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O C TO B E R 3 1 , 2 0 1 8

Revenue Recognition Considerations for Telecommunications Companies

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PRESENTER

Paul Koster, CPA

Partnerpkoster@bkd.com

Agenda

• The Five-Step Process

• Contract Costs & Contract Modifications

• Transition Method

• Disclosures

• What to Do

• Telecommunications Impact & Examples

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Effective Dates• The new revenue standard defines a public entity as any of

these

A public business entity

A not-for-profit (NFP) that has issued—or is a conduit bond obligor for—securities traded, listed or quoted on an exchange or over-the-counter market

An employee benefit plan that files or furnishes financial statements to the U.S. Securities and Exchange Commission (SEC)

Effective Dates

ASU 2014-09

Revenue Recognition

Public EntitiesAnnual & interim reporting periods beginning after

December 15, 2017

All Others

Annual reporting periods beginning

after December 15, 2018

Five-Step Model

Step 1• Identify contract(s) with customer

Step 2• Identify the performance obligations

Step 3• Determine the transaction price

Step 4• Allocate transaction price to performance

obligations

Step 5• Recognize revenue when (or as) performance

obligation is satisfied

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Step 1 – Identify Contract(s) with Customer• Contract = “agreement between two or more parties that

creates enforceable rights & obligations” & meets the following criteria

Commercial substance

Approval & commitment by all parties

Identifiable rights, obligations & payment terms

Collectibility is probable

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4: Allocate

Transaction Price

Step 5: Recognize Revenue

Step 1 – Identify Contract(s) with Customer

• May be formal & written

• May be informal & only exist for a moment

• Barring credit quality issues in client base, this should be straight forward

• Portfolio method available, but can be tricky with multiple performance obligations

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Step 2 – Identify Performance Obligations• Performance obligation

Promise to transfer distinct goods/services to customer

Can be explicitly identified in contract or implied by customary business practices

One contract could equal one or many performance obligations

Significant judgment may be required

• ASU 2016-10 permits entities to disregard promises that are deemed to be immaterial in the context of the contract

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4: Allocate

Transaction Price

Step 5: Recognize Revenue

Step 2 – Identify Performance Obligations

• Separate performance obligations should be identified if goods or services meet both of the following

Customer can benefit from good/service on its own or with other readily available resources

Distinct within context of contract, i.e., not highly dependent on, or highly interrelated with, other promised goods/services in contract

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Step 3 – Determine Transaction Price• Transaction price = amount of consideration entity

expects to be entitled to for providing services

• Additional considerations Variable consideration

Revenue constraint

Significant financing component

Noncash consideration

Consideration payable to a customer

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4:Allocate

Transaction Price

Step 5: Recognize Revenue

Step 3 – Determine Transaction Price

• Revenue from variable consideration is constrained unless

Entity has experience with similar contracts & is able to estimate cumulative amount of revenue

Based on experience, significant reversal of revenue previously recorded isn’t probable

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Step 4 – Allocate Transaction Price to Separate Performance Obligations• Allocate based on relative standalone selling prices of

separate performance obligations

Observable price when sold separately (best evidence); otherwise, use a reasonable estimate based on

• Adjusted market assessment

• Cost plus margin

• Residual value – only if highly variable or uncertain

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4:Allocate

Transaction Price

Step 5: Recognize Revenue

Step 4 – Allocate Transaction Price to Separate Performance Obligations• Discounts on bundled services are allocated on a pro-rata

basis of standalone selling price for all performance obligations unless observable evidence exists that discount applies to a specific performance obligation

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4:Allocate

Transaction Price

Step 5: Recognize Revenue

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Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied

• Revenue recognized when (or as) control of good/service is transferred to customer

• Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service

• Can be recognized over time or at a point in time, depending on how performance obligations are satisfied

Step 1: Identify

Contract(s) with Customer

Step 2: Identify

Performance Obligations

Step 3: Determine

Transaction Price

Step 4:Allocate

Transaction Price

Step 5:Recognize Revenue

Step 5 – Recognize Revenue When (or as) Performance Obligations Are Satisfied

• Control is transferred over time if any of the following criteria are met

Customer controls asset as it’s created/enhanced

Customer receives & consumes benefits of entity’s performance as entity performs

Entity’s performance doesn’t create asset with alternative use to entity & customer doesn’t control asset created; however, entity has right to payment for performance completed to date & expects to fulfill contract

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Step 5 – Recognize Revenue

Control transferred at a point in time

Present right to

paymentLegal title Physical

possession

Significant risk &

rewards of ownership

Customer acceptance

Contract Modifications

• Additional goods or services that are distinct & at standalone prices – separate contract

• Remaining services that are distinct, but not at standalone prices – replacement contract

• Remaining services not distinct – addendum to existing contract

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Contract Costs

• Incremental cost of obtaining a contract – capitalized if recoverable

Direct response advertising would be expensed

• Costs to fulfill contract – entity would recognize asset only if costs meet the following criteria

Relate directly to contract or specific anticipated contract, e.g., direct labor or materials

Generate or enhance resources that would be used to satisfy performance obligations in future

Disclosures

• Disaggregation of revenue

Point in time vs. over time

Qualitative information

• Information about performance obligations

• Significant payment terms

• Nature of goods & services

• Obligations for returns & refunds

• Types of warranties & related reliabilities

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Transition Method• Full retrospective Change everything

• Adjust all periods presented

• Opening retained earnings adjustment

• Practical expedients

Contracts that begin & end in same period – no adjustment

Completed contracts & variable consideration – can use the actual transaction price rather than estimating

Comparative periods before date of application – do not disclose transaction price allocated to remaining performance obligations

No retrospective restatement of contracts modified before beginning of earliest reporting period

Transition Method

• Modified retrospective

Change current year only

• Adjust the current year

• Cumulative effect recognized in retained earnings at the date of application

Additional disclosures

• Amount each financial statement line item is affected in the current year by the application of the new standard when compared to the old standard

• Reasons for any significant changes above

Can choose to apply to all contracts or only to contracts not completed as of the date of adoption

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What to Do• Remember even if nothing changes, this has to be proven through

documentation

Decide transition method

Determine revenue streams

Determine contracts in revenue streams & if they can be grouped together (portfolio method)

Analyze contracts to determine recognition under new standard

Gather information for disclosures

• Document decisions made, document significant judgments, document, document, document

Telecommunications Industry Impact

• Will vary greatly by company depending on volume of contracts, variety of terms & how frequent modifications are to the contracts

• May result in more revenue being allocated to equipment & earlier recognition of revenue, e.g., wireless entities with phone included/discounted with a contract

• Allocation of discounts/bundles could differ under new standard

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Example 1 – Bundled Services

• Company offers a bundle for $168 that includes phone, internet & video

• Standalone selling prices are

Local – $18

Video – $95

Internet – $70

• Company offers a discount on phone/internet bundles, but not on phone/video bundles

Example 1 – Bundled Services

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Example 2 – Bundled Services

• Company offers a bundle for $168 that includes phone, internet & video

• Standalone selling prices are

Local – $18

Video – $95

Internet – $70

• Company offers a discount on phone/internet bundles & on phone/video bundles

Example 2 – Bundled Services

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Example 3 – Wireless Phone Sold with a Contract

• Company sells phone for $200 as part of 24 month contract

• Monthly service plan of $120 per month

• Standalone selling prices are

Phone – $700

Monthly service – $110/month

Example 3 – Wireless Phone Sold with a Contract

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Example 3 – Wireless Phone Sold with a Contract

BKD Thoughtware®

• Webinars, seminars & articles

• Many are CPE-eligible

Revenue Recognition

Tax Implications for the New Revenue Rules

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BKD Hot Topics

• In ongoing efforts to offer valuable insights into accounting issues affecting organizations, BKD has created BKD Hot Topics, an online resource dedicated to helping you understand & address significant emerging accounting issues

• BKD Hot Topics offers insights & guidance, including transition & implementation considerations, on accounting topics such as

New revenue recognition standard

New lease standard

Current expected credit loss

Accounting alternatives available to private companies

BKD Hot Topics

• BKD Hot Topics offers articles & webinars from BKD’s accounting & audit professionals & connects you to valuable external resources – visitors will have easy access to BKD industry professionals; they’ll also be able to share resources through numerous social media outlets

• To learn more about how BKD advisors can help you understand & implement new & proposed accounting standards, visit BKD Hot Topics

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Questions?

CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org.

The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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CPE CREDIT

• CPE credit may be awarded upon verification of participant attendance

• For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com

Thank You!Paul Koster, CPA | pkoster@bkd.com