17 November 2017
By Kuan Sook Fern, Assurance Executive Director, PwC Malaysia
The telecommunications industry is probably one of the industries that is most affected by MFRS 15 – ‘Revenue from Contract with Customers’ (“MFRS 15”). The rush, from completing the accounting and gap assessments to getting the business and information technology (“IT”) requirements ready, in order for the systems to be up and running by 1 January 2018, began in 2016. Some of the key challenges that the telecommunications operators ("telcos") faced were:
Most telcos offer subsidised handsets with 12 or 24 months service plans/contracts that provide voice, SMS and data services. Throw in some additional services into the plan – e.g. an option to upgrade the handset, roaming passes, weekend data, pocket Wi-Fi, free trial access to video on demand services, and club member privileges – and you can imagine the pain that the telcos had to go through when identifying POs. Could some of these have resulted in material rights?
Before POs could even be identified, the finance department had to spend significant amounts of time with the respective product owners, marketing, and other departments to understand the features of the service plans in detail. At the same time, product owners and the marketing department were struggling to grasp the fact that freebies thrown into a plan could potentially translate into a separate PO with a price attached to it under the new revenue standard.
Some telcos with a past practice of capitalising handset subsidies could no longer capitalise handset subsidies, plus there was a possibility that certain contracts could now contain an operating lease for the handset. Installation charges had to be analysed in bundled services. And gross vs agent analysis had to be re-performed by the telcos for certain arrangements with their distribution channels.
As if identifying POs was not challenging enough, allocating a stand-alone selling price (“SSP”) to the POs was another hurdle. In most cases, there wasn’t a single standard price, and determining SSPs often involved a significant amount of judgement.
How should telcos price 1GB of data vs 15GB of data? How should they price free data content?
A slight difference in the SSP would affect the amount of revenue recognised at any point in time due to voluminous contracts with the subscribers. If key performance indicators (“KPIs”) were tagged to revenue measures for performance and rewards, then SSPs should be reviewed closely.
Whilst trying to be as accurate as possible, most telcos exercised judgement and applied a materiality threshold during the process of identifying POs and determining a SSP for each PO. Where the impact was assessed to be immaterial compared to the current practice pre MFRS 15, no changes were made to the IT systems.
It was also crucial for the IT department to be involved from the start so that they understood the objectives and can identify data gaps based on the existing systems.
One of the challenges faced by the telcos was having to choose between upgrading their existing accounting and billing systems, or keeping the existing systems and using a separate revenue engine to calculate the MFRS 15 adjustments.
The other challenge was having to ensure that the IT consultants had enough time to complete the system requirements and to perform user acceptance testing. It is important that a simulation of the results from the system are analysed before the system goes live. Most system implementers require six to nine months to meet the system requirements,which means that the systems would be ready just in time for the effective date.
In the first instance, most of the telcos found the modified retrospective approach more appealing as they wouldn’t need to gather voluminous historical data to restate comparatives. However, after further considerations, some of the telcos may choose to go with the full retrospective approach instead to avoid having to keep two sets of accounting records in the year of adoption to meet disclosure requirements under the modified retrospective approach. It is important to consider the ability of the company to gather historical data as open contracts for the prior periods have to be restated.
So these are some of the challenges that the telcos faced. Up next, we look at the implementation challenges within the automotive industry.