A significant accounting standard, “IFRS 15 – Revenue from Contracts with Customers,” is now in place, and will increase awareness of how lending money to sell devices is combined with selling communications services. Over time, it will likely accentuate the underlying growth and profitability prospects of the “core” communications services business.
Separation between the businesses of selling communications services and the “Bank of Telco” is to be welcomed
IFRS 15 is an accounting standard backed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) – respectively the two leading bodies for accounting guidance inside and outside the US and in most other countries. IFRS 15 takes effect for results periods starting after January 1, 2018. Individual “performance obligations” within customer contracts must be identified, the transaction price of each service determined and allocated, and revenue recognized (only) as these performance obligations are fulfilled.
The sale of devices by communications service providers (CSPs) has often been embedded within the price of postpaid contracts with customers. This represents a so-called “significant financing component” of the agreement. In effect, customers are paying a bundled fee for services that incorporates a fee for borrowing money from the “Bank of Telco” for the purchase of a communications handset, device, or set-top box. These two activities are now considered separately. Complex rules and principles apply if a contract is modified during its duration or is greater than one year or where there is uncertainty whether the customer may be able to pay. Offering customers options for free or discounted services may represent additional performance obligations.
A spotlight on the true nature of the underlying business transactions is likely, over time, to have a real-world impact on business models and strategy, as companies increasingly question the degree to which financial lending is a profitable part, or even a core part, of the CSP business model. As usage grows seemingly inexorably, service revenues from “airtime” (likely, in fact, to be a conglomeration of different communications services) ought to exhibit healthy growth. The new accounting standard also increases the profile of how much customers are charged once their initial contract period is over. Transparency, though, is to be welcomed.
Telecoms Industry and Operator Benchmarks by Key Financial Metrics: 3Q17, PT0016-000005 (January 2018)
World Telecoms Financial Benchmarks – Group Guidance Tracker 2017, PT0016-000004 (November 2017)
Upin Dattani, CFA, Principal Financial Analyst