The impending adoption of Ind-AS will impact the telecom sector in many areas.

Revenue recognition In the telecom industry, multiple element arrangements (MEA) are common with sale of multiple goods or services. For example, sale of a handset equipment along with a range of wireless services or sale of equipment along with implementation, training, or maintenance services.

There are also a plethora of retail and customised plans which are interchangeable. The 2G/3G and now the 4G networks and their inter-changeability for the same set of customers may present more complexities when accounting for MEA. Spectrum sharing arrangements may also need close scrutiny.

The new Ind-AS 115 provides a five-step approach for revenue recognition, more focused on when control is transferred vis-a vis the current risk and reward model. It also has detailed guidance on accounting for MEA for each of the performance obligations and has less restrictive guidance on variable consideration.

Some of this may mean earlier revenue recognition.

Currently, telecom entities recognise revenue from such transactions using “contingent revenue cap” approach. That is, revenue is recognised as per customer billings. Under the new standard, sale of equipment and service may represent separate performance obligations.

So, entities will have to recognise the portion of consideration allocated to the equipment when control of equipment is transferred to the customer. The allocated amount may typically be greater than the consideration collected upfront from customers.

LeasesClassification of IRUs — lease or service: Telecom companies often enter into transactions for sale, purchase or exchange of excess network capacity conveying an indefeasible right of use (usually referred to as IRU). One will have to go by substance of every arrangement; impact will be significant if it is determined that a transaction contains an element of lease and more so if it satisfies the criteria for a finance lease.

AROs: The large tower network and other assets and properties on lease give rise to obligations to restore and return the underlying asset/property/site in the manner received — this is commonly referred to as asset retirement obligations (AROs).

Unlike Indian GAAP, under Ind-AS, these liabilities are carried at their present value (discounted value).

This would have an impact on both the asset and liability sides of the balance sheet (fixed assets and liability carrying values would reduce), and also on the profit and loss account for most telcos.

The writer is Partner, Accounting Advisory Services at KPMG in India

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