Abstract
One of the key indicators which are used to assess a company’s financial performance is revenue. Revenue is one of the most analysed and critiqued sections of companies financial statements by stakeholders for decision-making purposes. The International Accounting Standards Board (IASB) issued a new revenue standard which was an overhaul of IAS 18 and its related interpretations. During the standard-setting process, one of the industries, which viewed the new Standard, IFRS 15, negatively, was the telecommunications industry.
One reason which caused the telecommunications industry to oppose the adoption of IFRS 15 was the anticipated costs that would be required to implement the system. These systems allow companies to produce information on revenue which would be IFRS 15 compliant. Furthermore, the move from recognition of revenue using different rules, depending on the type of revenue, to the uniform use of the 5-step approach was viewed as a meaningful change to revenue recognition principles. The uniform approach to recognising revenue for contracts with a customer included clearer guidance on what constitutes a contract and a customer.
Customer contracts in the telecommunications industry have a prevailing attribute of offering bundled products (products and services) in a single contract. Furthermore, mobile operators also offered handsets to their customers for ‘free’ when they sign long-term contracts. The bundling of products and services required that companies reassess the promises made in the contracts in order to accurately identify performance obligations in a contract. This resulted in handsets being identified as separate performance obligations and therefore, a portion of the consideration would be allocated to the product. The long-term nature of some customer contracts also meant that companies needed to determine whether there was a significant financing component. The telecommunication industry regularly incurs costs to obtain and fulfil contracts, and IFRS 15 provides more guidance on criteria to capitalise costs which are incurred in the obtaining or fulfilling of performance obligations. Another notable change which was introduced by IFRS 15 was the recognition of contract assets and liabilities in the Statement of Financial Position (SoFP).
The primary objective of this limited scope dissertation is to quantify the impact of IFRS 15 on the financial performance and financial position of the telecommunications industry by analysing line items and key ratios. The secondary objective is to corroborate whether the anticipated negative impact of IFRS 15 on the telecommunications industry was realised in the
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first year of adoption of IFRS 15. A quantitative content analysis was employed to achieve research objectives; and twenty-eight financial statements of listed telecommunications companies were analysed in the first year of adoption of IFRS 15.
The limited scope dissertation found that there was insignificant impact on the financial performance of telecommunications companies after the adoption of IFRS 15. The insignificant impact was specifically found on total revenue, cost of sales, and total costs. However, there was a meaningful change found in the categories of revenue for sales of equipment and services rendered. The gross profit margin also had a minor impact, as a direct result of the insignificant change in revenue and cost of sales. Furthermore, the insignificant changes in revenue, cost of sales and expenses resulted in a small impact on the operating profit margin of the companies analysed in the limited scope dissertation.
The limited scope dissertation further found that the financial position of telecommunications companies significantly improved due to the recognition of contract assets and costs, which resulted in a significant increase in current assets and non-current to a lesser degree. Although, the recognition of contract liabilities led to an increase on the current liabilities, this increase was lower than the increase in assets. The strengthening of the financial position was attributable to the significant increase in the current assets, which was only partially offset by a slight increase in current liabilities, resulting in a significant increase in the current ratio.
Keywords: revenue recognition, IFRS 15 quantitative impact, contract assets, contract liabilities, telecommunication companies