The nature of the telecom business lends itself to some interesting accounting issues. Operators need licences to provide services in specific regions. A few months ago, a Supreme Court order proposed cancelling the licences of some telecom operators. If the licences constitute a major part of the business, uncertainty clouds the very existence of these companies. Though the operators can participate in the upcoming auction of spectrum, winning is contingent. When the ‘going concern’ assumption cannot be supported, the management will have to prepare financial statements on a liquidation basis. Telecom companies need to decide on this.
In India, a portion of the revenue is paid as licence fee to the Government. Further, the ARPU, or average revenue per user, is related to revenue. To attract subscribers, telecom companies sell handsets and talk time as part of a single transaction. Complexity arises when the handset and services (such as talk plan) are sold at a discount. To use a simple example, a handset costing Rs 2,500 and a talk plan costing Rs 2,000 are sold together at Rs 4,000. A question arises over the accounting for the discount of Rs 500 — is it attributable to the handset, the talk plan, or both? If it is both, then how much should be attributed to each? There are multiple tariff plans in the market, which makes accounting more complex.
In India, there is multiplicity of guidance and, therefore, practices followed by operators may be disparate. Consequently, peer comparison is distorted.
Telecom companies or tower companies erect towers on rented land. When the rent agreement ends, the company is expected to return the land to the owner in the original condition. An obligation is recorded in the account books based on the expected cost to restore the site. This involves significant estimation. As the obligation will be incurred after a gap of nearly 15 to 20 years, its discounted value is recorded in the balance sheet prepared under the International Financial Reporting Standards. Under Indian GAAP, discounting is not permitted.
Many multinational telecom groups carry goodwill as an intangible asset in their balance sheet. Under IFRS, goodwill should be tested for impairment at least annually. It is not subject to amortisation. Therefore, changing business conditions, increased competition, falling tariffs and so on pose significant challenges for these companies in maintaining goodwill without recording impairment. Under Indian GAAP, the accounting treatment for goodwill in the consolidated financial statements is not clear. It can be amortised and should be tested for impairment only when there are some indicators for it.
Another common issue is the accounting of Indefeasible Right to Use, or IRU. Telecom companies use assets such as optical fibre which are legally owned by another party. When these are accounted as operating lease rentals, it impacts EBITDA. However, when treated as an intangible asset, the amortisation charge does not impact EBITDA. In the absence of clear standards, disparate practices have emerged.
Telecom companies are required to make significant estimates and exercise judgment in the preparation of financial statements. Under IFRS, disclosures by telecom companies explain in detail these estimates or judgments. Those using the financial statements — shareholder, analyst, lender, or regulator — need to understand them, as well as the accounting policy. Under Indian GAAP, disclosures tend to be brief and sometimes nebulous; hence, this may become an impediment to analysing the company’s performance.
Meghdoot Jajoo is senior professional in a member firm of Ernst & Young Global