No.

US2017-14 New revenue guidance

July 27, 2017
Implementation in the communications industry
What’s inside:
Overview ......................... 1
Step 1: Identify the
At a glance
contract...........................2
Step 2: Identifying Public companies must adopt the new revenue guidance in 2018. Almost all companies
performance will be affected to some extent by the new guidance, though the effect will vary
obligations ......................4 depending on industry and current accounting practices. Although originally issued as a
Step 3: Determine the converged standard under US GAAP and IFRS, the FASB and IASB have made slightly
transaction price…..........9 different amendments so the ultimate application of the guidance could differ under US
Step 4: Allocating the GAAP and IFRS.
transaction price …....... 12
Step 5: Recognize The Revenue Recognition Transition Resource Group (TRG) and the AICPA’s
revenue..........................15 Telecommunications Entities Revenue Recognition Task Force has discussed various
Other considerations.…16 implementation issues impacting companies across many industries. These discussions
may provide helpful insight into application of the guidance, and the SEC expects
registrants to consider these discussions in applying the new guidance.

This publication has been updated to reflect the implementation developments over the
past two years and to highlight certain challenges specific to companies in the
communications industry. The content in this publication should be considered together
with our Revenue guide, available at CFOdirect.com.

Overview
The communications industry comprises several subsectors, including wireless, fixed line,
and cable/satellite television (TV). These companies generate revenue through many
different service offerings that include access to, and usage of, network and facilities for the
provision of voice, data, internet, and television services. These services generate revenues
through subscription fees or usage charges. Some communications companies also sell or
lease equipment such as handsets, modems, dongles (a wireless broadband service
connector), customer premises equipment (CPE), and a variety of accessories.
Offerings in the communications industry have evolved as a result of consolidation,
technology changes and innovation. Examples include installment sales of wireless
devices; multi-line plans, in which customers attach more than one device to a service; and
bundled plans, with core video service, including voice and internet services, combined with
other offerings, such as home security services. Also, companies may provide services that
expand beyond traditional core offerings, including cloud and machine-to-machine services.

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The revenue standards (ASC 606 and IFRS 15, Revenue from Contracts with Customers) will impact each of these
businesses. Certain changes having the potential for the greatest impact include:

 Additional revenue may need to be allocated to discounted or free products provided at the beginning of a
service period due to the elimination of the “contingent revenue cap,” and changes to and restrictions in the
use of the “residual method” currently applied by some communications companies.
 The accounting treatment of activation fees, customer acquisition costs, and certain contract fulfillment costs
may change.
 The guidance may be applied to a portfolio of contracts or performance obligations in some circumstances,
although this approach may create additional implementation challenges and complexities.
 Free goods or services previously considered to be marketing offers may qualify under the revenue standards as
distinct goods or services.
Communications companies are continually evaluating their business models and providing new device and service
plans to customers. Assessing the accounting impact of these new services can be challenging. During the transition to
the revenue standards, management will need to consider the impact that these new offerings have under both the old
and new guidance, adding complexity to their growing list of challenges.

(2) Identify (3) Determine (4) Allocate (5)

(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

1. Identify the contract

A contract can be written, oral, or implied by a company’s customary business practices. Generally, any agreement with
a customer that creates legally-enforceable rights and obligations meets the definition of a contract under the new
guidance. Legal enforceability depends on the interpretation of the law and could vary across legal jurisdictions where
the rights of the parties are not enforced in the same way.
As part of identifying the contract, companies are required to assess whether collection of the consideration is
probable, which is generally interpreted as a 75-80% likelihood in US GAAP and a greater than 50% likelihood in IFRS.
This assessment is made after considering any price concessions expected to be provided to the customer. In other
words, price concessions are variable consideration (which affects the transaction price), rather than a factor to
consider in assessing collectibility. Further, the FASB clarified in an amendment of ASC 606 that companies should
consider, as part of the collectibility assessment, their ability to mitigate their exposure to credit risk, for example by
ceasing to provide goods or services in the event of nonpayment. The IASB did not amend IFRS 15 on this point, but
did include additional discussion regarding credit risk in the Basis for Conclusions of their amendments to IFRS 15.
The new guidance also eliminates the cash-basis method of revenue recognition that is often applied today if collection
is not reasonably assured (US GAAP) or probable (IFRS). Companies that conclude collection is not probable under the
new guidance cannot recognize revenue for cash received if (1) they have not collected substantially all of the
consideration and (2) continue to transfer goods or services to the customer.
Contract term
Determining the contract term is important as it impacts the determination and allocation of the transaction price
and recognition of revenue. Termination clauses should be considered when assessing contract duration – the
period over which the parties have enforceable rights and obligations. If a contract can be terminated at any time for
no compensation, the parties do not have enforceable rights and obligations, regardless of the stated term. In
contrast, a contract that can be terminated early, but requires payment of a substantive termination penalty, is likely
to have a contract term equal to the stated term. This is because enforceable rights and obligations exist throughout
the stated contract period. Judgment should be applied in determining whether a termination penalty is substantive.
There are no “bright lines” for making this assessment.

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Contract modifications
Customers of communications companies often request changes to their service plans. For example, wireless telecom
customers might change their existing service plans to upgrade or replace a device; include additional wireless
minutes; increase data usage; add incremental, or remove, existing services; or terminate service altogether.
Modifications also occur in multi-line plans when the customer adds or removes a device and/or changes the size of
the data plan being shared across devices. Companies will need to account for the changes as modifications to the
contracts when devices or services not covered under the original contract are added or removed.
Contract modifications exist when the parties to the contract approve a modification that creates or changes the
enforceable rights and obligations of the parties to the contract. A modification is accounted for as either a separate
contract or as part of the existing contract (either prospectively or through a cumulative catch-up adjustment). This
assessment is driven by whether (1) the modification adds distinct goods and services and (2) the distinct goods and
services are priced at their standalone selling prices. Companies will need to apply judgment in evaluating whether
goods or services in the modification are distinct. This may be particularly challenging when there are multiple
performance obligations in a contract.
Final guidance Current US GAAP Current IFRS

A contract modification is treated as Modifications to add or remove Modifications to add or remove goods
a separate contract only if it results goods or services in telecom or services in telecom arrangements
in the addition of a distinct arrangements are typically viewed as are typically viewed as new
performance obligation and the price new arrangements with changes arrangements with changes
reflects the standalone selling price accounted for prospectively. accounted for prospectively.
of that performance obligation.
Otherwise, the modification is
accounted for as an adjustment to
the original contract.
A company will account for a
modification prospectively if the
goods or services in the modification
are distinct from those transferred
before the modification. A company
will account for a modification
through a cumulative catch-up
adjustment if the goods or services in
the modification are not distinct and
are part of a single performance
obligation that is only partially
satisfied when the contract is
modified.
A contract modification that only
affects the transaction price should
be treated as part of the existing
contract.

Potential impact - both US GAAP and IFRS

Historically, modifications to communications contracts have typically been treated as new agreements with changes
accounted for prospectively. Going forward, companies will need to evaluate modifications under the new guidance to
determine whether they are accounted for prospectively or require a cumulative catch up adjustment. The analysis
will need to consider modifications in new types of service plans, such as multi-line plans, in which it may be more
difficult to determine whether the modification adds distinct goods or services, or modifies existing goods or services
being provided under the contract.
Contract modifications for a series
The revenue standards state that a company will account for a series of distinct goods or services that are substantially
the same as a single performance obligation if each distinct good or service meets the criteria for over-time

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recognition and the same method would be used to measure progress for each distinct good or service. This approach
will likely be used by communications companies for contracts that provide the customer with a consistent level of
services on a monthly basis over a contract period, rather than treating each month or each day of service as a
separate performance obligation.
Companies that account for a series of distinct goods or services in this manner at inception of the arrangement must
consider the distinct goods or services in the contract (not the performance obligation) for purposes of applying the
guidance on contract modifications. Therefore, when the remaining goods or services in the modified contract are
distinct from goods or services that have already been transferred to the customer, these modifications will be
accounted for prospectively.
Example 1-1 – Contract modification
Facts: A fixed-line communications company enters into a contract with a customer to provide voice and data services
for 24 months at a fixed charge of $50 per month. After six months, the customer decides to add TV services for an
incremental fee of $50 per month over the same term. This price is slightly lower than the price charged to customers
who just purchase the TV service without voice and data services, which reflects the fact that the customer acquired
the TV service as part of a bundle. In this scenario, assume there are no other fees or deliverables.
How should the company account for this modification?
Analysis: The TV services added by the customer are a distinct performance obligation. These services are being
charged at relative standalone selling price (when adjusted for the selling costs avoided by transacting with an
existing customer). The TV services are a new contractual arrangement, and there is no impact to the accounting for
the existing data and voice services.
While this example is fairly simple, further complexities could arise with contract modifications. For example, the
modification could provide the customer with a discount on new or existing services, the contract period could be
extended for all services, or additional deliverables (such as equipment) could be introduced. Communications
companies will have to assess the facts and circumstances in these more complex situations.

(2) Identify (3) Determine (4) Allocate (5)

(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

2. Identify performance obligations

A performance obligation is a promise to transfer a distinct good or service to a customer. Identifying the separate
performance obligations within a contract affects both when and how much revenue is recognized. Companies will
need to determine whether performance obligations within customer contracts should be accounted for separately or
bundled together. A promised good or service might be explicit in a contract, or implicit, arising from customary
business practices. Applying the separation principle might be challenging when there are multiple offerings in
bundled packages.
Communications companies regularly bundle the sale of services and equipment (e.g., handsets, modems, accessories)
and might also charge for activation or set up. Wireless companies give free or discounted equipment or promotional
rates to customers as incentives to enter into contracts.
Equipment (including handsets) transferred to customers is a separate performance obligation in most cases if the
company separately sells equipment or the customer can benefit from the handset together with other resources (for
example, the handset could operate on another communications company's network). This is true regardless of
whether the equipment is given at no cost or at a significantly discounted price. Other obligations, such as promises of
future discounted services or other material rights, will also need to be evaluated to determine if they qualify as
separate performance obligations.

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 Final guidance Current US GAAP Current IFRS

Performance obligations
The revenue standards require The following criteria are The revenue recognition criteria
companies to identify all promised considered to determine whether are usually applied separately to
goods or services in a contract and elements included in a multiple- each transaction. In certain
determine whether to account for element arrangement are circumstances, it might be
each promised good or service as a accounted for separately: necessary to separate a
separate performance obligation. transaction into identifiable
 The delivered item has value components to reflect the
A performance obligation is a to the customer on a substance of the transaction.
promise in a contract to transfer a standalone basis. Separation is appropriate when
distinct good or service to a  If a general return right exists identifiable components have
customer. for the delivered item, standalone value and their fair
A good or service is distinct and is delivery or performance of the value can be measured reliably.
separated from other obligations in undelivered item(s) is
considered probable and Two or more transactions might
the contract if:
substantially in the control of need to be grouped together when
 the customer can benefit from the vendor. they are linked in such a way that
the good or service separately or the commercial effect cannot be
together with other resources, understood without reference to
and the series of transactions as a
 the good or service is separately whole.
identifiable from other goods or
services in the contract.
The FASB clarified that companies
are not required to identify
promised goods or services that are
immaterial in the context of the
contract. The IASB did not
incorporate similar wording;
however, IFRS reporters should
consider materiality concepts when
identifying performance obligations.
A series of distinct goods or services
that are substantially the same are
accounted for as a single
performance obligation if:
 each would be a performance
obligation satisfied over time;
and
 the same method would be used
to measure the company’s
progress toward satisfaction.
Examples of this could include
network access or call center
services provided continuously over
a period of time.

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 Final guidance Current US GAAP Current IFRS
Options to acquire additional
goods or services
A company might grant a customer When an option is determined to be The recognition criteria are usually
the option to acquire additional substantive, a company evaluates applied separately to each transaction
goods or services free of charge or at whether that option has been offered (i.e., the original purchase and the
a discount. These options might at a significant incremental discount. separate purchase associated with the
include customer award credits or If the discount in an arrangement is option). However, in certain
other sales incentives and discounts. significant, a presumption is created circumstances, it is necessary to
An option gives rise to a separate that an additional deliverable is being apply the recognition criteria to the
performance obligation if it provides offered in the arrangement, requiring separately-identifiable components
a material right that the customer a portion of the arrangement as a single transaction to reflect the
would not receive without entering consideration to be deferred at substance of the transaction.
into the contract. The company inception.
should recognize revenue allocated If a company grants to its customers,
to the option when the option as part of a sales transaction, an
expires or when the additional goods option to receive a discounted good
or services are transferred to the or service in the future, the company
customer. accounts for that option as a separate
component of the arrangement and
An option to acquire an additional therefore allocates consideration
good or service at a price that is between the initial good or service
within the range of prices typically provided and the option.
charged for those goods or services
does not provide a material right,
even if the option can be exercised
only because of entering into the
previous contract.

Non-refundable upfront fees

Some companies charge a customer a An upfront fee should be deferred and Recognition of revenue from an
nonrefundable upfront fee at or near recognized systematically over periods upfront fee depends on the nature of
contract inception. Companies will in which it is earned unless it is in the services provided. A company
need to determine whether the exchange for products delivered or must determine whether an upfront
nonrefundable upfront fee relates to services performed that represent the fee related to installation or activation
the transfer of a good or service to a culmination of an earnings process. is a separate component of the
customer. transaction.
When an upfront fee is not related to
The standards state that activation specific products or services, it should Generally, an activation fee for
services are an example of be excluded from the consideration communications services is not a
nonrefundable upfront fees that do allocated to the deliverables and separate component, and the
not result in the transfer of a good or recognized over the longer of (1) the activation fee is recognized over the
service to the customer. The initial contractual term of the period that the communications
payment for the activation service is arrangement or (2) the estimated services are provided to the
an advance payment for future period over which the customer is customer.
communications services. expected to benefit from the payment
of the upfront fee (i.e., the customer
benefit period).
When all or a portion of an upfront
fee is related to a specific
deliverable(s) within the
arrangement, the upfront fee, or a
portion of it, should be included in
the consideration allocated to the
deliverables using the relative
selling price method.

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Potential impact - both US GAAP and IFRS
Companies will need financial processes and systems that identify the different performance obligations in each of their
contracts and pinpoint when and how the obligations are fulfilled. Traditionally, wireless communications companies
have identified the device and service as separate units of accounting under existing guidance, but they will need to
consider whether additional performance obligations exist under the new model. This assessment will need to extend
to all obligations under a contract, even items that are not regularly sold by the company, or that have previously been
viewed as marketing expenses (e.g., free products not related to the provision of communications services).
Companies will also need to consider separation when multiple services are provided in an arrangement, as this may
affect the allocation of the transaction price to separate performance obligations that have different patterns of
transfer. When multiple services (e.g., voice services, data services, television services) or multiple access points are
being provided that the customer can benefit from either on its own or together with readily available resources (i.e.,
the services are capable of being distinct), companies will need to evaluate whether the promise to transfer the goods
or services is separately identifiable from other promises in the contract (i.e., they are distinct in the context of the
contract) or whether some or all of the goods or services should be combined into one performance obligation. For
instance, if multiple services have the same pattern of transfer to the customer, the company may, as a practical
matter, account for the services as a single performance obligation.
Communications companies will have to consider outsourcing and network IT contracts, various types of
activation/connection services, and other upfront services (e.g., connecting customers to their networks or laying
physical line to the customers’ premises) to determine if these services meet the definition of a separate performance
obligation and if a good or service is transferred to the customer. The timing of revenue recognition for
communications companies that currently do not account for equipment separately from the telecom services will be
significantly affected if the components of their bundled offerings are separate performance obligations under the
revenue standards.
Many companies charge activation fees at the inception of a contract. The activation services are typically not a
separate performance obligation. Activation fees are typically advance payment for future goods or services and,
therefore, would be recognized as revenue when those future goods or services are provided. The recognition period
could extend beyond the initial contractual term if (1) the customer has the option to renew and (2) that option
provides the customer with a material right (e.g., an option to renew without requiring the customer to pay an
additional activation fee). Companies should consider the impact of options on all contracts, including month-to-
month service arrangements. This may result in a different pattern of revenue recognition from today's accounting
models under which activation fees are often recognized over the contract period.
Further, communications companies increasingly sell multi-line plans and will need to determine whether the option
to add additional lines is a material right that is a separate performance obligation.

Example 2-1 – Identifying performance obligations

Facts: A communications company enters into a contract with a customer to provide wireless telecom services for $50
per month and a handset for $100. It also charges an activation fee of $30. The communications company sells
handsets separately (for example, when a customer's handset is lost, stolen, or damaged).
How many separate performance obligations are in the contract?
Analysis: At least two separate performance obligations exist in this arrangement: telecom services and the handset.
The handset is a separate performance obligation because the company sells the handset separately.
The handset would be a separate performance obligation even if the company did not sell the handset separately if
the customer could use the handset to receive telecom services from another company.
Activation/connection fees are not separate performance obligations, but are considered upfront payments for the
handset and future telecom services.
Depending on the facts and circumstances, the company may need to further assess the nature of the telecom
services to determine whether the individual services should be considered separate performance obligations. For
example, if the services consist of bundled voice, text, and data, and the customer has the right to roll over some or all
of the unused services (e.g., unused data) to the next month, the individual services may not have the same pattern of
transfer. As a result, the company would not be able, as a practical matter, to bundle all services into a single
performance obligation as different measures of progress would be applied to them.

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Example 2-2 – Options that do not provide a material right
Facts: A communications company enters into a two-year contract with a customer to provide wireless telecom services
for $50 per month. The contract requires the communications company to provide the customer with 800 voice
minutes and 100 text messages per month. The contract specifies the customer may purchase additional voice services
for $0.10 per minute and text services for $0.20 per message during the contract. These prices are typically charged
for those services regardless of the type of contract, and therefore, they reflect the standalone selling price of those
services.
Is the customer's option to purchase additional voice minutes and text messages a separate performance obligation?
Analysis: No. The option provided in the contract is not a performance obligation because it does not provide a
material right to the customer. The customer pays the same price, or price within a range, for voice minutes and text
messages as other customers. The company will recognize revenue for the additional voice minutes and text messages
if and when the customer receives those additional services.

Example 2-3 – Multi-line “family” plans

Facts: A communications company enters into a contract to provide unlimited telecom services under a multi-line
“family” plan on a monthly basis. The customer has the option to add additional lines to the plan each month for a
package price that reflects a decrease in the monthly service fee per line as additional lines are added.
Does the option to add an additional line to the plan provide the customer with a material right?
Analysis: No. The option to add additional lines to a family plan in a future month does not provide the customer with a
material right. Even though a customer may add or subtract lines within the plan, which may be capable of being distinct, the
context of the contract provides for a plan that shares the same telecom services as a bundle. Further, when customers add or
subtract lines from the plan, they are making a decision on a month-to-month basis regarding which family plan to purchase that
month (e.g., a three line plan vs. a four line plan). The pricing for the family plan is based on the number of lines purchased that
month and is consistent across customers, regardless of the plan a customer purchased in prior months. The customer is not
receiving a discount based on its prior purchases.

Example 2-4 – Installation services

Facts: A communications company enters into a contract to provide cable services (television, internet, voice, etc.) on a
monthly basis, with no contract end date. The company charges an upfront, nonrefundable installation fee of $50 to
recover the cost of laying physical line to the customer's premises. This line can be used by other communications
companies if the customer later changes service providers.
Is the installation service a separate performance obligation?
Analysis: It depends. The company will need to determine whether laying the physical line is a distinct good or
service. In this example, other communications companies can provide services on the same physical line, so the line
is separately identifiable and can be used by the customer without the company subsequently providing cable
services. Therefore, laying the physical line is a distinct performance obligation.

Example 2-5 – Cable company, activation services

Facts: A cable entity enters into a contract to provide cable services (television, internet, voice, etc.) on a monthly
basis, with an initial contract period of 12 months. The company charges an upfront, nonrefundable fee of $50 to
recover the cost of sending a technician to activate the service on the customer's premises.
Is the activation service a separate performance obligation?
Analysis: It depends. The company will need to determine whether the activation is a distinct service. In this example,
the activation service is not distinct from the provision of the cable services because the customer cannot benefit
separately from the activation service. The activation fee should be deferred and recognized over at least the contract
period.
Companies will need to determine if the activation fee relates to the services that extend beyond the initial contract
period, and should be recognized over that longer period. This could be the case if the customer has a material right to
extend the contract without paying an additional activation fee.

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 (2) Identify (3) Determine (4) Allocate (5)
(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

3. Determine transaction price

The transaction price is the amount of consideration a company is entitled to receive in exchange for transferring goods
or services to customers. Determining the transaction price is more straightforward when the contract price is fixed; it
becomes more complex when it is not fixed. Discounts, rebates, refunds, credits, incentives, performance bonuses, and
price concessions could cause the amount of consideration to be variable. Because variable consideration is required to
be estimated and included in the transaction price subject to a constraint, communications companies may recognize
revenue earlier under the new revenue guidance.

Final guidance Current US GAAP Current IFRS

Variable consideration
The transaction price might include The seller's price must be fixed or Revenue is measured at the fair
an element of consideration that is determinable for revenue to be value of the consideration received
variable or contingent upon the recognized. or receivable. Fair value is the
outcome of future events, such as amount for which an asset or liability
Revenue related to variable
discounts, rebates, refunds, credits, could be exchanged or settled
consideration generally is not
incentives, etc. A company should between knowledgeable, willing
recognized until the uncertainty is
use the expected value or most likely parties in an arm's length
resolved. It is not appropriate to
outcome approach to estimate transaction.
recognize revenue based on the
variable consideration, depending on
probability of an uncertainty Trade discounts, volume rebates,
which is the most predictive.
being achieved. and other incentives (such as cash
Variable consideration included in settlement discounts) are taken into
Certain sales incentives entitle the
the transaction price is subject to a account in measuring the fair value
customer to receive a cash refund
constraint. The objective of the of the consideration to be received.
(e.g., a rebate) for some of the price
constraint is that a company should
charged for a product or service. The Revenue related to variable
recognize revenue as performance
company recognizes a liability for consideration is recognized when (1)
obligations are satisfied to the extent
those sales incentives based on the it is probable that the economic
it is probable (US GAAP) or highly
estimated refunds or rebates that will benefits will flow to the company
probable (IFRS) that a significant
be claimed by customers. and (2) the amount is reliably
reversal will not occur in future
measurable, assuming all other
periods. Although the terminology The company also recognizes a
revenue recognition criteria are met.
differs, “highly probable” under IFRS liability (or deferred revenue) for the
means the same as “probable” under maximum potential amount of the The company recognizes a liability
US GAAP. Management should refund or rebate (i.e., no reduction is based on the expected levels of
update the assessment at each made for expected breakage) if future rebates and other incentives that will
reporting period. refunds or rebates cannot be be claimed. The liability should reflect
reasonably and reliably estimated. the maximum potential amount if no
If a company receives consideration
reliable estimate can be made.
from a customer and expects to
refund some or all of that
consideration to the customer, it
recognizes a refund liability for an
amount it expects to refund.
Customers might not exercise all of
their contractual rights related to a
contract, such as mail-in rebates and

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 Final guidance Current US GAAP Current IFRS
other incentive offers. Companies will
need to continually update their
estimates to adjust for changes in
expectations. The revenue guidance
explains several factors that
companies should consider in
assessing the amount of consideration
to which a company expects to be
entitled.

Significant financing component

The revenue guidance requires companies to adjust the promised amount of consideration to reflect the time value of
money if the contract has a significant financing component. Factors to consider when determining whether a
contract has a significant financing component include, but are not limited to: (1) the expected length of time between
when the entity transfers the promised goods or services to the customer and when the customer pays for those goods
or services, (2) whether the amount of consideration would differ substantially if the customer paid in cash promptly
in accordance with typical credit terms in the industry and jurisdiction, and (3) the interest rate in the contract and
prevailing interest rates in the relevant market (i.e., interest rates offered by financing institutions in the same
market or geography).
A significant financing component would not exist when: (1) the customer paid for the goods or services in advance
and transfer is at the discretion of the customer, (2) a substantial amount of the promised consideration is variable
and the amount or timing of consideration varies based on the occurrence or nonoccurrence of a future event that is
not substantially within the control of the customer or the company, or (3) the difference between the cash selling
price and promised consideration is for a reason other than providing financing and the difference is proportional to
that reason.
Potential impact - both US GAAP and IFRS
Some companies will recognize revenue earlier under the revenue guidance because variable consideration is included
in the transaction price prior to the date on which all contingencies are resolved. For example, a network provider
might offer a communications company (its customer) a volume discount on usage rates (voice and data access) to
access its network as part of a minimum purchase commitment arrangement. The network provider charges penalties
or the customer loses the volume discount if the customer does not meet specified usage volumes. Network providers
that offer such discounts under minimum purchase commitment arrangements and determine it is probable (US
GAAP) or highly probable (IFRS) that they will receive penalties or additional payments because customers fail to
meet the specified usage volumes could recognize revenue earlier than under current guidance.
Companies will also have to estimate amounts related to incentives and consider the guidance for variable
consideration to determine the amounts to which they expect to be entitled, considering their experience with existing
incentives, discounts, take-rates, and other external factors.
Communications companies should consider whether the transfer of a handset to a customer at the initiation
of the contract and collecting monthly payment for the handset over the contract period provides the
customer with significant financing, which would result in an adjustment to the transaction price to reflect the
financing component. A significant financing component may exist even though a contract has an interest
rate of zero.
Communications companies may offer incentives to customers to purchase handsets with payments made
over an extended period of time. The company needs to determine whether it offered a discount equal to the
financing charge that would have otherwise been charged to the customer. If a financing component exists,
the company needs to evaluate whether the financing is significant.

Example 3-1 – Discount program, revenue is not constrained

Facts: A communications company enters into contracts with its customers to provide telecom services for $50 per
month and provides Equipment X for $200. The customers will receive a discount of $100 related to the purchase of
Equipment X if they submit a proper form and proof of purchase via mail (also known as a mail-in-rebate). The

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company has predictive experience from providing similar discounts to a range of customers (refund amounts for
similar equipment with similar sales prices).
Historically, 75% of the company’s customers took advantage of the rebate and the company concludes that there
are no external economic factors that affect historical trends.
How should the company estimate the transaction price?
Analysis: The company should estimate the transaction price based on the amounts to which it expects to be entitled
using the most recent history for similar discount programs (refund amounts for similar equipment with similar sales
prices). It estimates the refund liability for each transaction using the following probabilities representing the pattern
of similar rebates.

Probability-
weighted
Amount Probability amount
$ 0 25% $ 0
100 75% 75
$ 75

The company concludes it is probable (US GAAP)/highly probable (IFRS) that variable consideration of $25 will not
be subject to significant reversal. The company records a refund liability of $75 and reduces the transaction price by
$75. The company will update the estimated liability at each reporting period, with any adjustments recorded to
revenue.

Example 3-2 – Discount program, revenue is constrained

Facts: A communications company is launching its service in a new country; it enters into contracts with its customers
to provide telecom services for $50 per month and Equipment Y for $350. The customers receive a discount of $100
related to the purchase of the equipment if they submit a proper form and proof of purchase via mail. The company
does not have predictive experience providing similar discounts (refund amounts for similar equipment with similar
sales prices) in this country and concludes that there is no amount of the variable consideration (the potential
discount) that is probable (US GAAP)/highly probable (IFRS) of not being subject to a significant reversal.
How should the company determine the transaction price?
Analysis: The company records a full refund liability of $100 and reduces the transaction price by $100 as there is no
amount of the potential discount that is probable (US GAAP)/highly probable (IFRS) of not being subject to a
significant reversal.
The company will adjust the liability and recognize revenue as soon as management is able to conclude it is probable
(US GAAP)/highly probable (IFRS) that (1) there will be no significant reversal for some part of the consideration or
(2) the right to the discount expires. The company will update the estimated liability at each reporting period, with any
adjustments recorded to revenue.

Example 3-3 – Minimum purchase contract

Facts: A network provider enters into a contract with a communications company (its customer) to provide access to
its network over a one-year period. The contract offers a discounted usage rate of $0.05 per voice minute. The
discounted rate is contingent on the customer's minimum monthly purchase commitment of 25 million minutes of
network voice usage. If the customer is unable to meet the volume commitments, the usage rate increases to $0.08 per
voice minute, applied retroactively.
How should the network provider determine the transaction price?
Discussion: The network provider should estimate the variable consideration to determine the transaction price. The
network provider determines, based on its facts and circumstances, including the customer’s usage history, that there
is an 85% probability that the customer will meet the minimum monthly volume commitments for the contract period
and a 15% probability the customer will not meet the minimum commitments. The network provider uses the most
likely outcome method as it concludes it is the best prediction of the amount it expects to receive. It also determines
that there is no amount in excess of $0.05 per minute that is probable (US GAAP)/highly probable (IFRS) of not being
reversed. Therefore, the network provider will recognize revenue based on a transaction price of $0.05 per voice
minute.

National Professional Services Group │ www.cfodirect.com In depth 11

 (2) Identify (3) Determine (4) Allocate (5)
(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

4. Allocate transaction price

Communications companies often provide multiple products and services to their customers as part of a bundled
offering. These arrangements usually consist of the sale of telecom services and the sale of equipment (wireless
handset, modem, etc.). Some communications companies also charge customers upfront activation fees. Under
current US GAAP, communications companies are required to apply a contingent revenue cap, while most
communications companies reporting under IFRS use either a residual method or apply a contingent revenue cap. The
contingent revenue cap limits the amount of consideration allocated to the delivered item (e.g., a handset) to the
amount that is not contingent on the delivery of additional items (e.g., the telecom services).
Under the new guidance, the transaction price in an arrangement must be allocated to each separate performance
obligation based on the relative standalone selling prices (SSP) of the goods or services being provided to the customer.
The allocation could be affected by variable consideration or discounts.
The best evidence of SSP is the price a company charges for that good or service when the company sells it separately in
similar circumstances to similar customers. However, goods or services are not always sold separately. The SSP needs
to be estimated or derived by other means if the good or service is not sold separately.
Final guidance Current US GAAP Current IFRS

The transaction price is allocated to Arrangement consideration is Revenue is measured at the fair
separate performance obligations in allocated to each unit of accounting value of the consideration received
a contract based on relative based on the relative selling price. or receivable. Fair value is the
standalone selling prices, as amount for which an asset or
determined at contract inception. Third-party evidence (TPE) of fair liability could be exchanged or
value is used to separate settled, between knowledgeable,
Companies will need to estimate the deliverables when vendor specific
willing parties in an arm's length
selling price if a standalone selling objective evidence (VSOE) of fair
value is not available. Best estimate transaction.
price is not observable. In doing so,
it should maximize the use of of selling price is used if neither IFRS does not mandate how
observable inputs. VSOE nor TPE exist. The term consideration is allocated and
"selling price" indicates that the permits the use of the residual
Possible estimation methods include: allocation of revenue is based on method, in which the consideration
 Expected cost plus reasonable entity-specific assumptions, rather for the undelivered element of the
than assumptions of a marketplace arrangement (normally service or
margin
participant. The residual or reverse tariff) is deferred until the service is
 Assessment of market price for residual methods are not allowed.
similar goods or services provided, when this reflects the
 Residual approach (if certain When performing the allocation economics of the transaction. Any
criteria are met) using the relative selling price revenue allocated to the delivered
method, the amount of items is recognized at the point of
A residual approach may be used to consideration allocated to a sale.
estimate the standalone selling price delivered item is limited to the
when the selling price of a good or consideration received that is not
service is highly variable or contingent upon the delivery of
uncertain. A selling price is highly additional goods or services. This
variable when a company sells the limitation is known as the
same good or service to different “contingent revenue cap.”
customers (at or near the same
time) for a broad range of amounts. Communications companies
typically account for the sale of the
equipment and telecom services in a
bundled offering as separate units of
account, with telecom services
collectively accounted for as a single
unit of account, as they are generally
delivered at the same time.

National Professional Services Group │ www.cfodirect.com In depth 12

 Final guidance Current US GAAP Current IFRS

A selling price is uncertain when a The arrangement consideration that

company has not yet established a can be allocated to the equipment is
price for a good or service and the generally limited to cash received
good or service has not previously because future cash receipts are
been sold. contingent upon the company
providing telecom services.
Therefore, when the handset is
transferred, revenue is recognized at
the amount that the customer paid
for the handset at contract inception.
The remaining contractual payments
are recognized subsequently as the
company provides network services
to the customer.

Potential impact - both US GAAP and IFRS

The revenue guidance's allocation requirements will have significant implications to the telecom industry. It requires
the transaction price be allocated to each separate performance obligation in proportion to the standalone selling
price of the good or service. It therefore eliminates the contingent revenue cap. The revenue guidance also
substantially reduces the circumstances when a residual approach can be applied under IFRS and permits it in
certain circumstances under US GAAP. The residual approach is different from the residual method that is used
today. Applying today’s residual method results in the entire discount in an arrangement being allocated to the first
item delivered under the contract. This will not be the case under the new guidance.
Judgment will be needed to determine the standalone selling price for each separate performance obligation (e.g.,
services, equipment, and material rights) in a customer contract. There is good visibility into the pricing of
communications equipment and the associated telecom service in some markets. However, in many markets,
communications companies charge customers little, if anything, for the equipment, and only sell equipment bundled
with the telecom services. If communications companies do not separately sell equipment, management may have to
use various estimation methods, including, but not limited to a market assessment approach or a cost plus margin
approach.
Determining the standalone selling price of certain services may also present challenges. Historically, there was a
reasonable level of consistency in the amounts charged for bundled services within operators and between operators.
Today, there is increasing variability in the amounts charged for equivalent bundles of services. For example, the
amount charged for services can vary depending on the number and mix of devices chosen by the customer, including
“SIM-only” deals in which the monthly price for service is less when the customer does not take a subsidized device,
or multi-line plans.
The revenue guidance will likely require companies to allocate more of the transaction price to the equipment than
under the current guidance, and therefore, result in earlier recognition of revenue. Recognizing more revenue than
consideration received also results in the recognition of a contract asset, which will need to be monitored for
impairment. See chapter 4 of PwC’s Revenue guide for more information.
Companies will face practical challenges in allocating the transaction price for a large volume of customer contracts
with varying configurations of equipment and service plans. The revenue guidance permits a company to apply the
guidance to a portfolio of contracts (or performance obligations) with similar characteristics if it reasonably expects
that the effects on the company’s financial statements of doing so would not differ materially from the results of
applying the guidance to individual contracts (or performance obligations). The boards acknowledged in their Bases
for Conclusions that this approach may be particularly useful to companies in the telecommunications industry. The
boards also noted that companies should be able to take a “reasonable approach” to identify portfolios for applying
this guidance, as opposed to a quantitative evaluation. Companies choosing to apply a portfolio approach should
consider the extent of variability in characteristics of portfolio groupings not only upon adoption, but also on an
ongoing basis. Companies should consider whether they need to modify existing systems or develop new systems to
gather information on customer contracts and to perform the required allocations of the transaction price between
separate performance obligations.

National Professional Services Group │ www.cfodirect.com In depth 13

Example 4-1 − Allocating the transaction price
Facts: A wireless company enters into sales arrangements with two different customers: Customer A and Customer B.
Each customer purchases or receives the same handset and selects the same monthly service plan. The standalone
selling price for the handset is $300 (it is purchased wholesale by the wireless company for $290) and the standalone
selling price of the telecom service plan is $40 per month.
Customer A purchases the handset for $300 and enters into a cancelable contract to receive telecom services for $40
per month.
Customer B enters into a 24-month service contract for $40 per month and receives a discounted handset for $50.

In summary: Customer A Customer B

Standalone selling price of handset $ 300 $ 300
Standalone selling price of services 40 960 ($40 x 24 months)
Total $ 340 $1,260
Cost of equipment $ 290 $ 290

Customer A transaction price $ 340 ($300 handset + $40 for one month of service)
Customer B transaction price $ 1,010 ($960 services + $50 for handset)
How should the transaction price be allocated to the performance obligations in the contracts with Customer A and B?
Analysis: The company needs to identify the separate performance obligations within the customer contracts. In this
example, the sales of telecom services and handsets are separate performance obligations because they are distinct
goods and services. Revenue is recognized when a promised good or service is transferred to the customer and the
customer obtains control of that good or service. Revenue is recognized for the sale of the handset at delivery, when
the communications company transfers control of the handset to the customer. Service revenue is recognized over
the contract service period.
For simplicity, the example assumes the potential financing impact of transferring the handset to the customer at the
initiation of the contract and collecting the customer's monthly payment over the 24-month contract period is
insignificant.
The tables below compare the effect of applying the allocation guidance in the revenue guidance with that of the
current guidance.

Current guidance—existing US GAAP guidance (contingent revenue cap)

Customer Day 1 Month 1 Month 2 Month 3
Customer A (a) (a)
$300 $40 $40 $40
(b)
Customer B $50 $40 $40 $40
Total $350 $80 $80 $80
(a) Recognize revenue for the sale of the handset ($300) and service ($40) based on the relative standalone selling prices.
(b) Recognize revenue for the amount of consideration received ($50) that is not contingent upon the delivery of additional items
(telecom services).

Current guidance—existing IFRS guidance (residual method)

Customer Day 1 Month 1 Month 2 Month 3
(a)
Customer A $300 $40 $40 $40
(b)
Customer B $50 $40 $40 $40
Total $350 $80 $80 $80
(a) Under the residual method, the amount of consideration allocated to the delivered item ($300) equals the total arrangement
consideration ($340) less the aggregate fair value of the undelivered item(s) ($40).
(b) Under the residual method, the amount of consideration allocated to the delivered item ($50) equals the total arrangement
consideration ($1,010) less the aggregate fair value of the undelivered item(s) ($960).

National Professional Services Group │ www.cfodirect.com In depth 14

New guidance—revenue recognized

Customer Day 1 Month 1 Month 2 Month 3

(a) (a)
Customer A $300 $40 $40 $40
(b) (c) (c)
Customer B $240 $32 $32 $32(c)
Total $540 $72 $72 $72
(a) Handset: $300 = ($300 / $340) x $340; One month of service $40 = ($40 / $340) x $340.
(b) Handset: $240 = ($300 / $1,260) x $1,010.
(c) Monthly service revenue: $32 = ($960 / $1,260) x $1,010 = $770 / 24 months.

In this example, the communications company recognizes $190 more in equipment revenue compared to current US
GAAP and IFRS. The communications company will also recognize a net contract asset of $190 under the revenue
guidance ($540 less $350 cash received), which should be amortized over the period that the related goods and
services are transferred to the customers. Management needs to monitor the contract asset for impairment each
reporting period. For example, the communications company may have to impair the asset if Customer B terminates
the contract before the end of two years, and it is unable to collect an early termination fee in excess of the contract
asset balance.
This simple example does not address other complexities that companies will have to consider. For example, the
company may charge an activation fee. The guidance states that activation services are an example of nonrefundable
upfront fees that do not result in the transfer of a good or service to the customer. Rather, the activation fee is an
advance payment for future communications services. Additionally, if the company grants the customer an option to
renew that provides a material right (e.g., an option to renew without requiring the customer to pay an additional
activation fee), the amount allocated to the material right would likely be recognized over the customer relationship
period.

(2) Identify (3) Determine (4) Allocate (5)

(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

5. Recognize revenue
A performance obligation is satisfied and revenue is recognized when control of the promised good or service is
transferred to the customer. A customer obtains control of a good or service if it has the ability to (1) direct its use and
(2) obtain substantially all of the remaining benefits from it. Directing the use of an asset refers to a customer’s right
to deploy the asset, allow another entity to deploy it, or restrict another company from using it.
Management should evaluate transfer of control primarily from the customer’s perspective, which reduces the risk
that revenue is recognized for activities that do not transfer control of a good or service to the customer.

National Professional Services Group │ www.cfodirect.com In depth 15

 (2) Identify (3) Determine (4) Allocate (5)
(1) Identify Other
performance transaction transaction Recognize
the contract considerations
obligations price price revenue

Other considerations

Costs to obtain a contract

Communications companies often pay commissions to internal sales agents and third-party dealers for connecting
new customers to their networks. Commissions paid for connecting new customers can vary depending on the length
of the service contract and the type of service plan, including any enhanced services sold. The longer the service
contract and the greater the monthly proceeds (e.g., service plans with relatively high or unlimited minutes of use),
the greater the commission costs.
Some companies that report under IFRS capitalize customer acquisition costs as an intangible asset, while other
communications companies, including most US communications companies, expense these costs as incurred. The
new guidance requires communications companies to capitalize incremental costs of obtaining a contract if the costs
are expected to be recovered. As a practical expedient, companies are permitted to expense these costs when incurred
if the amortization period would be less than one year.
Some wireless companies also provide free or heavily-discounted handsets to attract customers. Incentive programs
will not be accounted for as costs to obtain a contract under the revenue guidance. A handset is a separate
performance obligation, and the cost of the handset is recognized as an expense when the performance obligation is
satisfied (i.e., when the handset is delivered to the customer). Communications companies offer a wide range of
discounts and subsidies, using both their own and third-party dealer networks, and will have to assess the accounting
for each different type of arrangement.
Final guidance Current US GAAP Current IFRS

Companies recognize as an asset the US GAAP allows incremental direct Given the lack of definitive guidance
incremental costs of obtaining a acquisition costs to be deferred and under current IFRS, costs of
contract with a customer if they charged to expense in proportion to acquiring customer contracts are
expect to recover them. the revenue recognized. Other costs— capitalized by some communications
such as advertising expenses and companies as intangible assets and
The incremental costs of obtaining a
costs associated with the negotiation amortized over the customer contract
contract are those costs that a
of a contract that is not period, while other communications
company would not have incurred if
consummated—are charged to companies expense the costs when
the contract had not been obtained.
expense as incurred. incurred.
All other costs incurred regardless of
whether a contract was obtained are
recognized as an expense.
The revenue standards permit
companies to expense incremental
costs of obtaining a contract when
incurred if the amortization period
would be one year or less, as a
practical expedient.
Contract costs recognized as an asset
are amortized on a systematic basis
consistent with the pattern of
transfer of the goods or services to
which the asset relates. In some
cases, the asset might relate to goods
or services to be provided in future

National Professional Services Group │ www.cfodirect.com In depth 16

 Final guidance Current US GAAP Current IFRS
anticipated contracts (e.g., service to
be provided to a customer in the
future if the customer chooses to
renew an existing contract).
An impairment loss is recognized if
the carrying amount of an asset
exceeds:
1) the amount of consideration to
which a company expects to be
entitled in exchange for the
goods or services; less
2) the remaining costs that relate
directly to providing those goods
or services.
Under IFRS, companies may reverse
impairments when costs become
recoverable; however, the reversal is
limited to an amount that does not
result in the carrying amount of the
capitalized acquisition cost
exceeding the depreciated historical
cost. Companies are not permitted
to reverse impairments under US
GAAP.

Potential impact - both US GAAP and IFRS

The revenue standards will have a significant impact on companies that do not currently capitalize costs to obtain
contracts. Companies will likely have to develop systems, processes, and controls to identify and track incremental
contract acquisition costs and to subsequently monitor the capitalized costs for impairment.
A communications company will capitalize costs to obtain a contract as an asset if they are recoverable, and amortize
them consistent with the pattern of when goods or services to which the asset relates are transferred to the customer.
Companies will need to use judgment to determine the amortization period as the revenue standards require
companies to consider periods beyond the initial contract period (e.g., the renewal of existing contracts and
anticipated contracts). Therefore, the asset recognized from the cost to obtain the initial contract may be amortized
over a period longer than the initial contract term, such as over the average customer life, which is based on the
period of expected future cash flows to be received from the customer. However, there may be circumstances when
the asset should be amortized over a period shorter than the average customer life, such as when the lifecycle of the
goods or services to which the asset relates is shorter than the average customer life.
Amortizing an asset over a longer period than the initial contract would not be appropriate when a company pays a
commission on a contract renewal that is commensurate with the commission paid on the initial contract. The FASB
staff clarified that the level of effort to obtain a contract or renewal should not be a factor in determining whether the
commission paid on a contract renewal is commensurate with the initial commission. However, it may be reasonable
for a company to conclude that a renewal commission is commensurate with an initial commission if the two
commissions are reasonably proportionate to the respective contract value.
A company also has to develop a systematic approach, considering the number of customers and contract offerings, to
test assets relating to contract acquisition costs for impairment (e.g., a portfolio approach) when the estimated
amount of consideration to be received from customers might be less than the outstanding contract asset.
Spreading these costs over the amortization period could significantly affect operating margins compared to the
current accounting model. Wireless companies, for example, often incur significant contract acquisition costs during
the holiday seasons as they sign up customers through significant promotional offers.

National Professional Services Group │ www.cfodirect.com In depth 17

Example 6-1 − Contract acquisition costs, practical expedient
Facts: A communications company enters into a contract with a customer to provide telecom services. The transaction
does not include the sale of a device. The company pays a third-party dealer a commission to connect the customer to its
network. The customer signs an enforceable contract to receive telecom services for one year.
How should the communications company account for the third-party dealer commission?
Analysis: The company identifies incremental contract acquisition costs and capitalize those costs that are
recoverable.
The communications company may use the practical expedient and expense contract acquisition costs when incurred
if the amortization period would be one year or less. In this case, the company determines that the amortization
period is one year because no renewal is expected.

Example 6-2 − Contract acquisition costs, identifying incremental costs

Facts: A communications company sells wireless telecom service subscriptions (service plans) from a retail store in a
shopping mall. Sales agents employed at the retail store sign 120 customers to two-year telecom service contracts in a
particular month. The monthly rent for the store is $5,000. The communications company pays the sales agents’
commissions for the sale of telecom service contracts, in addition to their normal wages. Wages paid to the sales
agents during the month are $12,000 and commissions are $24,000.
The communications company also offers customers free, or significantly subsidized, handsets to create an incentive
for them to enter into two-year contracts. The net subsidy (loss) on handsets sold to the 120 customers is $36,000
(measured on the basis of the cost of the handset compared to advertised price, and not as specified in the revenue
standards). The retail store also incurs $2,000 in costs during the month to advertise in the local journals.
How much should the communications company recognize as a contract acquisition asset?
Analysis: The communications company is required to capitalize incremental costs to acquire contracts, which are
those costs it would not have incurred unless it acquired the contracts. The practical expedient is not available as the
amortization period is greater than a year. In this example, the only costs that qualify as incremental contract
acquisition costs are the $24,000 commissions paid to the sales agents.
All other costs are expensed when incurred. The store rent of $5,000, the sales agents' wages of $12,000, and
advertising expenses of $2,000 are all expenses the communications company would have incurred regardless of
acquiring the customer contracts.
Although the company might internally regard the handset losses as marketing incentives or incidental goods or
services, the sale of the handsets are performance obligations, and the costs of the handsets are recognized (as cost of
goods sold) as the goods are delivered.
Companies should be aware that subtle differences in arrangements could have a substantial impact on the
accounting for subsidies and discounts under the revenue guidance. For example, another communications company
might pay third- party dealers greater commissions to allow those dealers to offer similar incentives (i.e., offer
significantly-discounted handsets at a dealer's discretion). Payments to dealers that are in-substance commissions
should be treated as contract acquisition costs.

Example 6-3 − Contract acquisition costs, amortization period for prepaid services
Facts: A communications company sells wireless services to a customer under a prepaid, unlimited monthly plan.
The communications company pays commissions to sales agents when they activate a customer on a prepaid
wireless service plan. While the stated contract term is one month, the communications company expects the
customer, based on the customer's demographics (e.g., geography, type of plan, and age), to renew for six additional
months.
What period should the communications company use to amortize the contract acquisition costs (i.e., the
commission costs)?
Analysis: The company could use the practical expedient to expense the costs as incurred. If the company chooses to
capitalize the costs, it will use judgment to determine an amortization period that represents the period during which
the company transfers the telecom services. In this example, the company determines an amortization period of
seven months based on anticipated renewals.

National Professional Services Group │ www.cfodirect.com In depth 18

Fulfillment costs
Some communications companies defer the cost of activating customers to the network (i.e., labor and equipment
cost) under US GAAP. These costs can be material and are typically deferred up to the amount of related activation
revenue and amortized on a straight-line basis consistent with the related revenues.
Under IFRS, companies that provide long-term network outsourcing services sometimes defer set-up costs because
they are necessary investments to support the ongoing delivery of the contract.
Costs to fulfill contracts are capitalized in accordance with other standards (e.g., inventory, property, plant and
equipment, or intangible assets) or, if not within the scope of other guidance and they meet specific requirements, are
capitalized under the revenue guidance. Companies need to review their cost capitalization policies to understand the
potential effect of these changes.
Final guidance Current US GAAP Current IFRS

Direct costs incurred to fulfill a Costs incurred to install services at the Costs incurred to install services at
contract are first assessed to origination of a customer contract are the origination of a customer
determine if they are within the either expensed as incurred or deferred contract are either expensed as
scope of other standards, in which and charged to expense in proportion to incurred or recognized as an asset
case the company accounts for the revenue recognized. and charged to expense in
them in accordance with those proportion to the revenue
In particular, direct, incremental, set-up
standards. recognized, depending on the
costs on long term network outsourcing
nature of the costs.
Costs that are not in the scope of contracts may be deferred by reference to
another standard are evaluated the FASB Conceptual Framework and In particular, direct, incremental,
under the revenue guidance. A analogy to ASC 310-20 and ASC 605-20- set-up costs on long term network
company recognizes an asset 25-4. outsourcing contracts may be
only if the costs: deferred if they are “costs that
In addition, many of the costs of
relate to future activity on the
 relate directly to a contract; connecting customers form part of the
contract.”
 generate or enhance resources operator’s network, and the costs are
that will be used in satisfying capitalized as property, plant and In addition, many of the costs of
future performance obligations equipment. connecting customers form part
(i.e., they relate to future of the operator’s network, and
performance); and the costs are capitalized as
 are expected to be recovered. property, plant and equipment.
These costs are then amortized as
control of the goods or services to
which the asset relates is
transferred to the customer.

Potential impact - both US GAAP and IFRS

Communications companies that currently expense all contract fulfillment costs as incurred might be affected by
the revenue standards since costs are required to be capitalized when the criteria are met. Fulfillment costs that are
likely to be in the scope of this guidance include, among others, set-up costs for service providers.

National Professional Services Group │ www.cfodirect.com In depth 19

 About PwC’s Technology, Media, and Telecommunications
(TMT) practice:
PwC’s TMT practice strives to help business leaders in the Technology, Media and Telecommunications industries manage
their complex businesses and capitalize on new windows of opportunity.

With offices in 157 countries and more than 223,000 people, we help organizations and individuals create the value they’re
looking for by delivering quality in assurance, tax, and advisory services. Visit our website at: www.pwc.com/us/tmt.

For more information about the TMT practice or PwC, please contact:

Thomas Tandetzki
Global Communications Leader
Email: thomas.tandetzki@de.pwc.com

Kevin Healy
US Technology, Media and Telecom Assurance Leader
Email: kevin.healy@pwc.com

To have a deeper discussion,

contact:

Ashley Wright Jason Waldie

Partner Partner
Email: ashley.j.wright@pwc.com Email: jason.waldie@pwc.com

Lindsey Morris Dominic Wong

Senior Manager Senior Manager
Email: lindsey.morris@pwc.com Email: dominic.s.wong@pwc.com

Michelle Dion
Senior Manager
Follow @CFOdirect on Twitter. Email: michelle.dion@pwc.com

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