Deloitte responds to revenue proposals
Revenue is a key number in virtually all financial statements. A converged standard addressing revenue recognition across all industries is something the IASB and FASB have been working towards for a number of years and is a major prize that now seems to be within their grasp. Any such standard needs to be based on clear principles, have sufficient flexibility to accommodate a diverse group of industries and business models and be practical to implement.
One area in which the exposure draft falls short of this objective is the telecoms industry. Telecoms companies 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). Deloitte response to the exposure draft highlights this issue and suggests that it could be addressed by adopting an approach similar to the ‘intangible asset model’ familiar from IFRIC 12 to directly sourced customer contracts. This, unlike the proposals in the exposure draft, would provide a consistent profile for revenue from calls, texts and data and consistent profit recognition between directly and indirectly sourced customers. Deloitte response also illustrates how, where a residual approach is used, revenue for calls and texts can be set at the price of the incremental calls and texts in that particular contract, with the handset being allocated the residual amount.
Were these suggestions and other clarifications suggested in the Deloitte comment letter adopted by the Boards, the overall goals of transparency and consistency will be achieved more fully than would be the case under the proposals in the exposure draft.