The impact of IFRS 15 on the telecom industry

SUITS THE C-SUITE By Ernesto A. Clarin

Business World (12/12/2016 – p.S1/2)

IFRS 15, Revenue from Contracts with Customers, the highly anticipated revenue standard issued by the International Accounting Standards Board (IASB), will change the rules for revenue recognition. IFRS 15 replaces all existing revenue recognition standards and provides companies and industries a comprehensive and consistent set of guidelines by which to account for revenue transactions and in preparing relevant disclosures.

The impact of the new rules for revenue recognition will depend on the various sources of revenue for companies. For some, the effect is minimal and they will continue the way they recognize revenue when they sell goods or perform services. However, companies offering long-term and varied contracts and bundled goods and services to customers might face challenges which could require modifications to billing and accounting systems, as well as require getting all stakeholders within the organization on board.

One of the industries that will probably face the biggest challenges brought about by the new revenue standard is the telecommunications industry, given the telecom operators’ huge client base, varied contracts, and significant offerings of bundled products (e.g., call and data plan plus free handsets). The following are some of the potential impacts of the new standard on telcos:

1. Accounting for multiple-deliverable arrangements
2. Significant financing component
3. Billing and accounting systems
4. Accounting for contract modifications
5. Non-recurring upfront fees
6. Accounting for contract costs


Many telcos provide free handsets as standard for a postpaid plan. International Accounting Standards (IAS) 18, the current revenue recognition standard, provides that companies should determine the separately identifiable components of a single transaction and recognize revenue when the goods (e.g. handsets) are delivered or the services (e.g. monthly plans) are provided. IAS 18 does not specify how to separately identify the components of the contracts and how the transaction price will be allocated for the bundled products. This has led companies to make their own judgments in applying the current standard.

IFRS 15 will now require companies to allocate transaction prices among all performance obligations based on their stand-alone selling prices. They are required to determine the stand-alone selling prices of all the components within the bundle (i.e., telecom service and the handset). These are then used to allocate the total contract price to the various components. This allocation requirement may result in a change in the timing of revenue recognition of telcos (i.e., some revenue may be recognized up front). This change may also affect their income statement as the amount of revenue in the income statement may be significantly different from the amounts billed and collected by the telco on a monthly basis.


IFRS 15 also requires that financing components for long-term contracts settled after 12 months from the contract date be accounted for separately such as in the example above. As a result, telcos will need to revisit the customer contract and compute for the effect of the time value of money.

Companies need to understand the intent of deferring the timing of payments from the timing of the transfer of goods and services. If the deferred payment terms were intended or implied to be a financing component, it means a portion of the contract price will have to be recorded as interest income and not as part of the telco’s revenue.


Most telcos have systems that are interfaced with one another with minimal user intervention. Most of the time, the billing system is directly interfaced with the accounting system such that the revenues and receivables from customers are automatically recorded once bill runs have been made.

Since under IFRS 15, the recognition of revenue from the handset may be earlier than the monthly billing, the bill may no longer reflect the amount of service revenue to be recognized for the month. As such, manual adjustments will have to be made or significant changes to the IT systems will have to be done to automatically compute the amount of revenue per month.


As a result of the changing lifestyle of customers, telcos have allowed a certain level of flexibility for subscribers to choose the plan that best suits their needs. They now offer add-on services to be billed on top of the monthly plan fees and/or allowed the shortening of the contract period.

IFRS 15 requires entities to evaluate whether the modification is a valid separate contract or part of the existing one depending on whether it would result in additional promised goods or services and whether it is expected to result in an increase to the amount of consideration. In case there is no new contract, entities need to assess the nature of the modification whether such change will require retrospective adjustment of revenue recognized previously or prospective catch-up adjustments for future revenue to be earned.

Again, managing the impact of such a contract modification to the billing and accounting system may not be easy for telcos given the huge number of subscribers and the diversity of the contracts offered to each one of them.


Telcos often hire sales personnel or pay certain amounts of commissions to dealers and agents as part of their subscriber acquisition efforts. Since the telcos would not have obtained new subscribers without the assistance of these sales personnel, the commissions that are payable to them are considered “incremental costs of obtaining a new contract,” and should therefore be capitalized as assets on the telecom company’s balance sheet and amortized over the subscription period.


Telcos sometimes require activation, processing, connection and installation fees from their subscribers in order to allow the subscribers to access the network. Currently, these non-refundable fees are recognized as income upon subscription. IFRS 15 provides guidance that non-refundable upfront fees are to be amortized over the contract period since the obligation does not end with connecting the subscriber to the network but includes providing continuous access to it.


There’s no denying the fact that IFRS 15 will bring about changes in the companies’ revenue recognition policies and procedures. Such changes will involve considerable efforts across multiple departments. The burden not only lies with the accountants and auditors, but also with the personnel who are handling the IT, billing, marketing, product development and other relevant functions within the organization.

With the effectivity date on Jan. 1, 2018, companies do not have much time left to prepare for this new standard. Management should already assess its capability to comply with the requirements of IFRS 15, including the evaluation of the various contracts and the specific contract terms for every type of plan. Management should also be ready for the significant costs that will be incurred from system upgrades, process changes and professional trainings.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Ernesto A. Clarin is a Senior Director of SGV & Co.