Question

Case 1: Telecommunications

Johnny enters into a 12-month telecom plan with the local mobile operator ABC. The terms of plan are as follows:

• Johnny’s monthly fixed fee is RM100.
• Johnny receives a free handset at the inception of the plan.

ABC sells the same handsets for RM300 and the same monthly prepayment plans without handset for RM80/month.

How should ABC recognize the revenues from this plan in line with MFRS 118 and MFRS 15?

Answer 1

1. MFRS 118

MFRS 118 does not give any guidance on how to identify these components and how to allocate selling price and as a result, there were different practices applied.

For example, telecom companies recognized revenue from the sale of monthly plans in full as the service was provided, and no revenue for handset – they treated the cost of handset as the cost of acquiring the customer.

Some companies identified these components, but then limited the revenue allocated to the sale of handset to the amount received from customer (zero in this case). This is a certain form of a residual method (based on US GAAP’s cash cap method).

Assume that ABC recognizes no revenue from the sale of handset, because ABC gives it away for free. The cost of handset is recognized to profit or loss and effectively, ABC treats that as a cost of acquiring new customer.

Revenue from monthly plan is recognized on a monthly basis.

Journal entry:

Debit - Account Receivables / Cash    RM100

Credit - Revenues                                RM100

 

2. MFRS 15

ABC needs to identify the contract first (step 1), which is obvious here as there’s a clear 12-month plan with Johnny.

Then, ABC needs to identify all performance obligations from the contract with Johnny (step 2in a 5-step model):

1. Obligation to deliver a handset
2. Obligation to deliver network services over 1 year

The transaction price (step 3) is RM1,200, calculated as monthly fee of RM100 x 12 months.

Now, ABC needs to allocate that transaction price of RM1,200 to individual performance obligations under the contract based on their relative stand-alone selling prices (or their estimates) – this is step 4.

Allocation:

PO	Stand alone SP	%	Revenue (Relative SP = RM1,200*%)
Handset	RM300	23.8	RM285.60
Network	RM960 (RM80x12)	76.2	RM914.40
	RM1,260	100	RM1,200

 

The step 5 is to recognize the revenue when ABC satisfies the performance obligations. Therefore:

• When ABC gives a handset to Johnny, it needs to recognize the revenue of RM285.60;
• When ABC provides network services to Johnny, it needs to recognize the total revenue of RM914.40. It’s practical to do it once per month as the billing happens.

Journal entries:

Sale of Handset

Debit - Unbilled revenue                      RM285.60

Credit - Revenues -  Handset              RM285.60

 

Network services

Debit - Acc Receivable                         RM100

Credit - Revenues - Network                RM76.20

Credit - Unbilled Revenue                    RM23.80

MFRS 118 does not give any guidance on how to identify these components and how to allocate selling price and as a result, there were different practices applied.

MFRS 15 -  ABC needs to identify the contract first, identify all performance obligations, determine the transaction price, allocate that transaction price, recognize the revenue when ABC satisfies the performance obligations.