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Accounting rule changes mean telecoms firms have to invest in IT and find new ways of doing business
07 October 2014
Stand by for major changes in the rules about how operators account for revenue, says Holger Forst. That will affect not only the financial people in a company but the IT and marketing plans too. Co-sponsored feature: EY
Holger Forst: The telecoms industry lobbied hard against that
rule, with only very limited success. The new accounting
regulations might have an impact on the real
Telecoms operators worldwide need to be prepared for huge
changes in the way they recognise and account for revenue
— changes that will be implemented in the next two
Operators campaigned against the new standards, which will
require them to invest heavily in new IT systems and will
markedly affect the way they state their results. But they lost
the fight and they will have to implement the new rules from
That gives them a little over two years to take major decisions
before implementing and testing the new processes and systems
— and to prepare shareholders and bankers for the
inevitable changes in results.
"The new standard is not only an accounting exercise," says
Holger Forst, global telecommunications markets leader at EY.
"There will be an impact on profit and loss, on key performance
indicators, on systems. There is a need to get all stakeholders
on board. The implementation will be costly and time consuming.
It’s critical to kick the projects off now."
The people behind the new rules on revenue recognition are the
Financial Accounting Standards Board, whose primary purpose is
to establish and improve generally accepted accounting
principles in the US, and International Financial Reporting
Standards, which are applied globally.
But why make the changes? US generally accepted accounting
principles — or GAAP — were different from
IFRS in the way they recognised revenue. "The old international
standard was very general," says Forst. US GAAP appeared to
have a more detailed approach, but there was little consistency
in how different companies accounted for revenue.
"The organisations decided to produce a joint approach." A more
sophisticated standard would aid comparability and better
reflect companies’ actual performance.
"This affects all industries but telecoms was one of the
loudest in the lobby against the new standard."
That’s because telecoms operators — fixed
and mobile — have many historic practices which have
fitted comfortably with the old rules.
Device subsidies for example — and not just the
explicit offers in mobile phone shops which offer the latest
Apple iPhone or Samsung Galaxy for just a few dollars as part
of a long-term service contract. What about the wifi hub,
set-top box or personal video recorder that fixed broadband and
cable companies offer as temptations to their customers?
"The new rules will have a significant impact on a lot of
areas," says Forst. One of the major changes is that the rules
will "accelerate the time when you recognise revenue. The total
revenue across the period of a contract will not change, but
some companies will have to recognise revenue earlier than in
Under the rules, operators need to record a "fair value" for
all the components in a bundle. "In the old days, you could
provide a subsidised handset for a $1 as part of a 24-month
contract. The revenue that you needed to recognise was capped
at that $1."
But under the new rules, "if the fair value of that handset is
$300, you will need to recognise all that revenue the moment
the customer signs the contract that equals the relative fair
value of the handset in relation to the revenue for the entire
contract", says Forst. "So now there is a difference between
the cash taken and the recognition of the revenue."
The telecoms industry lobbied hard against that rule, and lost.
"They wanted an industry opt-out on the cash cap but they
failed to win the argument."
Revenue no longer equals cash
The new rules will clearly affect a company’s
profit and loss statement. "From an accounting perspective, you
cannot continue with the idea that 'revenue equals
cash’," he says.
But the telecoms industry moves so quickly that the fair value
of a particular device may change. "Companies are changing
their prices and offers more or less every month." So the
accounting software will have to track these changes, even on
And, as new devices emerge, customers may decide to upgrade
before the end of the 24-month contract. What happens then?
"This isn’t a one-time adjustment," says Forst.
Companies will have to upgrade their systems so that they can
track and adjust for all these changes. "That was the
industry’s major argument when these new rules
were being proposed. This is not just a matter for the
accounting department. They will have to make sure
they’re reporting to the new standards but a lot
of other departments will need to be involved."
Which other departments? Controlling, IT, internal audit,
revenue assurance, for a start, says Forst. "And product
development." The new rules will have a significant impact on
the value of new products and services.
Impact on real business
"People in the industry are saying this might mean the
accounting regulations will have an impact on the real business
— on the way operators offer bundles and subsidies and
the way contracts are offered."
One of the biggest headaches for the industry is that are
millions of different contracts and the new rules will apply to
each. One of the industry’s main successes when it
was lobbying FASB and IFRS was the acceptance of a proposal
that operators could bundle broadly similar contracts into a
portfolio. Then, the idea is, a common formula can be applied
to the whole bundle to bring it into alignment with the new
"When this portfolio approach was introduced in the second
draft of the standard a lot of people in the industry thought
this was a silver bullet to solve the problem," smiles Forst.
But it is not. "The more and more than we look into it we find
that to identify and approve a portfolio we will need to have
the same level of data as if we were making the adjustment
contract by contract. There are more and more question marks,"
"Some operators are trying to take on very broad portfolios and
they’re combining them with a sophisticated
mathematical formula, which might work. But they will have to
test and document the internal controls. And you will have to
provide proof of the mathematics," so that auditors can examine
the assumptions that were made to derive the formula.
However operators decide to face the challenge, the date of
introduction is fixed. Public entities will have to apply the
standard for fiscal years starting after 15 December 2016,
including interim periods within those years — which
means that we will see the new standards being applied to
quarterly results from March 2017.
"There won’t be any extra time," says Forst.
"Perhaps 2017 sounds far away but there is a lot to do. In
fact, the more you dig the more you find."
Billing system changes
Telecoms companies are famous, for example, for having a
multiplicity of billing systems — perhaps one for each
service, numbering dozens in all. Each will have to be amended
to conform with the new requirements.
"This will be a large project that will require lots of
resources in every operating company. And companies will need a
lot of external help to implement approved IT solutions."
Move quickly, he says, but don’t make "too early
decisions" on key areas such as whether to go for the
contract-by-contract approach or the portfolio approach.
"You need to know where the information is." And the accounting
team will need new information — for example, about
how many contracts go to the full term and how many are
terminated early, perhaps because a customer upgrades to a new
What happens when a new iPhone comes out and many of your
customers want to upgrade much earlier than expected? "This was
one of the examples operators used when they were lobbying
against the standard," says Forst.
The accountancy people will need to know if a contract
initially expected to be 24 months is replaced after 18 with a
new one: the revenue will have to be recognised over a shorter
The financial team will have to go through all of a
company’s business and ask: "Do we have the
information we need to prepare the accounts, and is this
information reliable as the basis of our accounting decisions?
Can we get all the information we need from the
company’s data warehouse?"
Profit and loss impact
That’s why, he says, "the new standards will
certainly have an impact on profit and loss and on key
Here’s another example of a change that will be
coming as a result of the new rules. How do operators regard
commissions and other sales costs? "Today most operators
expense the subscriber acquisition costs," says Forst. "The new
standard says they will have to regard it as capital
expenditure and amortise it over the life of the contract." And
the lifetime of the contract, of course, may not be predictable
at the start: further uncertainty.
Chief financial officers are in no doubt about the size of the
challenge facing them, says Forst. "From all the discussions
we’ve had, CFOs and heads of accounts are saying
they want to do it properly. We don’t see anyone
wanting to take short cuts."
Some larger operators have already started the process, as soon
as the last draft of the standard was accepted at the end of
2013. That means they are at the front of the queue for the
extra resources that will be needed: those who wait will have
to look harder and pay more.
Operators need to allocate a budget for all the changes that
they will have to implement. The scale of the work may mean
that other IT projects, for example, will need to be set aside
for a couple of years. "It’s not just about the
cost, but companies will need to allocate the time and the
resources and the IT skills."
There is constant pressure within companies to update IT
systems, "but because of the new accounting rules, revenue
recognition is non-negotiable," says Forst. "These changes will
have an impact on companies’ development over the
next two or three years. They have to be on the agenda of the
What will happen to those companies that bury their heads in
the sand and don’t implement the changes in time?
"Who will sign off their accounts?" he asks. Companies will
face litigation if they don’t do everything in
time. "But if they lose time it will be more and more