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The Bruce Column — Ringing the changes in telecoms accounting

Apr 26, 2012

Mobile phones are a boon to mankind. But when it comes to revenue recognition all manner of problems arise. Robert Bruce, our regular, resident columnist, looks at a way out of the current entanglements.

Change is rapid. But often the consequences and ramifications of change take much longer to be properly assimilated into business and management thinking. We are good at bright ideas. We are quite good at implementing them. But changing the way we see things afterwards is often the slowest part of the process. And this is why the issue of revenue recognition and the telecoms business has proved so intractable.

What are needed are principles which can cope with flexibility and still make sense. And that flexibility needs to reflect the nature of the industry. The ways in which mobile phone services are sold are in a constant state of flux. They change with astonishing rapidity on a day by day, week by week, basis. But the way that the business is accounted for may be hung up, if that is the right thing to say about a phone business, on the old model, the old way of seeing the business. Once upon a time you bought a land-line phone and paid for its use. The phone was a solid fixed bit of equipment which didn’t change from the day you bought it to the day, often many, many years later, when it got chucked out. Now the reasons for deciding on a particular mobile phone are based on the services it can provide and the way it can be used. They are just as much, if not more, about what you expect to be able to do with it. And that too changes on a rapid basis and, reflecting that, so do the phones. Most telecom companies say they are in the business of selling airtime, not phones.

And that is why at a basic level many telecoms companies believe the problem with the current revenue recognition proposals are that they stumble over the issue of the phone and not the service. They may source new customers directly by offering a free or subsidised handset in return for entering into a contract or through an agent who provides the handset and then charges the telecoms company for introducing the customer. Economically, the two arrangements are very similar but under the proposals in the exposure draft they would be accounted for very differently (through reallocation of subsequent billings to recognise revenue for providing the handset in the former case and by recognition of a contract cost asset in the latter). And even then the timing of profit recognition might be very different even where the two contracts would ultimately produce the same total profits.

And then there are the practical issues. Telecoms companies are driven by market forces and changing circumstances. The deals for customers change with astonishing rapidity to cope with this. Telecoms companies believe the handset is not the driver. It is simply the cost of getting the customer. And it is this maelstrom of ever-changing contracts which would make it so hard to apply the exposure draft in its current form. It would mean calculating everything contract by contract. But this is a business with millions of customers all doing different things at different times. Contracts are changed, upgrades are provided, usage patterns alter. Computer software can be written to cope with that. But that is expensive and it is not a quick solution, particularly in an industry which has grown by acquisition and where companies operate on a whole range of patched-together legacy systems.

During the current programmes of roundtables to discuss these issues it would make sense to recognise that the telephone business has changed significantly over the years. One idea aired in recent discussions that could help recognise the change in the business is to capitalise the handset discount given in a directly sourced customer contract as a cost of obtaining that contract. This would enable a consistent profile for revenue from calls, texts and data and consistent profit recognition between directly and indirectly sourced customers.

The whole revolution which mobile phones have brought about is an extraordinary one and an easy one. And it also goes to show that people are remarkably happy to embrace change if it brings them astonishing benefits. What this revenue recognition debate has done is highlight the need at times of such great change to recalibrate our own minds to properly understand the nature of a business and reflect the economics of the business in the way it is accounted for.

Robert Bruce
April 2012

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