IFRS 15, Revenue from Contracts with Customers, (the Standard) will have a profound impact on the way in which the Communications industry measures and reports revenue. The industry is currently assessing the impact of the Standard on its current revenue recognition policies. Operators also have major change and implementation programmes in progress reflective of the impact this Standard will have on accounting, systems and the processes of the business.

1. PwC TIAG perspectives on IFRS 15
IFRS 15 – Determining and allocating the transaction price
Introduction
IFRS 15, Revenue from Contracts with
Customers, (the Standard) will have a
profound impact on the way in which the
Communications industry measures and
reports revenue. The industry is currently
assessing the impact of the Standard on its
current revenue recognition policies.
Operators also have major change and
implementation programmes in progress
reflective of the impact this Standard will
have on accounting, systems and the
processes of the business.
The FASB announced in April that it
would defer the application of the
Standard for one year. The IASB has
recently also decided to propose a one year
deferral. That said, the industry does not
see this as an opportunity to pause in its
implementation but rather as allowing
more time to better implement the
changes.
In this first of a series of papers we will
set out some of the aspects of the
Standard that require consideration by
Communications businesses, including
practical implementation considerations.
This paper considers the requirement to
determine and then allocate the total
transaction price to the goods and services
being provided to the customer.
Overview of the change
In the Communications sector revenue
recognition generally follows the billing
profile. Little or no revenue is recognised
for the provision of subsidised equipment
or devices. The recovery of the subsidy is
implicitly priced into the charge for
services. This is referred to as the
‘contingent cap’ approach because the
amount of revenue recorded for
equipment is capped at the amount
billable in respect of the equipment at
the point of delivery to the customer.
IFRS 15 requires operators to allocate the
total transaction price to separate
performance obligations based on the
ratio of their standalone selling prices
(‘SSP’). In the Communications industry,
the main challenge relates to bundled
offers that combine the sale of services and
the sale of equipment (handset, modem,
set-top box and other types of customer
premises equipment).
The SSP is defined as the price at which
the operator would sell a promised good or
service separately to a customer. This
required allocation method is expected to
faithfully depict the economics (different
margins) that may apply to promised
goods and services, referred to as
‘performance obligations’ in the Standard.
The best evidence of SSP is the
observable price of the good or service
when sold separately to similar
customers in similar circumstances. If a
SSP is not directly observable it needs to
be estimated. Possible estimation
methods for SSP include:
• adjusted market price for similar
goods or services; or
• expected cost plus a reasonable
margin; or
• residual approach (expected to apply
in very limited circumstances).
IFRS 15 does not specify a hierarchy of
evidence but requires that the use of
observable inputs is maximised.

2. PwC 2
Key discussion points
Determining standalone selling
price
Determining the standalone selling price
of communications services and
equipment may present challenges and
judgment will be needed. Let’s explore
some options.
In many markets, communications
equipment is not sold on a standalone
basis. The equipment is bundled with
various services and customers are often
charged little, if anything, for it. Therefore
many operators have limited experience of
the amount at which they would sell the
equipment on a standalone basis.
The stated ‘list price’ for the equipment
in an operator’s own retail stores may
sometimes be used as the basis for
determining SSP, although this cannot
be presumed. This may be appropriate
where there are regular transactions at
that price. For others, equipment is rarely
sold at list price and they do not consider
it a representative data reference point for
their circumstances. In some cases the
market price of the equipment will be
readily observable, (e.g. Apple retail
prices in its own stores).
Where list price is not considered
representative or observable market
prices are not readily available, it is likely
operators will need to use an estimation
technique such as 'cost plus a reasonable
margin’ to estimate the SSP. As business
models develop, for example, split bills
(invoices stating the amount of the
monthly bill that is for the equipment) or
customer financing for equipment (again
giving better transparency on the price of
the equipment) other data points and
experience will develop to further
support the determination of the
SSP for equipment.
How communications services are
priced and sold can vary widely from
market to market and even within markets
depending on the type of customer. In
some markets service is sold on a volume
and product basis (e.g. prepaid mobile
services, fixed enterprise voice and data
services). At the same time convergence in
the consumer space has increased the
number of complex service bundles which
include ‘All You Can Eat’ allowances of
fixed and mobile voice, data and
broadband, which is some cases can be
shared across multiple devices. TV is also
increasingly included in these bundles.
In the enterprise space operators offer a
range of service stacks and professional
and managed services to customers –
some of these are ‘off the shelf’ but many
are bespoke and tailored to the enterprise
customer’s needs.
Operators may have observable price
points for different bundles of services.
For example, in parts of Europe and North
America mobile operators have introduced
SIM-only contracts where a bundle of
service is sold without the subsidised
equipment. This provides a good
reference point in determining the SSP
of the relevant services.
That said, the industry is grappling
with the fact that voice, data and internet
services are not traded commodities and
the range of price points for a minute of
voice or bit of data can vary widely.
Customer type (e.g. prepay/postpay,
consumer/enterprise, fixed/mobile),
market dynamics, the tariff the customer
signs up to etc., all contribute to this.
Comparable SIM-only pricing, or its
equivalent outside of mobile, is not always
available. Hence the determination of the
SSP for services is likely to require a
higher level of judgement and estimation
than that required for equipment.
Allocation of the
transaction price
The Standard requires the transaction
price be allocated to each separate
performance obligation in proportion to
the SSP of the good or service.
Consequently, any discount compared to
the aggregate of SSPs should be allocated
between communications services and
equipment on a relative basis. There may
also be certain circumstances where the
discount will be allocated to certain, or
groups of, performance obligations.
This requirement therefore eliminates the
contingent cap approach described earlier.
One of the key judgements operators will
be required to make is how many separate
performance obligations (promises of
goods and services) it is making to the
customer. For example, is a bundle of
fixed and mobile voice, data and TV a
single performance obligation or four
separate performance obligations?
Depending on the conclusion of this and
the basis on which pricing or discounting
for the bundles of services is applied,
operators may need to assess if any
discounts should be determined and
applied to an promise or bundle of
promises before performing the
allocation of the equipment subsidy to
the overall arrangement.
There is also the potential to identify
additional performance obligations
(such as material rights, loyalty programs
and other promotional offers) for which
the SSP will need to be determined and
included in the allocation.
One other area for the industry to consider
is the treatment of arrangements with its
third party dealers. If the dealer is acting
as an agent on behalf of the operator then
any goods or services it provides on behalf
of the operator should be accounted for as
a performance obligation of the operator
in both the determination and allocation
of the total transaction price.

3. 3 PwC
Analyst perspective
Many commentators have said they expect
the requirements of IFRS 15 to represent
an opportunity for the sector to better
reflect and explain the economics of the
business in the financial statements.
Key measures of performance in the
industry have included revenue based
measures (e.g. ARPU), EBITDA and Free
Cash Flow. Because revenue has followed
the billing profile there have typically been
limited differences between the timing of
cash flows and the timing of revenue
recognition. The Standard will have a
couple of significant impacts which
analysts have raised questions on:
• Measures such as APRU will decrease
as service revenue is reduced by the
amount of the total transaction price
that is allocated to the equipment.
• Non service (equipment) revenue will
increase by the amount allocated to it
which will result in a short term
EBITDA benefit.
• This will result in differences between
the profiles of revenue and cash flow.
In addition to the impact on key metrics
there will be an increase in the level of
estimation applied in determining the
amount of revenue to allocate to various
goods and services and operators, in
complying with the Standard, could take
different judgements about the level at
which to define performance obligations,
the basis of determining the SSP and the
allocation methods. Many analysts have
questioned the levels of disclosure that
will be made available in respect of
these estimation techniques and the
comparability of operator results across
the industry.
These changes will require action
to educate analysts and communication
on how the Standard will affect the
financial reporting.
Implementation
considerations include:
• Identification of data reference points
to establish the SSP of individual
performance obligations.
• Systems which have historically been
owned by Operations will become
finance critical systems and robust
processes, controls and validation
checks will be required over the
data used.
• New intermediary systems and
systems interfaces may be required to
support the flow of data from various
source systems to the final financial
and management reporting systems.
• New processes may be required to
track delivery of equipment to
customers by your business or third
parties that deliver and install
equipment on your behalf to support
the trigger for revenue recognition.
• Identification of financial reporting
risks, design and implementation of
new internal controls will be required.
This will be particularly important for
operators subject to the Sarbanes
Oxley requirements.
• Where using a portfolio approach,
supplemental processes and controls
may be required to calculate any
adjustments that should reasonably
reflect the result of a contract by
contract approach.

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Americas
Rob Glasgow
Little Rock
rob.glasgow@us.pwc.com
+1 973 236 4019
Geoff Leverton
Toronto
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+1 416 815 5053
Richard Veysey
New York
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EMEA
Paul Barkus
London
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+44 20 7213 5514
Fiona Dolan
TIAG Chair
London
fiona.mc.dolan@uk.pwc.com
+44 20 7213 4885
Peter Hogarth
London
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+44 20 7213 1654
Matthieu Moussy
Paris
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+33 15 657 8630
Michel Vique
Paris
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Christoph Gruss
Frankfurt
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Thomas Tandetzki
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George Cheng
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India
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China
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Rosalie Wilkie
Australia
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About TIAG
The PwC Telecom Industry Accounting Group provides a forum for discussion and develops in conjunction with the
industry, solutions to emerging industry accounting issues. I would like to thank the TIAG for its contributions to
this paper and in particular Matthieu Moussy and Michel Vique.
To have a deeper
conversation about how
the proposed changes to
accounting for revenue
may affect your business,
please contact: