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Revenue recognition for Telecoms
Efficient recognition and measurement of revenue is essential for the well being, progress and prosperity of any company or individual engaging in business transactions. As the financial markets have become more and more globalized, the need for standardized procedures has increased. That is why the new standard guidelines have been developed with the aim of streamlining the process of keeping accurate financial records and preparing financial statements.
The Five Step Principle
The main principle of measuring and recognizing revenue and cash flows is that an entity receives and records the appropriate amount from customers as a result of the services or goods the entity provides. The following five steps can be applied in order to achieve this principle:
- Establish an agreement or contract with a customer
- Agree on the exact outcomes that are identified in the contract
- Determine the amount that will be paid by the customer
- Assign the amount to the outcomes in the contract
- Recognize the revenue when the entity achieves the outcomes
In the telecoms industry, the implications of the new revenue standard will be far-reaching in terms of timing, amount, costs and recognition of revenue. There will also be a knock-on effect where IT systems, financial reporting, disclosures and internal controls are concerned.
The new standard regarding disclosure requirements affects both quality and quantity, with the purpose of providing better insight for users. Financial statements can help to bring understanding of matters related to contracts with customers, such as the amount, timing and uncertainty of cash flows.
Telecom entities will need to apply the five step model in order to ascertain when and what revenue to recognize. According to the model of the new standard, as soon as an entity hands over the goods or services to the customer and receives the agreed payment, the revenue is recognized. Whenever the relevant criteria are fulfilled the revenue is recognized and this may be at a given point in time or over a given period of time.
The scope of the new standard covers contracts to supply goods and services to a client or customer. Within the telecom industry there may be other specific requirements in complex contracts which are not covered by the scope of the new standard, such as leases and guarantees.
If a telecom company provides a warrantee on equipment which is incremental to the warrantee of the manufacturer, then the telecom entity would need to use the new standard guidelines to decide whether it is a service warrantee. That being the case, it would constitute a separate performance obligation or outcome. If it is not a service warrantee it should be covered by other guidance which will result in a cost accrual.
When it comes to service contracts set up by telecom entities, there are often agreements regarding the quality of service or performance which is guaranteed by the telecom company. These service contracts need to be taken into account when setting the price as they may result in the final payment to the telecom entity being decreased or increased.