Risk & Economy » Regulation » Watershed moment for telecoms accounting

DECEMBER 2012 was a watershed moment for the telecoms industry. Against much resistance, the IASB and FASB declared their intention to enforce proposed revenue recognition reporting standards. After three years of consultation, the new IFRS and US GAAP standard will require telecoms companies to change the way they recognise revenue, reallocating it based on the contractual performance obligations. This means accounting at the customer or portfolio level for the wide variety of bundled offerings unique to telecom business models. This ruling will force operators to invest in new reporting systems and processes.

In markets characterised by changing products and incentives, recording fair value or standalone costs of the components offered in a package is typically done using a model. This will no longer suffice. The changes may result in the service provider having to vary accounting for the same monthly service plan offered to two customers because they bought different handsets or started their contract at different times.

For many in the telecoms industry, one of the primary sources of resistance to these new standards is that expensive core billing systems have been designed to support the existing model. Adapting these systems to support the new revenue recognition method would be expensive, difficult and slow.

Under the current business models, most telcos provide hardware, call-time and content to their customers in bundles with a single monthly price. With the current IFRS accounting treatment – the residual method – telecoms operators do not account for the true cost of the handset, viewing the cost as an incentive to the customer at the start of the contract. Under the new proposals, operators would have to value such elements using fair-value or standalone selling price methods applied over the life of the contract. The pattern of revenue recognised in the income statement will change – with a direct impact on reported profits.

In many cases, operators may maintain their existing accounting treatments in parallel. Reporting in both formats will be impossible to support without making significant changes to systems and processes.

Operators also argued it would become difficult to calculate the stand-alone selling price, as prices and discounts for telecom bundles change frequently. While this represents significant issues for mobile operators providing handsets as part of a bundle, the challenges may be far greater for those offering fixed line services.

Many operators are considering a portfolio approach as an alternative. In order to satisfy auditors, operators will need to provide evidence that the numbers created are the same as using contract-level accounting. Under this scenario, they will have to justify assumptions, make sure their accounting processes are transparent and assure auditors that high-quality data underlies reporting.

Time is running out for operators

Despite the protestations, operators now have to ready their accounting systems to comply. To enable finance departments to achieve this, there are a number of considerations that must be addressed.

In the first instance, operators may want to consider changing their business models. While this may seem like a straightforward solution, it will affect the customer experience. In the mobile market, consumers have grown used to a model of bundled handset and service contracts. Flexible contract bundles offered to the consumer are a well-established feature of the business model. Any change adversely affecting revenue streams will not be supported.

Operators may instead choose to make changes to their legacy billing systems and inventory systems. Many billing systems are old – all customer-facing and business-critical. They are also difficult to change. Additionally, the billing systems support revenue collection and processing the varied customer contracts. These systems do not account for component costs. Making changes would be costly and represent an operational risk, with one operator saying it could cost about €20m and another needing between 10 to 15 years to implement it.

The other approach would be to bring revenues and costs together in the general ledger. But the granular data levels required to process the information are not available in the GL today, nor is it appropriate or feasible to bring such data volumes into these systems. A better alternative is to establish an automated processing and accounting layer between the billing systems and the general ledger, which removes the need for changes to these critical systems. Not only will this meet the new regulations – it will automate the manual processes that many finance departments use to fill the functional gaps in the primary processing platforms and core accounting systems. This gives telecom companies an opportunity to invest in an automated and flexible finance environment.

This approach will allow the finance function to transform its role within the business to a source of valuable customer insight. New accounting systems will generate ground-level data – something of considerable value to stakeholders. The more enlightened businesses have recognised that if you integrate this profitability information into IT systems, it can be used to enhance customer acquisition and retention strategies.

Telecoms operators may find that to implement these changes in such a short timescale, good resources will be at a premium. To mitigate this, implementing a ready-to-deploy and configurable IFRS accounting solution designed for bundled products should be the default choice.

Implementing the new standards will deliver far-reaching benefits. With the right solution, telecoms companies could facilitate more accurate insight into their customers and be in a more agile position to adapt to the fast-paced market changes affecting this industry today.

Nick Cromie is regional business development manager at software provider Microgen