2016 Global Communications GAAP Summit
Transition: getting it right in
a changing environment
Workshop 2:
Implementation of IFRS 15
Global Communications GAAP Summit
PwC
June 2016
2
Implementing IFRS 15 (illustrative – table exercise)
Stakeholders:
CFO
Audit
Committee
CIO
Board
Investor
relations
RemCo
2016
2011 - 2015
Lobbying and
understanding
Accounting impact
assessment
Disclosure
requirements
Identify impacted
systems
Budget/Planning:
Marketing:
2017
Regulator
IT Vendor selection
New product offerings /
propositions
IT Controls design and
implemented
Design, build and
implement fixes
User testing
3 – 5 year
budget/plan
Redefine KPIs
Management
information systems
Competing
projects
2019
Annual
Report/20-F
Design and implement new
financial reporting controls
Update Risk and
Control Matrices
Design, implement and test
Systems
integrator
2018
Reporting
ICFR risk
assessment
Understand
requirements for MI
Other assurance
providers
Cumulative catch up
Business requirement
and user cases
Billing system etc
assessment
Technology:
External
audit
Retrospective
TODAY
Finance:
Internal
audit
Controls testing
Parallel and dual reporting
3 – 5 year
budget/plan
3 – 5 year
budget/plan
Adoption of
IFRS 16
Alignment to
KPIs
Review commission
structures
Share option/
Rem plans
Remuneration:
Investors:
Governance:
Global Communications GAAP Summit
PwC
Qualitative
Internal audit
plan
Subsidiary
judgments
Retail store
incentives
Share option/
Rem plans
Share option/
Rem plans
Qualitative &
Quantitative
Full comparatives
Key metrics
Ongoing governance review: Audit Committee, Disclosure Committee, Steering Committee, Auditor, etc
June 2016
3
What you said…
CFO’s are the
main project
sponsor
1
Some projects (7%)
have not yet
started….
Global Communications GAAP Summit
PwC
40% are
planning on
engaging with
external
stakeholders in
the next 12
months
2
Most projects are
in the analyse and
design phases
22% do not
expect to need to
communicate
with external
stakeholders
31% are
planning on
using the full
retrospective
approach for
transition
27% have identified
contract modifications
with a retrospective
effect
June 2016
4
Technical update – what has happened since last
year?
Global Communications GAAP Summit
PwC
June 2016
5
Technical clarifications
Topic
Identifying
Performance
Obligations
Licenses
Principal vs agent
FASB
IASB
Partially
Identifying
Performance
Obligations and
Licensing
Issued April 2016
Principal vs Agent
Considerations
Issued March 2016
Clarifications to IFRS
15
Issued April 2016
Transition
Collectability
Presentation of sales
taxes
Non-cash
consideration
Global Communications GAAP Summit
PwC
Convergence
Partially
Same
Partially
Narrow-Scope
Improvements and
Practical Expedients
Issued May 2016
None
None
None
None
None
None
June 2016
6
Polling question
Which topics would you like to discuss?
1. Principal versus agent
2. Fixed enterprise contracts
3. Costs to acquire and fulfil contracts
4. A view from your peers – practical implementation
5. Determining SSP and allocating discounts
6. Disclosures and reporting
Global Communications GAAP Summit
PwC
June 2016
7
Principal versus agent
Global Communications GAAP Summit
PwC
June 2016
8
Fundamental change
IAS 18 IE 21
IFRS 15.B35
Risk and reward approach
Control concept
“An entity is acting as a principal
when it has exposure to the
significant risks and rewards
associated with the sale of goods
or the rendering of services.”
“An entity is a principal if it
controls
the specified good or service
before that good or service is
transferred to a customer.”
IFRS 15 states that having risk and rewards of
ownership is one indicator of control
Global Communications GAAP Summit
PwC
June 2016
9
What the rules say?
Control concept
Indicators of IFRS 15.B37
Discretion
Responsibility
The entity is primarily responsible for
fulfilling the promise to provide the
specified good/ service, including the
responsibility for acceptability of the
good/service.
b)
a)
Indicators
for being
a
principal
Inventory risk
The entity has inventory risk before the
goods/service have been transferred to
a customer or after transfer of control
to the customer.
Global Communications GAAP Summit
PwC
c)
No specific ranking
(IFRS15:B37a)
d)
The entity has discretion in establishing the
price for the good/service, indicating that the
entity has the ability to direct the use of that
good/service and can obtain substantially all
of the remaining benefits.
Other facts and circumstances
Specific scenarios will required judgments
based on the facts and circumstances of the
transaction
June 2016
10
Q: Bundled premium content
•
Customer purchases a monthly service bundle including music streaming from
FiTel.
•
The music streaming service cannot be purchased separately from FiTel. FiTel
commits to a minimum guarantee payment to the music streaming provider of
€1m per annum.
•
FiTel has discretion in establishing the price for the bundle.
•
FiTel is the primary point of contact for the customer if there are service issues.
Is FiTel the principal or agent?
1.
Principal
Global Communications GAAP Summit
PwC
2.
Agent
3.
Not sure
June 2016
11
Proposed solution: Bundled premium content
In this example, which of the indicators stated in IFRS 15.B37 are met:

Responsibility
 FiTel determines the
composition of services
included in its bundles,
including the provision of
music
 FiTel is primarily
responsible for the
customer care
?
Inventory risk
 The minimum guarantee
to the content provider
could be viewed as
inventory risk

Discretion
 FiTel has discretion for
setting the price of the
bundle
FiTel is a principal for provision of the bundle of services including
the content
Global Communications GAAP Summit
PwC
June 2016
12
Q: TV content
•
A FiTel customer purchases a monthly TV subscription. The customer is billed
by FiTel.
•
FiTel purchases the TV content from the third party and resells it to its
customers, i.e. FiTel does not produce or modify the content.
•
The customer agrees to the third party’s terms and conditions in order to be
able to access the TV content. The pricing and branding is set by the third party.
Is FiTel the principal or agent?
1.
Principal
Global Communications GAAP Summit
PwC
2.
Agent
3.
Not sure
June 2016
13
Proposed solution: TV content
In this example, which of the indicators stated in IFRS 15.B37 are met:
x
Responsibility
 The customer enters into a
contract with the third party
agreeing to its general terms
and conditions, not FiTel's
?
Inventory risk
 FiTel does not carry an
inventory of the TV
content
x
Discretion
 The third party sets the
price for the TV content
FiTel is an agent for provision of TV content, reselling it on
behalf of the third party
Global Communications GAAP Summit
PwC
June 2016
14
Other considerations
Minimum guarantee payments
•
What if there was no minimum guarantee payment?
•
What if the service is successful and the minimum guarantee payment ceases to
have substance?
•
Is inventory risk relevant to digital business models?
Signing up to third party platform
•
Does the fact a customer may have to sign up to third party platform to access
the content change who has responsibility?
•
If the content is third party branded, is the Telco always an agent?
Global Communications GAAP Summit
PwC
June 2016
15
Q: Dealer reselling handset purchased from
operator
•
Dealer purchases handsets from FiTel. Subsequently, the dealer bundles these
handsets with FiTel’s service plans and sells the bundle to FiTel end-customers.
•
Dealer can resell the handsets to non FiTel customers. FiTel recommends a
certain handset price to the dealer. Dealers need to price match and so use the
recommended price point.
Is the dealer acting as a principal or agent for the supply of the handsets?
1.
Global Communications GAAP Summit
PwC
Yes
2.
No
3. Not sure
June 2016
16
Dealer reselling handsets purchased from operator
“Momentary transfer
of control”
• Does the dealer control the
handsets before the handset
is transferred to the
customer?
• If yes => the dealer is
principal
• If no => more likely that the
dealer is agent
Global Communications GAAP Summit
PwC
Dealer is principal
if….
• Dealer can sell handsets
purchased from FiTel to
non-FiTel customers
Other
factors
• Dealer can set the selling
price of handsets
• Dealer does not have the
option to return unsold
handsets to FiTel or be
compensated for any loss
Dealer is agent
if ….
• Cannot sell handsets to nonFiTel customers, or minimal
volume
• Selling price is set by FiTel
• Dealer can return unsold
handsets to FiTel
June 2016
17
Fixed enterprise contracts
Global Communications GAAP Summit
PwC
June 2016
18
Typical stages of an enterprise contract
These contracts usually include a combination of some, or all, of the following elements:
Contract
start
Bid
Modifications
?
Start-up /
transition
Design
Build
Operate
Modifica
tions?
Time
Bid costs should be
expensed as incurred
Global Communications GAAP Summit
PwC
Are set up and
transformation
activities separate
POs?
Costs to fulfil, or
separate POs
MFN / benchmarking
clauses
June 2016
19
Q: Are set-up and transition activities distinct?
• FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and
security), Cloud storage services and software patching to Corp.
• In order to transition the services FiTel must (i) novate existing supplier contracts, (ii)
perform an inventory of the existing IT estate, (iii) work with in-house network
design team on the optimal network configuration, and (iv) set up its billing capabilities
in the 100 countries where Corp operates which includes billing in 18 currencies.
• Corp agrees to pay €20m up-front with remaining payments linked with service terms or
event based (e.g. as software patches are delivered).
Are the set-up and transition activities distinct?
1.
Yes
Global Communications GAAP Summit
PwC
2.
No
3.
Design is distinct
4. Not sure
June 2016
20
Proposed solution: Set-up and transition activities
In this example, how many of the indicators of IFRS 15:27 are met?
x
Separate customer benefit
 The set-up and transition
activities are necessary for FiTel
to provide the services and do
not provide a benefit to Corp
AND
x
Separate in context of
contract
 The activities were undertaken
for FiTel’s benefit so it can
deliver the services requested by
Corp
The set-up and transition activities are not distinct
performance obligations
Global Communications GAAP Summit
PwC
June 2016
21
Q: How many performance obligations are there?
• FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and
security), Cloud storage services and software patching to Corp.
• In order to transition the services FiTel must (i) novate existing supplier contracts, (ii)
perform an inventory of the existing IT estate, (iii) work with in-house network
design team on the optimal network configuration, and (iv) set up its billing capabilities
in the 100 countries where Corp operates which includes billing in 18 currencies.
How many distinct POs have you identified?
1.
1
Global Communications GAAP Summit
PwC
2.
2
3.
7
4. 8
5.
Not sure
June 2016
22
Proposed solution: performance obligations
In this example, how many of the indicators of IFRS 15:27 are met?

Separate customer benefit
 Corp receives a separate benefit
from each of the different
services being provided
AND

Separate in context of
contract
 Services are distinct from one
another in the contract
Each of the services being offered by FiTel are
available on a standalone basis to end customers. In
total there are 7.
Global Communications GAAP Summit
PwC
June 2016
23
Q: How to determine the transaction price?
• FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and security), Cloud
storage services and software patching to Corp.
• Corp agrees to pay €20m up-front as a contribution towards the transition activities noted
earlier and €100m per annum for 10 years for the services.
• Corp has the option to request a pricing benchmark under the MFN clause every 3 years in
respect of the WAN and LAN services. Corp is expected to exercise the option which could
change (expected to reduce) pricing prospectively.
How should FiTel determine the transaction price?
1. Current pricing
in the contract
(€100m*10 years
+€20m upfront)
Global Communications GAAP Summit
PwC
2. Estimate the
outcome of the
benchmarking
3. €320m
(3 years * €100m
+ €20m)
4. Material right
5. None of the
above
June 2016
24
Proposed solution: Transaction price
x
x
Material right
• The MFN clause only
requires benchmarking to
rates already available to
comparable customers
•
Contract
modification
MFN clauses are
included in the contract
from inception
4
Variable
consideration
• Consideration can vary
because of MFN clause
• Series provision
(IFRS15:22b) can be applied
• Benchmarked rate applied
from date of change
(IFRS15:84,85,73)
If the MFN clause is exercised, any change will be applied prospectively to
the WAN and LAN services.
Global Communications GAAP Summit
PwC
June 2016
25
Costs to acquire and fulfil contracts
Global Communications GAAP Summit
June 2016
26
The results are in…
Which types of costs of acquiring and executing a contract does
your company intend to capitalise?
93%
Third party commissions
Global Communications GAAP Summit
PwC
52%
52%
Internal commissions
Installation costs
June 2016
27
What does IFRS 15 say?
Definition
Capitalisation
Amortisation
Practical expedient Disclosures
Costs that directly
relate to either
obtaining (e.g. sales
commissions) or
fulfilling a contract
(e.g. direct labour) and
that would not have
incurred if the contract
had not been obtained
(IFRS 15.92).
Capitalisation as a
separate asset, if cost
recovery is expected.
Capitali-sation
applies separately
from presentation of
net contract position.
Amortisation over
economic lifetime
=> usually average
customer
retention period,
provided that no
similar costs arise
when contract is
prolonged.
Contracts with
Additional quantitative
duration <12
and qualitative
months (IFRS 15.94) information.
=> Expense instead of
capitalisation of costs
at contract inception.
An entity shall recognise as an asset the incremental costs of acquiring a contract with
a customer if the entity expects to recover those costs (IFRS 15.91)
Global Communications GAAP Summit
PwC
June 2016
28
The results are in…
Will you take the practical expedient to expense costs for a contract
of less than 12 months?
42%
Expensing costs < 12 months
Global Communications GAAP Summit
PwC
June 2016
29
Q: Costs to acquire a contract
FiTel engages dealers to sell service contracts on their behalf. FiTel pays different
sales commissions to dealers for acquiring new customers and has other costs that
relate to acquisitions:
a) Volume commission of €400 for every 100 acquisitions – as follows:
0-99 acq.
= €0
100-199 acq. = €400
200-299 acq. = €800
b) Connection commission of €20 per acquisition
c) Joint marketing support costs
Which of the costs qualify as costs to acquire a contract?
1.
Volume
commission
Global Communications GAAP Summit
PwC
2.
Connection
commission
3.
Volume and
connection
commission
4.
All of the
above
June 2016
30
Proposed solution: Costs to acquire a contract
Cost
Proposed solution

Volume
commission
• Any payment is directly attributable and incremental to acquiring
the customer contract.

Connection
commission
• The amount for the individual contract should be estimated based
on the expected outcome.
x
Joint marketing
support
• Payment by FiTel for marketing services provided by the dealer –
therefore not directly attributable to acquiring the customer contract.
Global Communications GAAP Summit
PwC
June 2016
31
Q: Can set-up and transition costs be capitalised as
costs to fulfil a contract?
• FiTel agrees to provide various services to Corp.
• In order to transition the services FiTel must (i) novate existing supplier contracts, (ii) perform an
inventory of the existing IT estate, (iii) work with in-house network design team on the optimal
network configuration, and (iv) set up its billing capabilities in the 100 countries where Corp operates
which includes billing in 18 currencies.
• Corp agrees to pay €20m up-front, remaining payments are linked with service terms or event based (e.g.
software patch delivered).
What costs to fulfil the contract have been incurred by FiTel?
1.
All of the costs
above
Global Communications GAAP Summit
PwC
2.
None of the above setup and transition is
a distinct PO for
which FiTel has been
paid €20m
3.
Novating contracts and
setting up billing sound
like administrative tasks
that should be expensed
4.
Not sure
June 2016
32
Proposed solution: Capitalisation of set-up and transition
costs
Technical guidance
Proposed solution
Costs relate directly to a contract
All activities relate directly to the
contract
Costs generate or enhance resources
The activities enable FiTel to effectively
and economically deliver the services
Costs are expected to be recovered
The costs will be recovered over the life
of the contract
Global Communications GAAP Summit
PwC
June 2016
33
Other considerations?
Governance processes:
Determination of
amortisation period
•
•
•
To ensure only appropriate
costs are capitalised
To understand bid models /
investment cases
To set and monitor minimum
thresholds
Contract by contract
or portfolio:
• Costs to acquire
• Costs to fulfil
Global Communications GAAP Summit
PwC
June 2016
34
A view from your peers – practical
implementation
Global Communications GAAP Summit
PwC
June 2016
35
How are you approaching the implementation?
How do you
approach IFRS 15
implementation?
What are the key
challenges in your
opinion?
What are the critical
judgements / decisions you
have made to simplify the
processes for implementation?
Global Communications GAAP Summit
PwC
June 2016
36
SSP and allocating discounts
Global Communications GAAP Summit
PwC
June 2016
37
The results are in…
How will you determine the standalone selling price of equipment
in a bundle?
50%
41%
9%
Market assessment
Global Communications GAAP Summit
PwC
Cost plus margin
Residual approach
June 2016
38
What is the cost for equipment?
Initial cost from
manufacturer/
supplier
•
•
Are there direct and
indirect costs
involved?
•
Are there research and
development costs
that are expected to be •
recovered through
sales?
•
Marketing and other
contributions?
Volume
discounts
Rebates
•
Global Communications GAAP Summit
PwC
What is the timing
between purchasing
and selling the devices
and confirming the
volumes?
•
•
How variable are the
amounts? What
conditions are attached
•
to obtaining the
rebates?
Do the operating units
have full visibility or is
purchasing
centralised?
Are the terms and
conditions of volume
discounts properly
understood?
NRV
adjustments
•
How frequently are
these made?
•
Centrally procured in
US$
•
What if the equipment
was not historically
treated as a sale – is
there a mechanism to
track NRV?
•
Sold to the operating
unit in Euro
•
Sold to customers in
Sterling
How good is the
business at estimating
volume discounts ?
How have they been
tracked and allocated
for management
reporting purposes etc?
Is this a reliable basis?
Currency
arrangements
•
Should NRV be taken
into account?
June 2016
39
The results are in…
How will you determine the standalone selling price of services?
61%
43%
8%
Market assessment
Cost plus margin
Not yet decided
4%
Residual approach
* Responses add to more than 100% because multiple approaches will be applied
Global Communications GAAP Summit
PwC
June 2016
40
What is the cost for service?
Data/broad
band
Voice
•
Termination mix
•
•
Regulatory impacts
(MTR/FTR etc)
On/offnet and leased
line costs
•
Dedicated versus shared
network assets
•
•
Fully allocated or
marginal costs
•
Data used for product
profitability or
regulatory reporting
•
Transfer pricing studies
Network costs
•
Depreciation
•
Maintenance
•
Data used for product
profitability or
regulatory reporting
•
Transfer pricing studies
Global Communications GAAP Summit
PwC
Professional
services
Interconnect
and roaming
•
Termination mix
•
Regulatory impacts (EU
roaming, etc)
•
Data used for product
profitability or
regulatory reporting
•
TV
Labour costs – director/
indirect/ overhead
allocation
•
Content costs
•
Broadcast
•
Costs capitalised
•
Video on demand
•
Outsourced /
consultants costs
•
Transfer pricing studies •
Transfer pricing studies
June 2016
41
The results are in…
What judgements have you taken in deciding how to allocate
discounts?
None – purely
mathematical
Consistency
Global Communications GAAP Summit
PwC
Allocation of
discounts to a
single PO
Materiality
“Hardware”
Determining costs
and variable
“Connect
consideration
ion is not
a PO”
Two step approach when
(multiple) goods and
services are being
offered in a single
bundle
June 2016
42
Disclosure and reporting
Global Communications GAAP Summit
PwC
June 2016
43
The results are in…
Which of the following have you determined to be distinct
performance obligations?
PO
%
Fixed voice
37%
Fixed broadband
33%
TV and content
48%
SMS
19%
Mobile data
33%
Connection fee
30%
Installation
33%
Hosting
46%
WAN/LAN
37%
DCO
19%
Global Communications GAAP Summit
PwC
“Not yet
decided”
“Service
is
service”
“Some installation
is distinct, while
others are not”
“Connection
is not a PO”
“Concurrent services
will not be treated as
multiple POs”
“Hardware”
June 2016
44
The results are in…
In the financial statements, do you expect to separately disclose
revenue from each distinct performance obligation?
52%
48%
Yes
No
“Sale of goods” and
“services”
Not yet decided
Global Communications GAAP Summit
PwC
Waiting for industry
practice to develop
Tariffs are integrated
June 2016
45
Disclosures and reporting
Breakdown of revenue
Performance obligations
•
•
Transaction price that is
allocated to the sum of
outstanding performance
obligations
When revenue is expected
from these amounts
•
1
Contracts with customers
•
•
Capitalised contract costs
•
•
•
Closing balance of capitalised costs,
divided into main categories
Amount of depreciation and
impairments
Discussion of assumptions made
regarding the determination of
capitalised contract costs and the
respective depreciation method
Global Communications GAAP Summit
PwC
5
3
Revenue is to be divided into
appropriate categories
Revenue from contracts with
customers separately from other
revenues
Impairment losses from
receivables and contract assets
from contracts with customers
Significant management
judgement
•
2
•
Timing of satisfaction of
performance obligations
Determination of the
transaction price and
allocation to performance
obligations
4
Net contract position
•
•
•
Opening and closing balances of contract assets, contract
liabilities as well as receivables
Recognised revenue in the reporting period from contract
liabilities that were accounted for at the beginning of the year
Recognised revenue in the reporting period from already
satisfied performance obligations
6
June 2016
46
The results are in…
Having implemented the standard, does your company intend to
use IFRS 15 for management / internal reporting?
48%
45%
7%
Yes
Global Communications GAAP Summit
PwC
No
Not decided
June 2016
47
The results are in…
Do you intend to disclose your company’s KPIs in line with IFRS
15?
59%
30%
11%
IFRS 15
Global Communications GAAP Summit
PwC
No change
Not decided
June 2016
48
Coffee break
Next session:
11:00 – 12:30
Global Communications GAAP Summit
PwC
Revenue recognition – plenary (Pirouette room)
June 2016
49
Thank you
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