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Deloitte responds to revenue proposals

Published on: Mar 13, 2012

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 toward 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 (ED) falls short of this objective is the telecoms industry. Telecoms companies may source new customers directly by offering a free or subsidized 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 ED they would be accounted for very differently (through reallocation of subsequent billings to recognize revenue for providing the handset in the former case and by recognition of a contract cost asset in the latter). Deloitte's response to the ED highlights this issue and suggests that the issue could be addressed by adopting an approach similar to the "intangible asset model" (IFRIC 12) to directly sourced customer contracts. This, unlike the proposals in the ED, would provide (1) a consistent profile for revenue from calls, texts, and data and (2) a consistent profit recognition between directly and indirectly sourced customers. Deloitte's response also illustrates how, when 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.

Should these suggestions and other clarifications suggested in the Deloitte comment letter be 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 ED.

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