured has created a few challenges under ASC 606.
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.
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.
The distinction is important: 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 to properly follow the guidance.
With telecommunications, there are additional areas to consider. For instance, ASC 606 may allow companies to recognize more revenue up-front, as is the case with subsidized handsets. In other instances, ASC 606 adds another layer of complexity to revenue recognition processes.
Simultaneously, telecom companies must contend with complex bill models, often including both one-time as well as subscription and usage-based models. Usage models may have to consider usage across one or multiple end consumers. They may have to consider usage minimums, overages, tiering, and other complexities, as well as the need to handle credits, cancelations, and other change events.
Billing and ASC 606 Automation Software for Telecommunications Companies
SOFTRAX is the only vendor that provides an option to deploy revenue recognition for ASC 606 as an independent application, or as a complete Revenue Management System (RMS), combining support for complex billing and revenue recognition against ASC 606 / IFRS 15 in a single system.
Contact us to learn how SOFTRAX can help with complex revenue management requirements in the Telecom industry with leading revenue management software.