2016 Global Communications GAAP Summit. Transition: getting it right in a changing environment

Transcription

1 2016 Transition: getting it right in a changing environment

2 Workshop 2: Implementation of IFRS 15 2

3 Implementing IFRS 15 (illustrative table exercise) Stakeholders: CFO Audit Committee Board CIO RemCo Investor relations Internal audit External audit Other assurance providers Regulator Systems integrator Competing projects TODAY Retrospective Cumulative catch up Finance: Lobbying and understanding Accounting impact assessment Business requirement and user cases Disclosure requirements ICFR risk assessment Update Risk and Control Matrices Reporting Design and implement new financial reporting controls Annual Report/20-F Technology: Billing system etc assessment Identify impacted systems IT Vendor selection Design, implement and test User testing Design, build and implement fixes IT Controls design and implemented Parallel and dual reporting Controls testing Budget/Planning: Marketing: Understand requirements for MI 3 5 year budget/plan New product offerings / propositions Redefine KPIs Management information systems Review commission structures 3 5 year budget/plan Alignment to KPIs 3 5 year budget/plan Adoption of IFRS 16 Remuneration: Share option/ Rem plans Retail store incentives Share option/ Rem plans Share option/ Rem plans Investors: Qualitative Qualitative & Quantitative Full comparatives Key metrics Governance: Internal audit plan Subsidiary judgments Ongoing governance review: Audit Committee, Disclosure Committee, Steering Committee, Auditor, etc 3

4 What you said CFO s are the main project sponsor 1 2 Some projects (7%) have not yet started. 40% are planning on engaging with external stakeholders in the next 12 months Most projects are in the analyse and design phases 22% do not expect to need to communicate with external stakeholders 27% have identified contract modifications with a retrospective effect 31% are planning on using the full retrospective approach for transition 4

5 Technical update what has happened since last year? 5

6 Technical clarifications Topic FASB IASB Convergence Identifying Performance Obligations Licenses Principal vs agent Identifying Performance Obligations and Licensing Issued April 2016 Principal vs Agent Considerations Issued March 2016 Clarifications to IFRS 15 Issued April 2016 Partially Partially Same Transition Partially Collectability Narrow-Scope None None Improvements and Presentation of sales Practical Expedients None None taxes Issued May 2016 Non-cash consideration None None 6

7 Polling question Which topics would you like to discuss? 1. Principal versus agent 2. Fixed enterprise contracts 3. Costs to acquire and fulfil contracts 4. A view from your peers practical implementation 5. Determining SSP and allocating discounts 6. Disclosures and reporting 7

8 Principal versus agent 8

9 Fundamental change IAS 18 IE 21 IFRS 15.B35 Risk and reward approach Control concept An entity is acting as a principal when it has exposure to the significant risks and rewards associated with the sale of goods or the rendering of services. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. IFRS 15 states that having risk and rewards of ownership is one indicator of control 9

10 What the rules say? Responsibility The entity is primarily responsible for fulfilling the promise to provide the specified good/ service, including the responsibility for acceptability of the good/service. Inventory risk The entity has inventory risk before the goods/service have been transferred to a customer or after transfer of control to the customer. Control concept Indicators of IFRS 15.B37 a) c) Indicators for being a principal No specific ranking (IFRS15:B37a) b) d) Discretion The entity has discretion in establishing the price for the good/service, indicating that the entity has the ability to direct the use of that good/service and can obtain substantially all of the remaining benefits. Other facts and circumstances Specific scenarios will required judgments based on the facts and circumstances of the transaction 10

11 Q: Bundled premium content Customer purchases a monthly service bundle including music streaming from FiTel. The music streaming service cannot be purchased separately from FiTel. FiTel commits to a minimum guarantee payment to the music streaming provider of 1m per annum. FiTel has discretion in establishing the price for the bundle. FiTel is the primary point of contact for the customer if there are service issues. Is FiTel the principal or agent? 1. Principal 2. Agent 3. Not sure 11

12 Proposed solution: Bundled premium content In this example, which of the indicators stated in IFRS 15.B37 are met: Responsibility? Inventory risk Discretion FiTel determines the composition of services included in its bundles, including the provision of music FiTel is primarily responsible for the customer care The minimum guarantee to the content provider could be viewed as inventory risk FiTel has discretion for setting the price of the bundle FiTel is a principal for provision of the bundle of services including the content 12

13 Q: TV content A FiTel customer purchases a monthly TV subscription. The customer is billed by FiTel. FiTel purchases the TV content from the third party and resells it to its customers, i.e. FiTel does not produce or modify the content. The customer agrees to the third party s terms and conditions in order to be able to access the TV content. The pricing and branding is set by the third party. Is FiTel the principal or agent? 1. Principal 2. Agent 3. Not sure 13

14 Proposed solution: TV content In this example, which of the indicators stated in IFRS 15.B37 are met: x Responsibility? Inventory risk x Discretion The customer enters into a contract with the third party agreeing to its general terms and conditions, not FiTel's FiTel does not carry an inventory of the TV content The third party sets the price for the TV content FiTel is an agent for provision of TV content, reselling it on behalf of the third party 14

15 Other considerations Minimum guarantee payments What if there was no minimum guarantee payment? What if the service is successful and the minimum guarantee payment ceases to have substance? Is inventory risk relevant to digital business models? Signing up to third party platform Does the fact a customer may have to sign up to third party platform to access the content change who has responsibility? If the content is third party branded, is the Telco always an agent? 15

16 Q: Dealer reselling handset purchased from operator Dealer purchases handsets from FiTel. Subsequently, the dealer bundles these handsets with FiTel s service plans and sells the bundle to FiTel end-customers. Dealer can resell the handsets to non FiTel customers. FiTel recommends a certain handset price to the dealer. Dealers need to price match and so use the recommended price point. Is the dealer acting as a principal or agent for the supply of the handsets? 1. Yes 2. No 3. Not sure 16

17 Dealer reselling handsets purchased from operator Momentary transfer of control Dealer is principal if. Dealer is agent if. Does the dealer control the handsets before the handset is transferred to the customer? If yes => the dealer is principal If no => more likely that the dealer is agent Other factors Dealer can sell handsets purchased from FiTel to non-fitel customers Dealer can set the selling price of handsets Dealer does not have the option to return unsold handsets to FiTel or be compensated for any loss Cannot sell handsets to non- FiTel customers, or minimal volume Selling price is set by FiTel Dealer can return unsold handsets to FiTel 17

18 Fixed enterprise contracts 18

19 Typical stages of an enterprise contract These contracts usually include a combination of some, or all, of the following elements: Contract start Modifications? Bid Start-up / transition Design Build Operate Modifica tions? Time Bid costs should be expensed as incurred Are set up and transformation activities separate POs? Costs to fulfil, or separate POs MFN / benchmarking clauses 19

20 Q: Are set-up and transition activities distinct? FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and security), Cloud storage services and software patching to Corp. In order to transition the services FiTel must (i) novate existing supplier contracts, (ii) perform an inventory of the existing IT estate, (iii) work with in-house network design team on the optimal network configuration, and (iv) set up its billing capabilities in the 100 countries where Corp operates which includes billing in 18 currencies. Corp agrees to pay 20m up-front with remaining payments linked with service terms or event based (e.g. as software patches are delivered). Are the set-up and transition activities distinct? 1. Yes 2. No 3. Design is distinct 4. Not sure 20

21 Proposed solution: Set-up and transition activities In this example, how many of the indicators of IFRS 15:27 are met? x Separate customer benefit AND x Separate in context of contract The set-up and transition activities are necessary for FiTel to provide the services and do not provide a benefit to Corp The activities were undertaken for FiTel s benefit so it can deliver the services requested by Corp The set-up and transition activities are not distinct performance obligations 21

22 Q: How many performance obligations are there? FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and security), Cloud storage services and software patching to Corp. In order to transition the services FiTel must (i) novate existing supplier contracts, (ii) perform an inventory of the existing IT estate, (iii) work with in-house network design team on the optimal network configuration, and (iv) set up its billing capabilities in the 100 countries where Corp operates which includes billing in 18 currencies. How many distinct POs have you identified? Not sure 22

23 Proposed solution: performance obligations In this example, how many of the indicators of IFRS 15:27 are met? Separate customer benefit AND Separate in context of contract Corp receives a separate benefit from each of the different services being provided Services are distinct from one another in the contract Each of the services being offered by FiTel are available on a standalone basis to end customers. In total there are 7. 23

24 Q: How to determine the transaction price? FiTel agrees to provide WAN, LAN, remote access, data centre (hosting and security), Cloud storage services and software patching to Corp. Corp agrees to pay 20m up-front as a contribution towards the transition activities noted earlier and 100m per annum for 10 years for the services. Corp has the option to request a pricing benchmark under the MFN clause every 3 years in respect of the WAN and LAN services. Corp is expected to exercise the option which could change (expected to reduce) pricing prospectively. How should FiTel determine the transaction price? 1. Current pricing in the contract ( 100m*10 years + 20m upfront) 2. Estimate the outcome of the benchmarking m (3 years * 100m + 20m) 4. Material right 5. None of the above 24

25 Proposed solution: Transaction price Contract x Material right x 4 modification Variable consideration The MFN clause only requires benchmarking to rates already available to comparable customers MFN clauses are included in the contract from inception Consideration can vary because of MFN clause Series provision (IFRS15:22b) can be applied Benchmarked rate applied from date of change (IFRS15:84,85,73) If the MFN clause is exercised, any change will be applied prospectively to the WAN and LAN services. 25

26 Costs to acquire and fulfil contracts 26

27 The results are in Which types of costs of acquiring and executing a contract does your company intend to capitalise? 93% 52% 52% Third party commissions Internal commissions Installation costs 27

28 What does IFRS 15 say? Definition Capitalisation Amortisation Practical expedient Disclosures Costs that directly relate to either obtaining (e.g. sales commissions) or fulfilling a contract (e.g. direct labour) and that would not have incurred if the contract had not been obtained (IFRS 15.92). Capitalisation as a separate asset, if cost recovery is expected. Capitali-sation applies separately from presentation of net contract position. Amortisation over economic lifetime => usually average customer retention period, provided that no similar costs arise when contract is prolonged. Contracts with duration <12 months (IFRS 15.94) => Expense instead of capitalisation of costs at contract inception. Additional quantitative and qualitative information. An entity shall recognise as an asset the incremental costs of acquiring a contract with a customer if the entity expects to recover those costs (IFRS 15.91) 28

29 The results are in Will you take the practical expedient to expense costs for a contract of less than 12 months? 42% Expensing costs < 12 months 29

30 Q: Costs to acquire a contract FiTel engages dealers to sell service contracts on their behalf. FiTel pays different sales commissions to dealers for acquiring new customers and has other costs that relate to acquisitions: a) Volume commission of 400 for every 100 acquisitions as follows: 0-99 acq. = acq. = acq. = 800 b) Connection commission of 20 per acquisition c) Joint marketing support costs Which of the costs qualify as costs to acquire a contract? 1. Volume commission 2. Connection commission 3. Volume and connection commission 4. All of the above 30

31 Proposed solution: Costs to acquire a contract Cost Proposed solution x Volume commission Connection commission Joint marketing support Any payment is directly attributable and incremental to acquiring the customer contract. The amount for the individual contract should be estimated based on the expected outcome. Payment by FiTel for marketing services provided by the dealer therefore not directly attributable to acquiring the customer contract. 31

32 Q: Can set-up and transition costs be capitalised as costs to fulfil a contract? FiTel agrees to provide various services to Corp. In order to transition the services FiTel must (i) novate existing supplier contracts, (ii) perform an inventory of the existing IT estate, (iii) work with in-house network design team on the optimal network configuration, and (iv) set up its billing capabilities in the 100 countries where Corp operates which includes billing in 18 currencies. Corp agrees to pay 20m up-front, remaining payments are linked with service terms or event based (e.g. software patch delivered). What costs to fulfil the contract have been incurred by FiTel? 1. All of the costs above 2. None of the above - setup and transition is a distinct PO for which FiTel has been paid 20m 3. Novating contracts and setting up billing sound like administrative tasks that should be expensed 4. Not sure 32

33 Proposed solution: Capitalisation of set-up and transition costs Technical guidance Costs relate directly to a contract Proposed solution All activities relate directly to the contract Costs generate or enhance resources The activities enable FiTel to effectively and economically deliver the services Costs are expected to be recovered The costs will be recovered over the life of the contract 33

34 Other considerations? Determination of amortisation period Governance processes: To ensure only appropriate costs are capitalised To understand bid models / investment cases To set and monitor minimum thresholds Contract by contract or portfolio: Costs to acquire Costs to fulfil 34

35 A view from your peers practical implementation 35

36 How are you approaching the implementation? How do you approach IFRS 15 implementation? What are the key challenges in your opinion? What are the critical judgements / decisions you have made to simplify the processes for implementation? 36

37 SSP and allocating discounts 37

38 The results are in How will you determine the standalone selling price of equipment in a bundle? 50% 41% 9% Market assessment Cost plus margin Residual approach 38

39 What is the cost for equipment? Initial cost from manufacturer/ supplier Rebates Volume discounts NRV adjustments Currency arrangements Are there direct and indirect costs involved? Are there research and development costs that are expected to be recovered through sales? Marketing and other contributions? What is the timing between purchasing and selling the devices and confirming the volumes? How variable are the amounts? What conditions are attached to obtaining the rebates? Do the operating units have full visibility or is purchasing centralised? Are the terms and conditions of volume discounts properly understood? How good is the business at estimating volume discounts? How have they been tracked and allocated for management reporting purposes etc? Is this a reliable basis? How frequently are these made? What if the equipment was not historically treated as a sale is there a mechanism to track NRV? Should NRV be taken into account? Centrally procured in US$ Sold to the operating unit in Euro Sold to customers in Sterling 39

40 The results are in How will you determine the standalone selling price of services? 61% 43% 8% 4% Market assessment Cost plus margin Not yet decided Residual approach * Responses add to more than 100% because multiple approaches will be applied 40

41 What is the cost for service? Voice Data/broad band Interconnect and roaming Professional services TV Termination mix Regulatory impacts (MTR/FTR etc) Fully allocated or marginal costs Network costs Depreciation On/offnet and leased line costs Dedicated versus shared network assets Data used for product profitability or regulatory reporting Transfer pricing studies Termination mix Regulatory impacts (EU roaming, etc) Data used for product profitability or regulatory reporting Transfer pricing studies Labour costs director/ indirect/ overhead allocation Costs capitalised Outsourced / consultants costs Transfer pricing studies Content costs Broadcast Video on demand Maintenance Data used for product profitability or regulatory reporting Transfer pricing studies 41

42 The results are in What judgements have you taken in deciding how to allocate discounts? None purely mathematical Allocation of discounts to a single PO Hardware Determining costs and variable consideration Connect ion is not a PO Consistency Materiality Two step approach when (multiple) goods and services are being offered in a single bundle 42

43 Disclosure and reporting 43

44 The results are in Which of the following have you determined to be distinct performance obligations? PO % Fixed voice 37% Fixed broadband 33% TV and content 48% SMS 19% Mobile data 33% Connection fee 30% Installation 33% Hosting 46% WAN/LAN 37% DCO 19% Not yet decided Service is service Some installation is distinct, while others are not Concurrent services will not be treated as multiple POs Connection is not a PO Hardware 44

45 The results are in In the financial statements, do you expect to separately disclose revenue from each distinct performance obligation? 52% 48% Yes No Sale of goods and services Waiting for industry practice to develop Not yet decided Tariffs are integrated 45

46 Disclosures and reporting Performance obligations Transaction price that is allocated to the sum of outstanding performance obligations When revenue is expected from these amounts Capitalised contract costs 1 Closing balance of capitalised costs, divided into main categories Amount of depreciation and impairments Discussion of assumptions made regarding the determination of capitalised contract costs and the respective depreciation method 5 Breakdown of revenue Revenue is to be divided into appropriate categories Contracts with customers Revenue from contracts with customers separately from other revenues Impairment losses from receivables and contract assets from contracts with customers Net contract position 3 Significant management judgement Timing of satisfaction of performance obligations 2 Determination of the 4 transaction price and allocation to performance obligations Opening and closing balances of contract assets, contract liabilities as well as receivables Recognised revenue in the reporting period from contract liabilities that were accounted for at the beginning of the year Recognised revenue in the reporting period from already satisfied performance obligations 6 46

47 The results are in Having implemented the standard, does your company intend to use IFRS 15 for management / internal reporting? 45% 48% 7% Yes No Not decided 47

48 The results are in Do you intend to disclose your company s KPIs in line with IFRS 15? 59% 11% 30% IFRS 15 No change Not decided 48

49 Coffee break Next session: 11:00 12:30 Revenue recognition plenary (Pirouette room) 49

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