2016 global communications gaap summit transition: getting ... › gx › en › communications ›...

Transition: getting it right in a changing environment

2016 Global Communications GAAP Summit

Workshop 2: Implementation of IFRS 15

2

June 2016Global Communications GAAP Summit

PwC

PwC

2011 - 2015

Stakeholders:

Finance:

Technology:

Budget/Planning:

Marketing:

Remuneration:

Investors:

TODAY Retrospective Cumulative catch up

2016 2017 2018 2019

Lobbying and understanding

Accounting impact assessment

Disclosure requirements

ReportingAnnual

Report/20-F

Update Risk and Control Matrices

Design and implement new financial reporting controls

IT Vendor selection

Design, implement and testBilling system etc

assessment

Identify impacted systems

Design, build and implement fixes

Parallel and dual reportingUser testing

IT Controls design and implemented

3 – 5 year budget/plan

New product offerings / propositions

Management information systems

Alignment to KPIs

Share option/ Rem plans

QualitativeQualitative & Quantitative

Full comparatives Key metrics

Implementing IFRS 15 (illustrative – table exercise)

CFO Audit Committee

Board CIO RemCoInvestor relations

Competing projects

Regulator





Understand requirements for MI

Business requirement and user cases

ICFR risk assessment

Redefine KPIs

Review commission structures

Retail store incentives

Internal audit

Governance:

Other assurance providers

Systems integrator

Internal audit plan

Subsidiary judgments

Ongoing governance review: Audit Committee, Disclosure Committee, Steering Committee, Auditor, etc

External audit

Controls testing

3


Adoption of IFRS 16

PwC

What you said…

1 2Most projects are in the analyse and

design phases

31% are planning on

using the full retrospective approach for

transition

40% are planning on

engaging with external

stakeholders in the next 12

months

27% have identified contract modifications

with a retrospective effect

CFO’s are the main project

sponsor

22% do not expect to need to

communicate with external stakeholders

Some projects (7%) have not yet

started….

4


PwC

Technical update – what has happened since last year?

5


PwC

Technical clarifications

Topic FASB IASB Convergence

Identifying PerformanceObligations

Identifying Performance Obligations and LicensingIssued April 2016

Clarifications to IFRS 15Issued April 2016

Partially

Licenses Partially

Principal vs agent Principal vs Agent ConsiderationsIssued March 2016

Same

Transition

Narrow-Scope Improvements and Practical ExpedientsIssued May 2016

Partially

Collectability None None

Presentation of sales taxes

None None

Non-cash consideration

None None

6


PwC

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

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PwC

Principal versus agent

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PwC

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 rewardsassociated 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 ofownership is one indicator of control

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PwC

What the rules say?

d)

b)

Indicators for being

a principal

Control conceptIndicators of IFRS 15.B37

c)

a)

Discretion

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

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.

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.

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No specific ranking (IFRS15:B37a)

PwC

Q: Bundled premium content

• Customer purchases a monthly service bundle including music streaming fromFiTel.

• The music streaming service cannot be purchased separately from FiTel. FiTelcommits 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.

1. Principal

Is FiTel the principal or agent?

2. Agent 3. Not sure

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PwC

Proposed solution: Bundled premium content

In this example, which of the indicators stated in IFRS 15.B37 are met:

Inventory risk Discretion?

FiTel determines the composition of services included in its bundles, including the provision of music

FiTel is primarily responsible for the customer care

The minimum guarantee to the content provider could be viewed as inventory risk

FiTel has discretion for setting the price of the bundle

FiTel is a principal for provision of the bundle of services including the content

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Responsibility

PwC

Q: TV content

• A FiTel customer purchases a monthly TV subscription. The customer is billedby FiTel.

• FiTel purchases the TV content from the third party and resells it to itscustomers, i.e. FiTel does not produce or modify the content.

• The customer agrees to the third party’s terms and conditions in order to beable to access the TV content. The pricing and branding is set by the third party.

1. Principal

Is FiTel the principal or agent?

2. Agent 3. Not sure

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PwC

Proposed solution: TV content

In this example, which of the indicators stated in IFRS 15.B37 are met:

Responsibility Inventory risk Discretionx ? x

The customer enters into a contract with the third party agreeing to its general terms and conditions, not FiTel's

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

FiTel does not carry an inventory of the TV content

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PwC

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?

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PwC

Q: Dealer reselling handset purchased from operator

• Dealer purchases handsets from FiTel. Subsequently, the dealer bundles thesehandsets with FiTel’s service plans and sells the bundle to FiTel end-customers.

• Dealer can resell the handsets to non FiTel customers. FiTel recommends acertain handset price to the dealer. Dealers need to price match and so use therecommended price point.

1. Yes 2. No 3. Not sure

Is the dealer acting as a principal or agent for the supply of the handsets?

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PwC

Dealer reselling handsets purchased from operator

• Cannot sell handsets to non-FiTel customers, or minimal volume

• Selling price is set by FiTel

• Dealer can return unsold handsets to FiTel

Dealer is agent if ….

Dealer is principal if….

• Dealer can sell handsets purchased from FiTel to non-FiTel customers

• 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

“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

Other factors

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PwC

Fixed enterprise contracts

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PwC

Typical stages of an enterprise contract

These contracts usually include a combination of some, or all, of the following elements:

Contract start

Time

Start-up / transition

OperateDesign BuildBid

Bid costs should be expensed as incurred

Are set up and transformation

activities separate POs?

MFN / benchmarking clauses

Modifications?

Modifications?

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Costs to fulfil, or

separate POs

PwC

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).

1. Yes 2. No 3. Design is distinct

Are the set-up and transition activities distinct?

4. Not sure

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PwC

In this example, how many of the indicators of IFRS 15:27 are met?

Proposed solution: Set-up and transition activities

Separate customer benefitSeparate in context of

contractx x

The set-up and transition activities are necessary for FiTel to provide the services and do not provide a benefit to Corp

The set-up and transition activities are not distinct performance obligations

AND

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The activities were undertaken for FiTel’s benefit so it can deliver the services requested by Corp

PwC

Q: How many performance obligations are there?



1. 1 2. 2 3. 7

How many distinct POs have you identified?

4. 8 5. Not sure

22


PwC

In this example, how many of the indicators of IFRS 15:27 are met?

Proposed solution: performance obligations

Separate customer benefitSeparate in context of

contract

Corp receives a separate benefit from each of the different services being provided

Each of the services being offered by FiTel are available on a standalone basis to end customers. In total there are 7.

AND

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Services are distinct from one another in the contract

PwC

Q: How to determine the transaction price?


• 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.

1. Current pricing in the contract (€100m*10 years +€20m upfront)

2. Estimate the outcome of the benchmarking

3. €320m

(3 years * €100m + €20m)

How should FiTel determine the transaction price?

5. None of the above

4. Material right

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PwC

Proposed solution: Transaction price

Material rightContract modification

Variable consideration

x x 4

• The MFN clause only requires benchmarking to rates already available to comparable customers

• 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.

• MFN clauses are included in the contract from inception

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Costs to acquire and fulfil contracts

26


PwC

The results are in…

Which types of costs of acquiring and executing a contract does your company intend to capitalise?

93%

52% 52%

Third party commissions Internal commissions Installation costs

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PwC

What does IFRS 15 say?

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)

Definition

Costs that directlyrelate to eitherobtaining (e.g. salescommissions) orfulfilling a contract(e.g. direct labour) andthat would not have incurred if the contract had not been obtained(IFRS 15.92).

Capitalisation

Capitalisation as a separate asset, if cost recovery is expected. Capitali-sation applies separately from presentation of net contract position.

Amortisation

Amortisation over economic lifetime=> usually average customer retention period, provided that no similar costs arise when contract is prolonged.

Practical expedient

Contracts with duration <12 months (IFRS 15.94) => Expense instead of capitalisation of costs at contract inception.

Disclosures

Additional quantitative and qualitative information.

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PwC


Will you take the practical expedient to expense costs for a contract of less than 12 months?

42%

Expensing costs < 12 months

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PwC

Q: Costs to acquire a contractFiTel engages dealers to sell service contracts on their behalf. FiTel pays differentsales commissions to dealers for acquiring new customers and has other costs thatrelate to acquisitions:

a) Volume commission of €400 for every 100 acquisitions – as follows:0-99 acq. = €0100-199 acq. = €400200-299 acq. = €800

1. Volume commission

Which of the costs qualify as costs to acquire a contract?

2. Connection commission

3. Volume and connection commission

4. All of the above

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b) Connection commission of €20 per acquisition

c) Joint marketing support costs

PwC

Proposed solution: Costs to acquire a contract

Volume commission

Connection commission

Joint marketing support

x

• Any payment is directly attributable and incremental to acquiring the customer contract.

• The amount for the individual contract should be estimated based on the expected outcome.

• Payment by FiTel for marketing services provided by the dealer –therefore not directly attributable to acquiring the customer contract.

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Cost Proposed solution

PwC

Q: Can set-up and transition costs be capitalised as costs to fulfil a contract?• FiTel agrees to provide various services to Corp.


• Corp agrees to pay €20m up-front, remaining payments are linked with service terms or event based (e.g. software patch delivered).

1. All of the costs above

What costs to fulfil the contract have been incurred by FiTel?

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

32


PwC

Proposed solution: Capitalisation of set-up and transition costs

Technical guidance

Costs relate directly to a contract

Proposed solution

All activities relate directly to the contract

Costs generate or enhance resourcesThe activities enable FiTel to effectively and economically deliver the services

Costs are expected to be recoveredThe costs will be recovered over the life of the contract

33


PwC

Other considerations?

Governance processes:

• To ensure only appropriate costs are capitalised

• To understand bid models / investment cases

• To set and monitor minimum thresholds

Determination of amortisation period

Contract by contract or portfolio:• Costs to acquire • Costs to fulfil

34


A view from your peers – practical implementation

35


PwC

PwC

How are you approaching the implementation?

What are the critical judgements / decisions you have made to simplify the processes for implementation?

What are the key challenges in your opinion?

How do you approach IFRS 15 implementation?

36


SSP and allocating discounts

37


PwC

PwC


How will you determine the standalone selling price of equipment in a bundle?

50%41%

9%

Market assessment Cost plus margin Residual approach

38


PwC

What is the cost for equipment?

Initial cost from manufacturer/ supplier

RebatesVolumediscounts

NRV adjustments

Currency arrangements

• 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?

• 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?

• 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?

• How frequently are these made?

• What if the equipment was not historically treated as a sale – is there a mechanism to track NRV?

• Should NRV be taken into account?

• Centrally procured in US$

• Sold to the operating unit in Euro

• Sold to customers in Sterling

39


PwC


How will you determine the standalone selling price of services?

61%43%

8% 4%

Market assessment Cost plus margin Not yet decided Residual approach

* Responses add to more than 100% because multiple approaches will be applied

40


PwC

What is the cost for service?

VoiceData/broadband

Interconnect and roaming

Professional services

TV

• Termination mix

• Regulatory impacts (MTR/FTR etc)

• Fully allocated or marginal costs

• Network costs

• Depreciation

• Maintenance

• Data used for product profitability or regulatory reporting

• Transfer pricing studies

• On/offnet and leased line costs

• Dedicated versus shared network assets



• Termination mix

• Regulatory impacts (EU roaming, etc)



• Labour costs – director/ indirect/ overhead allocation

• Costs capitalised

• Outsourced / consultants costs


• Content costs

• Broadcast

• Video on demand

41


PwC


What judgements have you taken in deciding how to allocate discounts?

None – purely mathematical “Connect

ion is not a PO”

Two step approach when (multiple) goods and

services are being offered in a single

bundle

Materiality

“Hardware” Determining costs and variable

consideration

Consistency

Allocation of discounts to a

single PO

42


PwC

Disclosure and reporting

43


PwC

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%

“Not yet decided”

“Connection is not a PO”

“Concurrent services will not be treated as

multiple POs”

“Service is

service” “Hardware”

“Some installation is distinct, while others are not”

44


PwC


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

Waiting for industry practice to develop

Tariffs are integrated

45


PwC

Disclosures and reporting

1

2 4

3Performance obligations

• Transaction price that isallocated to the sum ofoutstanding performanceobligations

• When revenue is expectedfrom these amounts

Contracts with customers

• Revenue from contracts withcustomers separately from otherrevenues

• Impairment losses fromreceivables and contract assetsfrom contracts with customers

Breakdown of revenue

• Revenue is to be divided intoappropriate categories

Significant managementjudgement

5

6

Net contract position

Capitalised contract costs

• Timing of satisfaction ofperformance obligations

• Determination of thetransaction price andallocation to performanceobligations

• Closing balance of capitalised costs, divided into main categories

• Amount of depreciation andimpairments

• Discussion of assumptions made regarding the determination of capitalised contract costs and the respective depreciation method

• Opening and closing balances of contract assets, contractliabilities 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

46


PwC


Having implemented the standard, does your company intend to use IFRS 15 for management / internal reporting?

45%

7%

48%

Yes No Not decided

47


PwC


Do you intend to disclose your company’s KPIs in line with IFRS 15?

59%

11%

30%

IFRS 15 No change Not decided

48


PwC

Coffee break

Next session:

11:00 – 12:30 Revenue recognition – plenary (Pirouette room)

49


Thank you

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained

in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information

contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability,

responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision

based on it.

© 2016 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers

International Limited, each member firm of which is a separate legal entity.

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