Previously, little guidance has been provided in terms of identifying the goods and services within a contract and then allocating the revenue to those goods and services. This has resulted into significant judgment being applied when recognizing and allocating revenue. Company may have to revise its current accounting practices as the result of the new standard. This change will ultimately affect the treatment of bundles arrangements – a bundle of goods and services that are distinct.
Timing of revenue recognition. One of the most widespread examples of this kind of contract involves the supply of a free cellphone, which is bundled with a service offering for monthly payment. It is common for the telecommunications industry to subsidize
…show more content…
The change will affect the timing of the revenue recognition in the bundled contracts. The company now will record revenue and profit that is attributable to the supply of the mobile phone on the inception of each contract. This will result into the recognition of more revenue and profit at the start of the contract period (when cellphone is supplied) and less revenue and profit as contract continues (when airtime services are provided). A more specific revenue allocation will significantly impact the pattern of revenue recognition for the company. This will lead to more consistent margins over the life of the …show more content…
Telecommunication equipment is often sold with a warranty. Warranties usually provide assurance that the item will operate as advertised for a specific period of time. The accounting treatment of warranties in the contracts depends on a number of factors. If the customer can purchase a warranty separately from the handset, than is accounted for separately as well. However, if the warranty is included into the package of goods and services, merely providing assurance, then it is not accounted for separately. The warranty goes beyond with agreed upon specifications is always accounted for as a separate component.
Contract modifications. Companies usually allow customers to modify their existing contracts. The most common examples include increase or decrease in minutes/data, adding or removing services. IFRS 15 includes detailed guidance, which depends on the way the contract is modified. The contract can be either accounted for prospectively (as an adjustment to future revenue) or retrospectively (immediate adjustment to