The telecommunications industry has been grappling with the new levels of complexity presented by the revenue recognition standard, ASC 606. For telecommunications entities, notable challenges include those related to determining performance obligations and transaction prices among other revenue recognition processes.
SOFTRAX saw these complications when they were introduced in 2014 and released a blog post on October 2nd of 2014 to explore these complexities as they applied during the time. The blog piece focused on the main areas in that ASC 606 presents problems, including revenue reallocation, variable transaction pricing, and contract modifications. While 2014 is now seven years away and much has changed, companies continue to struggle with the implementation of the standard and the points SOFTRAX foresaw remain applicable today and are spotlighted below.
To learn more about the information discussed in this blog, connect with a SOFTRAX representative and start a chat about your concerns.
Telecommunications and the New Revenue Recognition Standard
When the US Financial Accounting Standard Board (FASB) released its updated revenue recognition guidelines in 2014, the telecommunications industry was one of the most notable verticals spotlighted on the list of industries likely to see substantial impacts from the new ASC 606 guidance.
Telecommunication companies have achieved a high level of success in adopting recurring revenue models, but this creates complexity in revenue recognition — phone contracts are routinely modified, extended, and canceled, 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
Customer arrangements in the industry often involve multiple deliverables. Accordingly, the previous disclosure requirements under ASC 605-25 were intended to help financial statement users understand the nature of each deliverable, how it is valued, and how revenue is recognized.
Under ASC 606/ASU 2014-09/IFRS 15, old industry-specific guidelines for revenue recognition have been consolidated into a single 5-step procedure:
- Identify the contract with the customer.
- Identify the performance obligations 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.
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 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.
Telecommunications and SEC Comment Letters
Since the release of ASC 606, the comment letters that telecommunications entities most often receive from the Security and Exchange Commission require the entities to expand or clarify their disclosures about revenue recognition.
In recent years, the SEC has frequently requested wireless operators to clarify their revenue recognition policies for sales to the indirect channel (e.g., retailers, dealers). The SEC staff has asked about the nature of transactions with indirect channel participants, including whether equipment sales are accounted for on a consignment basis. In addition, the staff has commented on the accounting treatment of the associated indirect channel incentives and subsidies, with a focus on their accounting characterization as principal or agent and timing of recognition. Given this recent focus, registrants in the wireless industry may wish to enhance their disclosures about indirect channel sales.
Here are a few examples of additional problem areas telecommunications entities face:
Problem Area 1: 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, less so when it comes to recognizing revenue with the new guidance in 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 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.
Problem Area 2: “Friends and Family” Plans
“Friends and family” plans are standard offerings for wireless carriers, but the way they are structured has created 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 to properly follow the guidance.
Preparing for the Transition
Of course, telecommunication isn’t the only vertical that will see challenges from the new guidance. As businesses continue to shift and resettle as COVID-19 mandates loosen, there’s no better time than now to ensure your company has the best procedures in place to remain compliant with ASC 606.
If you are concerned 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.
Explore our solutions today or book a discovery session with one of our experts to learn more about how entities within the telecommunications industry can prepare for challenges before they arise.