KPMG Telecom Share Forum

Global Telecom Share Forum

Revenue Recognition- Planning for the new standard

Thursday March 27, 2014

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL.

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Agenda for Today’s Telecom Share Forum

1. Update on Exposure Draft status and timetable (20 min):

Allison McManus (IASB Senior Technical Manager) – IASB RR Project Update

Other initiatives – e.g. AICPA Revenue Recognition Task Force - Telecom, FASB/IASB Joint Transition Resource Group for Revenue Recognition

2. Participant’s perspectives on areas that can be addressed via portfolio approach (pooled) vs. contract by contract level approach (20 min)

3. Sharing of technical questions on telecom matters (1.5 hours)

4. Planned Discussion Points for upcoming Q1 calendar 2014 AC Meetings (5 min)

5. Impact on systems, processes and taxes (30 min)

© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms, affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG CONFIDENTIAL


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Agenda - Primary Facilitators

1. Toronto Site Dan Wilson – KPMG Audit Partner, KPMG Revenue Recognition Topic Team

Paul Simonetta – KPMG Audit Partner, Canadian Telecom Sector Leader

Phil Dowad – KPMG Audit Partner, KPMG IFRS Revenue Recognition Topic Team Leader

Jason Waldron – KPMG Audit Partner – AICPA Revenue Recognition Group

2. London Site Brian O’Donovan – KPMG Partner, KPMG IFRS Revenue Recognition Topic Team

John Edwards, KPMG Audit Partner

Greg Stinson – Senior Manager, Accounting Advisory Services

3. Silicon Valley Site Prabhakar Kalavacherla - KPMG US Audit Partner, Former IASB Board Member on Revenue ED

Project

4. New York Site Paul Munter – KPMG US Partner, Department of Professional Practice



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Logistical Items

1. Video conference sites

Voice activated ‘prime’ location

2. Webinar/Teleconference attendees

Please turn volume mute on computer and listen through the phone lines.

Please mute when not speaking

3. Interactive discussion is what makes these sessions valuable

4. Caveat - discussions today are subject to final wording in the standard once

issued



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Update on Revenue Recognition Exposure Draft status and timetable

1. Allison McManus (IASB Senior Technical Manager) – IASB Revenue Recognition Project Update

2. Other initiatives – e.g. AICPA Revenue Recognition Task Force - Telecom, FASB/IASB Joint Transition Resource Group for Revenue Recognition



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Portfolio-Based Approach

■ The portfolio approach within the Revenue Recognition Exposure Draft is governed by the requirement of paragraph 6:

“The proposed guidance specifies the accounting for an individual contract with a customer. However, as a practical expedient, an entity may apply this proposed guidance to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that the result of doing so would not differ materially from the result of applying this proposed guidance to the individual contracts (or performance obligations).”

■ The decision points related to the portfolio-based approach may include:

– Approach to defining portfolios at the appropriate level to comply with paragraph 6

– Approach to maintaining portfolios

■ The level of precision with the portfolios will be impacted principally by the following factors:

– Number of portfolios used to reflect differences in rate plans, handsets, corporate discounts, modifications and other factors

– Frequency with which averages from the portfolios are updated to apply to new transactions, and the relative ongoing accuracy of these key averages (stand-alone selling price, average contract term, handset price, etc.)



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Contract Level vs. Portfolio Approach: Considerations

Below is an overview of consideration points related to the two approaches:

■ Once automated, manual intervention and tracking reduce

■ Easier ability to demonstrate compliance with ED■ Easier ability to assemble disclosures and

support contract asset■ Ability to handle contract modifications■ Well defined audit trail

■ Reduced initial effort to program automated solution (although tools to maintain portfolios may need to be established)

■ Potentially decreased initial effort■ Reduced computed hardware an data storage

costs

Portfolio-Based Approach: Benefits

Contract Level Approach: Benefits

■ Initial effort involved in programming transaction scenarios with automated solution

■ Need to apply additional controls over data used in calculations (e.g., SSP data)

■ Complexity of maintaining integrity of portfolios■ Potentially increased risk of error■ Challenge of applying portfolios for separate

external reports/segments and tax jurisdictions■ Challenge of handling contract modifications

Portfolio-Based Approach: Challenges

Contract Level Approach: Challenges



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Portfolio vs. Contract by Contract Approach

For group discussion

• What are participants perspectives on the potential applicability of the portfolio approach to their businesses

• Perceived challenges and opportunities

• Process for determining ‘not materially different’

• Differences in European vs. North American views?



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Five Steps of the Model – Discussion Topics

Identify the contract with a customer1

Identify the separate performance obligations in the contract 2

Determine the transaction price3

Allocate the transaction price to the separate performance obligations4

Recognize revenue when (or as) the entity satisfies aperformance obligation5



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Step 1 – Identify the Contract With the Customer

Description of the Arrangement

In an indirect wireless sales transaction, wireless service provider (WSP) may sell a wireless handset to a retailer and promise to pay that retailer a sales commission when/if the retailer resells the handset to an individual customer and that customer signs a wireless service contract with WSP. Should the contract between WSP and the retailer be combined with the contract between the wireless service provider and the individual customer for wireless voice and data services?

Discussion Points:

1) Refresh on existing policy for identification of the arrangement(s)

2) Any changes expected under the new standard

• Principal vs. Agent Considerations – concept of control



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Step 2: Identify the Separate Performance Obligations in the Contract

Separate performance obligations Single performance obligation

Yes No

Are promised goods and services distinct from other goods and services in the contract?

Can the customer benefit from the good or service

either on its own or together with other

resources that are readily available to the customer?

The good or service is not highly dependent on, or highly interrelated with,

other promised goods or services in the contract

AND

Yes No



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Step 2: Identification of Performance Obligations

Scenario:

Wireless, Inc. (Wireless) enters into a two-year fixed wireless voice and data services contract with its customer John Doe. As part of the inducement to enter into the two-year contract, Wireless also sells John a wireless handset with an observable standalone selling price of $300 for a subsidized price of $100. At the time of activation, John is also assessed a one-time $50 activation fee that will appear on John’s first monthly service bill. The two-year contract includes 1,000 monthly minutes of voice talk time and unlimited data usage for a monthly fee of $80. During the fixed two-year term, John may decrease his service package to 500 monthly minutes of talk time and 1GB of data usage or increase his service package to 2,000 monthly minutes of talk time while retaining rights to unlimited data usage. The monthly fees for these two options are $50 and $110, respectively. John has declined a fixed text messaging plan; and therefore, will pay $0.05/text when and if he sends or receives them. Additional minutes of voice talk time above the fixed monthly limit will be charged at $0.10/minute.

Wireless regularly sells each of the three service plans outlined above separately, principally to customers who are renewing or continuing their service beyond their initial contractual terms, and always charges customers the same usage-based fees for texts and calls that exceed their contracted usage limits. The standalone selling price of the handset is reflective of the price Wireless and other wireless service providers and retailers charge for the handset when sold separate from new wireless service plan.

Wireless concludes that there is not a significant financing component in this contract.



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Considerations

1. What services constitute the base performance obligation(s) in the wireless network service plan

2. Should overage charges be considered ‘distinct optional services’ or as variable consideration (step 3)

3. Should optional add-on services (enhanced voicemail) be considered distinct

4. Impact of tiered plans - ‘minimum non-optional contracted fee approach’ vs. ‘currently contracted’ approach



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Discussion points for group re: ‘Distinct’

1. Set-top boxes• Rental (lease considerations) vs. outright sale• Perspectives on whether these are distinct

2. Installation for cable, internet and satellite TV• Tied to the ‘box’ or tied to the underlying telecom service

3. Other scenarios to discuss?



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Contract Modifications

1. Contract cancellations and the impairment of contract assets

2. Early hardware upgrade options (see following slides)

3. Unanticipated credits (concession vs. loyalty retention) (see following slides)



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Early Hardware Upgrade Options

Scenario

On January 1, 2013, New Customer A signs up for a 24-month contract term with a network service plan for $70/month. Upon inception the customer purchases a subsidized handset at $150. The stand-alone selling price of the handset is $650. The stand-alone selling price of the network services is $60/month.

On January 1, 2014, the customer early upgrades their handset. The carrier waives the early cancellation fee only if the customer signs up for a new wireless term contract. The customer purchases a subsidized handset at the subsidized rates in market at the modification date.

An unamortized contract asset exists at the date of the upgrade related to the initial handset purchase.



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Early Hardware Upgrade Options - Continued

Considerations

1. Does the potential waiver of the early termination fee give rise to a material right at contract inception?

2. If the waiver of the early termination fee is not considered a material right, consider the following options for accounting for the modification:a) Is the waiver of the early termination fee is considered a price

concession at the time of termination of the original contract, and therefore, a reduction of the transaction price on the original contract?

b) Should the unamortized contract asset on the first arrangement be considered a rebate/discount on the new contract and accounted for as a reduction of the transaction price of the new contract?



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Contract Modifications – Concession vs. Retention example

Background:

On January 1, 2013, New Customer A signs up for a 24-month contract term with a network service plan for $70/month. Upon inception the customer purchases a subsidized handset at $150. The stand-alone selling price of the handset is $650. The stand-alone selling price of the network services is $60/month.

Scenario #1:

On June 30, 2013, a one-time concession credit of $20 is issued to the customer relating to dissatisfaction for services for the previous month and applied to the customer’s next bill.

Scenario #2:

On June 30, 2013, a retention credit of $5/month is offered to the customer for the remainder of the contract term, and applied to each subsequent bill.



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Contract Modifications – Concession vs. Retention example

Considerations

Where a discount is provided to a customer that modifies the transaction price, the modification accounting potentially could vary depending on whether the discount relates to past services or future services. Under scenario #1, the discount is given for dissatisfaction with previous services. Under scenario #2, the discount is given to retain the customer for the remainder of the customer’s contract term.

1. Discuss the accounting considerations for each scenario2. Linkage to call center reason codes – how to operationally manage



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Other considerations

1. Accounting for promotional offers• E.g. six months of free specialty channels when you sign for a 2 year

term plan. • Other various offers provided to all customers

2. Classification of contract assets and liabilities related to the same contract

3. Contract fulfillment costs

4. Other matters for discussion?



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Contract Acquisition Costs

Contract acquisition costs must be capitalized and may be amortized over a period longer than the noncancellable contract term

■ Incremental costs that a vendor incurs directly as a result of obtaining a contract would be capitalized if expected to be recoverable

■ Amortization period would cover the term of the contract plus expected renewal periods.

■ Amortization over renewal periods may not be required where the entity pays an incremental sales commission for the renewal period and that commission is commensurate with the initial term commission.

New Standard



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Contract Fulfillment Costs

Contract fulfillment costs may be required to be capitalized.

■ First, apply other IFRS guidance if applicable (e.g. IAS 16, IAS 38)

■ Second, capitalize fulfillment costs that:

1. Relate directly to contract or anticipated contract;

2. Generate or enhance resources that will be used to satisfy future performance obligations; AND

3. Are recoverable

■ If unable to distinguish past and future performance, recognize the costs as expenses when incurred.

■ Amortization period would effectively be the same as under the existing standard (i.e., customer relationship period – contract term plus anticipated renewal terms)

New Standard



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System and Process Considerations

New information and data points will be needed to apply the forthcoming revenue standard. As a result, changes to systems and process may be required.

Policy gap analysis

Evaluate sources of

info

Determine information

needs New systems and

process

Existing systems and

processNew bolt-on

solutions

System upgrades

Feeder system changes

Excel

Access

SQL

Manual

Manual workaround



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Tax Considerations

■ Effects on income tax reporting, compliance and planning

– Change in book/tax differences

– Change in tax accounting methods

– Revenue-based apportionment factors used for calculating state and local tax rate

■ Taxes not based on income

– Income statement presentation of taxes collected from customers

– Contracting practices

■ Transfer pricing

– Changes to amount and timing of revenue recognition may impact transfer pricing

– Impact on transfer pricing strategy and documentation



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Wrap up and looking forward

Other matters

Suggestions for topics for next share forum


Thank youKPMG ‘s Global TMT Practice

KPMG CONFIDENTIAL

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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