2015 global communications gaap summit - pwc · 2015 global communications gaap summit. welcome and...

Hotel Grande Bretagne, Athens, 8-9 June

Workshop 2 – Changing business models

2015 Global Communications GAAP Summit

Welcome and introduction

Global Communications GAAP Summit

2June 2015

PwC

Megatrends shaping the communications landscape

1 2 3 4 5Shift in economicpower

• Growth beyondBRICS

• New geographicinvestments. M&A

Urbanisation

• Increase inurbanpopulation

• Rise of smartcities

• Infrastructuredeployment

Climate changeand resourcescarcity

• Energy efficiency

• CorporateResponsibility

Changingdemographics

• Population growth

• Aging population

• Changing consumerbehaviours

Technologyadvancements

• Technology drivenby innovation,increased R&D, etc.

• Digital strategy

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6Increasedregulations

• Net neutrality

• IFRS 15

• Leasing

Inc

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ase

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tio

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3June 2015

PwC

Megatrends are driving strategic industry initiatives

5. Telcos commit to upgradetechnologies

4. Bolstering customer experience

1. Organic expansion of products and services

Expandingservices

andpartnerships

Increasing focuson R&D andinnovation

Convergencethrough

M&As

TV and content

Improving customerexperience

Driving technologychanges

Focus on R&D - venturessupporting start-ups acrossmobility, cloud, security and socialmedia bolster. Laser focus onmeeting the demand driven pull forspecific products & services.

6. Innovation, alliances andpartnering for the next stage ofgrowth

Telcos commit to boosting 4G andshifting to 5G; and Evolvingtechnologies. Best network’s still astated strategic ambition.

New store designs, partnerships with CRM players, supportfor broader technologies like NFC, move to analytics,improved service management, etc. provide better customerexperience

Rise of information and mobility are driving Telcosto expand their portfolios.

Cutting costs and drivingsynergies remain core focus areasof Telcos globally. OTTdisruptions, competition fromcable companies, new geographicfocus, etc. are the key drivers

2. Competitive forces helpdrive M&A

Strategic partnerships for contentand content delivery provides newrevenue streams and futureopportunities to monetise assets

3. As voice revenues decline,focus on other content


4June 2015

PwC

Strategy:Churn reduction

Consolidation to achieve convergence continues…

BT’s launch of BT sportand acquisition of Premier

League rights has beensuccessful in reversing

fixed churn – BT is also re-entering the mobile space

Vodafone has beenacquiring assets in a

number of countries toacquire capabilities to

offer quad-play

Telefonica respondedquickly to market

disruptors with a strongquad-play offering,

protecting market shareand reducing churn

Deutsche Telekom havecombined LTE and fixedline network capabilitieswith a hybrid router to

differentiate themselves

Strategy:Subscriber growth/

churn reduction

Strategy:Subscriber growth/churn defence andcustomer reclaim

Strategy:Exclusivity

2015

TV+Net+Voz+Móvel(Available in Portugal)

€51.80/m(24 month contract)

TV + Infinity 1 + Calls(Available in the UK)

£30/m(12 month contract)

Magenta One(Available in Germany)

€64.85/m(24 month contract)

Fusión TV Contigo(Available in Spain)

€ 47/m(12 month contract)


5June 2015

PwC

…along with other key changes to business models

• Megatrends creating opportunities forgrowth

◦ The Internet of Things (IoT)

◦ Growth through internal researchand development or externalalliances to support and developdigital strategies

• Increased regulation - leases


6June 2015

PwC

Which of the megatrends do you see having the biggest impact onyour business?

1. Globalisation

2. Urbanisation

3. Climate change

4. Changing demographics

5. Technological advances

6. Increased regulations


7June 2015

PwC


8June 2015

PwC

Internet of Things/Machine to Machine

Growth through internal research and development

Growth through alliances

Increased regulation – leases

Does your company have a stated Internet of Things (IoT)/ Machineto Machine (M2M) strategy?

1. Yes

2. No

3. I don’t know


9June 2015

PwC

George bought a ‘connected’ car from Carco. The car has state of the art featuresincluding an embedded BetaCom SIM that allows him to stream music and videoto his children’s tablet computers as well as make phone calls.

George also uses his service from BetaCom to send data to his insurer (e.g. speedand distance travelled) to lower his insurance premiums. Carco also usesBetaCom’s new engine telemetry software under licence, which analyses engineperformance data sent wirelessly from the vehicle.

What types of revenue can you identify?

• Services

• Devices

• Hosting

• Software Licensing


10June 2015

PwC

Proposed solution

Services, devices and software licensing

• This example assumes BetaCom earns revenue from both CarCo and George

• George will pay his monthly fee for service

• BetaCom will earn a licence fee for the software and a service fee from CarCo


11June 2015

PwC

Panos had heart surgery recently. He’s been fitted with a remote heart rate monitorthat sends information back to the hospital.He called the 24 hour health service information line for support. The healthprofessionals had access to Panos’ health records and heart rate data.BetaCom provides the hospital with connectivity and runs the platform that storesand analyses the heart rate data. It also provides the 24 hour information line, whichis a toll free number.

What types of revenue can you identify?

1. Services

2. Data analysis

3. Hosting

4. Premium rate service

5. Call centre operation

6. Other


12June 2015

PwC

Proposed solution

Services, hosting, and premium rate service.

• In this example the hospital is BetaCom’s customer

• BetaCom earns service fee for the mobile connection, the freephone line andhosting

• BetaCom also earns a monthly fee for the hosting and storage of the patient datareceived from the monitor


13June 2015

PwC

Have you identified new types of revenue streams from your M2M orIoT offerings?

1. Yes

2. No

3. Don’t know


14June 2015

PwC

Research and Development

90% of Communications CEOs stated innovation willrequire an increase in Research and Development


15June 2015

PwC

Research and Development (R&D) - When tocapitalise the costs?

ExpenseExpense Research phaseDevelopment

phase

Expense

Internally generatedgoodwill

Internally generatedintangible assets

Capitalise(only if strict

conditions aremet)


16June 2015

PwC

BetaCom has two business divisions: mHealth and mVehicle. Research anddevelopment expenditure of €200 million for the mHealth and €150 million forthe mVehicle was incurred during the year.

The expenditure cannot be allocated separately to any specific product, but can beassociated with a division.

How should BetaCom account for these costs?

1. Capitalise

2. Expense


17June 2015

PwC

Proposed solution

• Expense


18June 2015

PwC

Criteria for capitalising development cost

It is technically feasible to complete the project so that theasset will be available for use or sale.

The intention is to complete the project and use or sell theproduct.

The entity has the ability to use or sell the asset.

The project will generate future economic benefits. Theentity can demonstrate either that a market exists for the output,or the usefulness of the asset if it is to be used internally.

Adequate technical, financial and other resources are available tocomplete the development and use or sell the asset.

The entity can reliably measure the costs attributable to the assetduring its development.

ALLcriteria need

to be metbefore

capitalisationmay

commence


19June 2015

PwC

Scenario A: Research and Development

• BetaCom is developing a solution for monitoring and controllingoperations of infrastructures such as bridges, railway tracks and wind-farms.

• The IoT infrastructure can be used for monitoring any events orchanges in structural conditions that can compromise safety andincrease risk. It can also be utilised for scheduling repair andmaintenance activities in an efficient manner, by coordinating tasksbetween different service providers and users of these facilities.

• The development of the solution has occurred in various stages.

Global Communications GAAP Summit20

June 2015PwC

Point Stage Process

1.Idea Identification of a need for/benefit of the new IoT technology.

2.

Feasibility

Commission a project to investigate the feasibility of new technology

3. Investigate other IoT technologies for such platforms available in the market

4. Feasibility analysis regarding design of new technology

5. Shortlist of three alternatives for commissioning stage and prepare costing/budget

6.Approval

Final proposal presented to the board

7. Approval of the development plan by the board

8. Development Develop and test new technology

9. Training Train staff on new technology

Initial measurement of development costs:

21

Global Communications GAAP SummitJune 2015

PwC

Based on the information provided, when would capitalisation begin?

1. Stage 1 (Idea)2. Stage 2 (Feasibility)3. Stage 7 (Approval)4. Stage 7 (Approval) but excluding stage 9 (Training)5. Stage 8 (Development) but excluding stage 9 (Training)


22June 2015

PwC

Proposed solution

4. Stage 7 (Approval) but excluding stage 9 (Training)


23June 2015

PwC

Growth through alliances

67% of communications CEO’s want to enter into jointventures, strategic alliances or informal collaborationsin order to access new customers (vs. 47% of the entiresurvey responses).


24June 2015

PwC

Type of structures

Yes

Consolidation inaccordance with IFRS 10

Define type of joint arrangementin accordance with IFRS 11

Account for share ofassets, liabilities,

revenues and expenses

Equity accountedinvestment (IAS 28)

Yes

Yes

Financial asset(IAS39/ IFRS 9)

No

No

NoJoint Operation Joint Venture

Controlalone?

Jointcontrol?

Significantinfluence?


25June 2015

PwC

Scenario B: Data software start-up – an opportunisticinvestment

BetaCom

DataCo

5% Equity& 1.5%royalty

DataCo is an unlisted start-up owned by its founders. DataCo hasdeveloped innovative new software to analyse utility (gas andelectricity) usage data.

• DataCo needs communication services but does not havesufficient cash

• It agrees to issue 5% of its shares and will also pay a 1.5% salesbased royalty to BetaCom on sales of the data analytics service

• On this basis, BetaCom agrees to sell DataCo a five-yearconnectivity service

DataCo had recently completed a round of fundraising, for whichan independent third-party valuation was obtained, showing thatthe technology start-up was valued at €10 million with a widevaluation range. DataCo’s results for the first year of the BetaComarrangement included sales of the analytics service of €500,000.

Connectivity


June 2015PwC

What is the value of the investment recorded by BetaCom?

1. €500,000

2. €400,000

3. €80,000

4. Nil


27June 2015

PwC

How much revenue does BetaCom recognise in the first year of thecontract?

1. €500,000

2. €407,500

3. €80,000

4. €87,500

5. €7,500


28June 2015

PwC

• An investment of €400,000 - based on the estimate of thefair value of its 5% economic interest at 5% of the totalbusiness valuation of €10 million implying €500,000, towhich BetaCom has then applied a 20% discount reflecting thelack of liquidity and inability to participate in DataCo’s policydecisions.

• BetaCom should recognise revenue of €87,500,comprising a €400,000 estimated value of the shares receivedspread over the 5 year contract term plus €7,500 representingthe 1.5% royalty on annual sales. This is based on:

• Recognise revenue over the life of the contract• At the fair value of the consideration received

BetaCom

DataCo

5% Equity& 1.5%royalty

Connectivity

Proposed solution:


PwC 29

Scenario C: Data software start-up – a strategic investment

BetaCom

DataCo

Data centre&

connectivity25% Equity

• Three years later DataCo has a proven solution

• BetaCom agrees to receive 25% of the shares in DataCo inreturn for data centre services and connectivity over twoyears

• The shares give BetaCom both a 25% economic interest and25% of the voting rights, along with one of five directors onthe DataCo board

• The fair value of DataCo is estimated as €20 million.BetaCom incurs €0.5 million in legal fees, which are directlyattributable to the transaction

• In a cash deal, it is expected that the equivalent serviceswould be sold for €5 million


PwC 30

How should BetaCom account for its interest in DataCo?

1. An investment

2. An associate

3. A subsidiary

4. Don’t know


PwC 31

How much revenue should BetaCom recognise in the first year of thecontract?

1. €5m

2. €4m

3. €2.5m

4. €2m

5. Don’t know


32June 2015

PwC

BetaCom

DataCo

Data centre&


Proposed solution:

• BetaCom would likely conclude thatDataCo is its associate and should beequity accounted.

• The fair value of the service delivered is€5 million in total. These are deliveredover two years, hence revenue in year1 would be €2.5 million.


June 2015

PwC

BetaCom

DataCo

Data centre&


Scenario C continued: Data software start-up – astrategic investment

What if there are potential voting rights?

In strategic deals it is common for the parties to put in placeput or call options.

Assume BetaCom had also negotiated the right to call afurther 30% of the share capital from the other shareholdersof DataCo (that would give BetaCom a 55% shareholding). Itwould need to consider carefully whether it controls DataCofrom the date of the transaction, hence should consolidateDataCo as a subsidiary.

34Global Communications GAAP Summit June 2015

PwC

NewCo

50

:50

Cash &access to

customersIP

BetaCom and TechCo agree to develop software toanalyse a range of biometric data for patientsrecovering from surgery.

• They establish a NewCo, which issues 50% of itsshare to each of them. In return, BetaComcontributes cash of €5 million. TechCocontributes an exclusive licence to prototypetechnology.

• The board of NewCo will comprise six directors.Three are appointed by BetaCom and three byTechCo. Decisions are made by majority vote.

TechCoBetaCom

Scenario D: NewCo data analytics – a collaborativeapproach

35Global Communications GAAP Summit June 2015

PwC

What type of investment is NewCo in BetaCom’s financialstatements?

1. Subsidiary

2. Joint venture

3. Joint operation

4. Associate

5. Don’t know


36June 2015

PwC

• A joint venture - It appears that BetaCom andTechCo jointly control the NewCo since alldecisions require unanimous consent. Assumingthis is the case, and since each party has a right tothe net assets of NewCo, BetaCom concludes that ithas an investment in a joint venture. As such, it isrequired to follow the accounting guidance in IAS28 on equity accounting.

However…

• Had the circumstances been slightly different, inthat the NewCo product could only be sold toBetaCom customers, then this would likely be ajoint operation.

Proposed solution:

37

NewCo

50

:50

Cash &access to

customersIP

TechCoBetaCom

Global Communications GAAP Summit June 2015PwC

Continuous reassessment

Reassessment oftype of joint

arrangement

No specific guidance

IFRS 11

Reassessment ofcontrol

Detailed guidance

IFRS 10

Both IFRS 10 and IFRS11 require reassessment

if facts andcircumstances changes


38June 2015

PwC


Decision making

Change in decision-making mechanisms,for example changefrom a substantivevoting system to an‘auto-pilot’ mechanism

External events

Events occur, even ifthey do not involve theinvestor, for examplelapse of decision-making rights byanother party

Agent / principal

Relationship betweenagent and principalchanges

Exposure to variablereturns

Investor’s exposure tovariable returnschanges

Reassessment of control is required if facts and circumstances indicatechanges to the elements of control:


39June 2015

PwC

JointCo

51:

49

BetaCom enters into an arrangement with SelectVehicles.

• BetaCom owns 51% and SelectVehicles owns 49% ofthe structure.

• The arrangement is structured in such a way thatduring the development phase BetaCom has controlover the relevant activities and consolidates with a49% NCI.

• The arrangement determines that after thedevelopment phase, i.e. during the operational phase,SelectVehicles’ power will increase and the relevantactivities will then require unanimous consentbetween the two shareholders.

• At this point in time, the structure is classified as ajoint venture.

SelectBetaCom

Scenario E: Continuous reassessment

40Global Communications GAAP Summit June 2015PwC

How should BetaCom calculate the gain/loss on loss of control?

1. No gain/loss as there is no change in shareholding.

2. The gain/loss is calculated on the loss of control which requires theremeasurement of the retained interest (investment in joint venture) at fairvalue, even though the percentage held didn’t change.


41June 2015

PwC

JointCo

51:

49

• The gain/loss is calculated on the loss of controlwhich requires the remeasurement of theretained interest (investment in joint venture)at fair value, even though the percentage helddidn’t change.

SelectBetaCom

Proposed solution:



Step-acquisitions

Jointventure

• Equityaccounting

Control •Consolidation

Investmentin associate



Fair value previously held equity interest through p&l


43June 2015

PwC


Joint control vs significant influence

Jointventure






Jointventure


No remeasurement of retained interest


44June 2015

PwC


Step-acquisitions

Jointoperation

•Account forassets,liabilities,revenues andexpenses


How to treat previously heldinterest?

Currently diversity inpractice to remeasure to fairvalue or not


45June 2015

PwC

JointCo

51:

49

BetaCom and SelectVehicles have joint control overan arrangement which is structured through aseparate legal entity.

• BetaCom owns 51% and SelectVehicles owns49% of the equity of the entity.

• Based on facts and circumstances, thearrangement is classified as a joint operation.

• BetaCom therefore accounts for its share of theassets, liabilities, revenues and expenses of thearrangement.

• BetaCom buys out SelectVehicles and now owns100% of the shares in the arrangement andobtains control over the business.

SelectBetaCom

Scenario F: Continuous reassessment


JointCo






SelectBetaCom



JointCo






SelectBetaCom

100

%



How should BetaCom treat the previously held interest in the jointarrangement upon acquiring control?

1. IFRS 3 requires remeasurement of previously held equity interests to fairvalue, therefore BetaCom should remeasure its 51% interest in thearrangement to fair value through the P&L upon gaining control.

2. The transaction involves BetaCom acquiring an additional interest in anumber of assets/liabilities in which it already had a direct interest whichdoesn’t represent an equity interest. BetaCom therefore does not remeasureits previously held interest to fair value upon gaining control.


49June 2015

PwC

JointCo

No clear guidance exists.

We observe that where the joint operation isstructured through a separate legal entity, the mostcommon practice is option 1, i.e. remeasure thepreviously held equity interest to fair value throughP&L.

SelectBetaCom

100

%

Proposed solution:


Increased regulations - leases


51June 2015

PwC

Timeline

17 August2010

EDpublished

15 December2010

Comment periodclosed

January 2011Re-deliberations

began

16 May2013RED

published

13 September2013 Comment

period closed

March 2014Re-deliberations

began

February2015

Update:Definition of a

lease

New standard expected before the end of 2015


52June 2015

PwC

Summary of the proposed accounting

BALANCE SHEET Proposed Accounting

All leases on balance sheet a

Exemption for short term leases a

Exemption for small asset leases ($5,000) a

Lease liabilities on a discounted basis a

Initial lease asset = lease liability a

Amortisation of lease assets Typically straight-line

Lease liabilities IAS 1

Lease assets PPE or own line item

Amortisation

Interest

Interest (IAS 7)

Principal

Recognition

Presentation

Measurement

INCOME STATEMENT

Operating costs

LESSOR ACCOUNTING MOSTLY UNCHANGED

Finance costs

Operating activities / Finance activities

Finance activities

CASH FLOW STATEMENT


53June 2015

PwC

Definition of a lease

A lease is defined as a contract that conveys to the customer the right touse an asset for a period of time in the exchange for consideration.

A lease exists when a customer controls the right to use an identified item,which is when the customer:

Has exclusive use of the item for a period oftime; andHas exclusive use of the item for a period oftime; and11

Can decide how to use itCan decide how to use it22


54June 2015

PwC

Key issue: Lease vs Service

Issue going forward: Lease or service, not lease classification

It is therefore important to consider the definition of a lease and distinguish betweena service and a lease

There is no change in the accounting for services as a result of the new LeasesStandard. Service contracts are not required to be capitalised on the balance sheet

unless the service is prepaid


55June 2015

PwC

Key issue: Lease vs Service

The definition of and guidance focus on whether a customer controls the use of anitem

Although leases and services are often combined in a single contract, amounts relatedto services are not required to be recognised on the balance sheet

LeaseLease

Customer controls the use of an item

ServiceService

Supplier controls the use of an item


56June 2015

PwC

1. Service2. Lease

BetaCom enters into a contract with PAG Electronics Stores (PAG) to use a space in thePAG Stores to sign up customers for a three-year period. The contract states the exactamount of space and that the space must be located at a site in the store that is visibleand easily accessible. PAG can change the location of the space allocated to BetaCom atany time during the contractual term, and there are minimal costs to PAG associatedwith doing so.

Is this a service or a lease?


57June 2015

PwC

1. Service

Who controls the use of the item?

Conclusion

The supplier

Contract is a service

Proposed solution:


A trading company enters into a contract for network services for two years.BetaCom installs servers at the trading company’s premises in order to supply theservices. The contract requires BetaCom to supply network services that meet aspecified quality level. To do so, BetaCom can carry out maintenance toreconfigure or replace the servers when needed. The trading company does notoperate the servers or make any other decisions about their use.


1. Service

2. Lease


59June 2015

PwC

1. Service


Conclusion

The supplier

Contract is a service

Proposed solution:


BetaCom enters into a contract with a distribution company for the distribution ofhandsets for a 5 year period. The distribution company is required to designate afleet of 10 BetaCom branded vehicles for BetaCom’s use for the contractual period.BetaCom decides when and where distribution will occur. The distributioncompany will be responsible for operating and maintaining the fleet.


1. Service

2. Lease

3. Service and a lease


61June 2015

PwC

1. Service and a lease


Conclusion

The customer

Contract is a serviceand a lease

Proposed solution:


Transition

An entity shall recognise and measure all outstandingcontracts within the scope of the IFRS as of the date of

initial application using a simplified retrospectiveapproach

The date of initial application is the beginning of the firstcomparative period presented in the first financial statements in

which the entity applies this IFRS


63June 2015

PwC

Other issues for Telcos: Lease vs Service

Tower spaceFibre

Spectrum


64June 2015

PwC

This publication has been prepared for general guidance on matters of interest only, and doesnot constitute professional advice. You should not act upon the information contained in thispublication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

© 2015 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers toPricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopersInternational Limited, each member firm of which is a separate legal entity.

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2015 global communications gaap summit - pwc · 2015 global communications gaap summit. welcome and...

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