Revenue recognition – Education session
The Boards hosted an education session in which members of the telecommunications industry presented concerns they have with the Board's proposals in the exposure draft and subsequent decisions to date. The Boards were also presented an opportunity to ask questions to the industry participants.
The presentations were made by representatives from Deutsche Telekom, TeliaSonera and Sprint Nextel (representing the US wireless industry also including AT&T and Verizon).
In the telecommunications industry, providers will often offer customers subsidised handsets when the customer enters into a minimum term service contract. These entities will typically incur losses on the handsets (the cost will exceed the price paid by the customer) in order to secure the periodic service contract of the customer as the profit margin in the service contract will more than recover the loss incurred on the handset.
Two of the presenting groups had fairly similar concerns with the proposals feeling they would (1) not accurately portray the economics of the transactions involved, (2) reduce comparability within the industry, (3) result in increased complexity because of the requirement to assess at the contract level, and (4) result in significant implementation costs. With respect to the economics not being accurately portrayed, they felt that the proposed model and its allocation of revenue to performance obligations based on the relative stand alone selling price would misrepresent revenue when the customer acquires the handset (when in fact the entity has incurred an economic loss at that point) and would then understate revenue throughout the contract life. However, the other participant's concerns on this issue were not as significant as their current revenue recognition approach aligns closer to the proposals in the exposure draft (they allocate the discounts offered in a bundling service arrangement based on their relative fair values).
All three participants had some concerns over the requirement to assess at the individual contract level. The one participant using an approach that aligns to the current proposal currently allocates any associated discount using a portfolio approach rather than a specific contract approach. The participants noted that contracts within the initial contract period are often modified. The participants also noted that their billing systems were tied into the accounting systems at an aggregated level and not at the individual contract level. As such, the costs to implement the proposals would result in significant systems overhauls.
No decisions were made during this session.