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Implementation and Consideration around the adoption of NZ IFRS 15 for Spark New Zealand Limited

Akademische Arbeit 2018 9 Seiten

BWL - Investition und Finanzierung

Leseprobe

Inhaltsverzeichnis

1. The background behind the introduction of NZ IFRS 15

2. The impact of NZ IFRS 15 on the telecommunication industry
2.1 Identify the contract(s) with a customer
2.2 Identify the performance obligations in the contract(s)
2.3 Determine the transaction price
2.4 Allocate the transaction price to the performance obligations
2.5 Recognise revenue when (or as) the entity satisfies each performance obligation

3. Financial consequences of the adoption of NZ IFRS 15 for Spark

4. Practical business considerations around the adoption of NZ IFRS 15 for Spark
4.1 Retrospective approach
4.2 Information systems
4.3 Training & Communication

5. Recommendations to Spark concerning the adoption of NZ IFRS 15

6. Conclusion

Executive Summary

In July 2014, the New Zealand Accounting Standards Board published a new standard that introduced significant changes to how companies recognise, measure and disclose revenue in their financial statements. The adoption of NZ IFRS 15 Revenue from Contracts with Customers is fraught with hurdles for telecommunications entities due to the variety of plans they offer and the frequency at which customer make changes to their plans (Ernst & Young, 2015). This report aims to investigate the impact of NZ IFRS 15 on the telecommunication industry. The main focus will be on Spark Limited, a New Zealand based company that will effectively implement NZ IFRS 15 from the financial year ending 30 June 2019 (Spark New Zealand, 2018). In the wake of this, we will provide some background on the introduction of the standard, the implementation as proposed by the five-step model, the impact on the financial results for Spark, as well as practical business consideration for the retrospective adoption.

Spark expects the adoption of the standard to have an effect on its accounting operations, particularly regarding the allocation of transaction prices. To ensure a smooth transition, the company will need to assess its impact and prepare departments and stakeholders for the anticipated changes.

1. The background behind the introduction of NZ IFRS 15

IFRS 15 Revenue from Contracts with Customers is the product of a corporate co-operation between the International Accounting Standards Board (IASB) and the US Financial Accounting Standard Board (FASB). It was introduced as existing standards, i.e. IAS 18 Revenue and similar interpretations, have been troublesome for many entities in the preparation of their financial statements (Ernst & Young, 2014). The objectives behind the publication include (Deloitte, 2018).

- To resolve inconsistencies in former revenue requirements that lead to different accounting treatments for similar transactions
- To implement a concise framework dealing with common concerns regarding revenue recognition
- To reform the comparability of revenue recognition across entities, jurisdictions and capital markets
- To improve the transparency and provision of information to readers of financial statements through aligned disclosure requirements
- To streamline general requirements and simplify the preparation of financial statements.

2. The impact of NZ IFRS 15 on the telecommunication industry

The impact of the new accounting standard will be material for many entities, affecting their financial statements, business processes and internal controls. The telecommunication sector is said to face difficulties in adopting NZ IFRS 15 due to the variety of mobile plans they offer, the frequency at which customers modify their plans and the volume of contracts they have with consumer, businesses, government and wholesaling (Ernst & Young, 2015). In order to simplify the adoption of the standard, NZ IFRS 15 introduces a five-step approach.

2.1 Identify the contract(s) with a customer

According to IFRS 15, a contract is an “agreement between two or more parties that creates enforceable rights and obligations” (NZ IFRS 15: Revenue from Contracts with Customers, §10). Before a contract can be identified as such within the scope of NZ IFRS 15, it is required to meet the criteria set out in the standard.

In the telecommunication industry, month-to-month contracts are widely used. These contracts provide selected services to customers on a month-to-month basis, may renew automatically, may not have a fixed duration and can be cancelled or modified in scope and price by either party (Ernst & Young, 2015). NZ IFRS 15 states that the recognition of revenue is subject to the term of the contract. In a month-to-month contract, the entity will have to verify whether a modification of a contract will be handled as a separate contract or as part of the existing contract. This will determine whether the amount will be accounted for on a monthly basis (Ernst & Young, 2015).

2.2 Identify the performance obligations in the contract(s)

Under IFRS 15, a performance obligation can be a promise in the contract to transfer either a distinct good or service, or a series of distinct goods and services that are substantially related. Unlike previous standards, IFRS 15 gives specific guidance for allocating revenue from contracts with customers to each good or service on a relative standalone selling price basis (Deloitte, 2014). In the telecommunication industry, entities frequently offer incentives to their customers to encourage them to sign up for mobile services. While these free services are seen as promised goods and services under the contract, it will have to be assessed whether they should be accounted for as separate performance obligations. If so, a part of the transaction price will be allocated to the incentives under NZ IFRS 15 (Ernst & Young, 2015).

2.3 Determine the transaction price

The transaction price is the amount to which an entity expects to be entitled to after fulfilling its obligation. The specification is subject to variable considerations and any significant finance component (Ernst & Young, 2015). Entities in the telecommunication industry will have to determine whether their arrangements with a consumer include a significant financing component, e.g. when offering subsidised handsets as part of a service contract (Ernst & Young, 2015).

2.4 Allocate the transaction price to the performance obligations

After the performance obligation and the transaction price have been determined, the entity will need to allocate both on a relative stand-alone selling price basis (Ernst & Young, 2017). Assuming an entity provides professional and maintenance services in a bundle at a various price, but also individually at relatively consistent prices, it may be required to determine the stand-alone selling price as the difference between the transaction price and the selling prices of the services (Ernst & Young, 2017). This will be further discussed in part 3 of this report.

2.5 Recognise revenue when (or as) the entity satisfies each performance obligation

Under IFRS 15, “an entity satisfies a performance obligation by transferring control of a promised good or service to the customer” (Ernst & Young, 2015, p. 21). Entities will be required to check if control to the customer is transferred at a point in time or over time.

3. Financial consequences of the adoption of NZ IFRS 15 for Spark

Spark New Zealand Limited anticipates material changes to its accounting policies with the adoption of the new standard which will be effective for the company from the year ending 30 June 2019. Spark intends to adopt the standard in full and retrospectively to prior reporting periods (Spark New Zealand, 2018). As mentioned earlier, the changes to the allocation of transaction price will have an effect on mobile revenue recognition.

According to Spark’s Annual Report 2018, Spark recognises revenue from contracts that include a subsidised purchase of a handset based on industry guidance outlined in NZ IAS 18. The allocation based on stand-alone selling prices will be different from the current allocation (Spark New Zealand, 2018). The following example illustrates this operation:

Spark advertises a handset along with a two-year mobile contract. The handset is a new model with a stand-alone selling price of NZD1800. As part of the fixed-term contract, Spark offers the handset at a reduced price of NZD600. In addition, Spark advertises a mobile plan with unlimited data, talk and text for NZD80 per month (equal to the stand-alone selling price) for the length of the two-year contract. For simplicity, we assume no additional discounts or incentives, such as free music streaming, are included. The following table illustrates how the transaction price will be allocated to the performance obligation and how revenue will be recognised under current practice from industry guidance and the new IFRS 15 (Ernst & Young, 2015).

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Allocation of transaction price and revenue recognition based on current and new practice

The calculations are as follows:

Abbildung in dieser Leseprobe nicht enthalten

As shown above, the requirement to allocate revenue based upon stand-alone selling prices is different to current practice, i.e. more revenue will be allocated to the handset. Note that this approach may result in similar promised goods and services being allocated to different amounts of revenue depending on how handsets and mobile plans are bundled into the specific arrangement (Ernst & Young, 2015).

4. Practical business considerations around the adoption of NZ IFRS 15 for Spark

4.1 Retrospective approach

According to its annual report, Spark intends to apply IFRS 15 retrospectively, i.e. prior to comparative reporting periods. As outlined in the standard, this approach comes with optional expedients that should, if applied, be used consistently over all prior periods. These include:

- Entities do not need to restate any completed contracts that begin and end within the same reporting period. For instance, as Spark will be applying the standard from the year ending 30 June 2019, a contract entered into and completed before 30 June 2018, will not be required to be restated (Deloitte, 2015).
- Also, for completed contracts that include variable consideration, Spark may use the transaction price at the date of the completion of the contract, rather than estimating variable consideration in prior reporting periods (Deloitte, 2015).
- For all periods before the date of the application, Spark will not be required to disclose the price of the transaction allocated to the rest of the performance obligation. For instance, if a contract is entered into before the first application date and is incomplete upon that date, Spark will not have to report on the remaining performance obligation of that contract (Deloitte, 2015).

4.2 Information systems

The approach to allocating the transaction price based on stand-alone selling prices will require telecommunication entities to reassess if their IT systems will be able to keep track of the multiple pricing points for a single offer (Ernst & Young, 2015). Spark’s whole IT ecosystem may have to undergo changes, as new rules, regulations and processes come into effect (Deloitte, 2016).

4.3 Training & Communication

To ensure a clean transition, entities should provide training to those employees affected. Due to the complexity of the changes in IFRS 15, finance employees may need to develop new skills to analyse and transpose the new financial reporting standard (Deloitte, 2017). Managers need to assess whether internal resources will suffice or of external advisors need to be involved at further costs. In addition, directors need to consider how to familiarise stakeholders with the upcoming changes in the financial statements (Deloitte, 2017).

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Details

Seiten
9
Jahr
2018
ISBN (eBook)
9783346243126
Sprache
Englisch
Katalognummer
v536408
Institution / Hochschule
University of Auckland – Graduate School of Management
Note
A-
Schlagworte
IFRS IFRS15 Accounting Finance

Autor

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Titel: Implementation and Consideration around the adoption of NZ IFRS 15 for Spark New Zealand Limited