IFRS 15 adopted, full retrospective method, policies, judgements, telecoms

Telstra Corporation Limited – Half year report – 31 December 2018

Industry: telecoms

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Section 1. Basis of preparation (extract 1)
1.2 Key accounting estimates and judgements
Preparing the Report requires management to make estimates and judgements. In preparing this report, the key sources of estimation uncertainty were consistent with those applied in the 2018 Annual Report with the exception of management judgements resulting from the adoption of the new accounting policies.

The key judgements and estimates used by management in applying the Group’s accounting policies for the period ended 31 December 2018 have been updated to reflect latest information available. They can be located in the following notes:
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Section 1. Basis of preparation (extract 2)
1.4 Adoption of the new accounting standards
In the financial year 2019, we have adopted new accounting policies for revenue recognition, deferred contract costs and impairment of financial assets. A summary of the key impacts, restatement of the financial statements previously reported and key changes to our measurement, recognition and presentation of the impacted balances and transactions have been detailed below.

(a) First time adoption of the new revenue standard
In December 2014, the AASB issued AASB 15: ‘Revenue from Contracts with Customers’ and AASB 2014-5: ‘Amendments to Australian Accounting Standards arising from AASB 15’. In October 2015, the AASB issued AASB 2015-8: ‘Amendments to Australian Accounting Standards – Effective Date of AASB 15’ which deferred the effective date of the new revenue standard from 1 January 2017 to 1 January 2018. In May 2016, the AASB issued AASB 2016-3: ‘Amendments to Australian Accounting Standards – Clarifications to AASB 15’. All these standards are further collectively referred to as AASB 15.

AASB 15 has superseded the existing accounting standards and interpretations for revenue and subscriber acquisition costs in the telecommunications industry.

We have adopted AASB 15 from 1 July 2018 and applied the standard retrospectively to prior reporting periods from 1 July 2017 (‘transition date’), subject to permitted and elected practical expedients. As a result, all comparative information in the financial statements has been prepared as if AASB 15 had always been in effect with a cumulative adjustment as at 1 July 2017.

The following practical expedients have been used for the transition to AASB 15:
• we have not restated contracts completed before 1 July 2017 (i.e. those contracts for which we have transferred all goods and services identified under the superseded accounting standards and interpretations)
• in the comparative reporting period of financial year 2018, for contracts that have variable consideration, we have used the transaction price at the date the contract was completed rather than estimating variable consideration amounts
• for contracts that were modified before 1 July 2017, we have not restated those contracts for their modifications effective prior to 1 July 2017 in accordance with AASB 15. Instead, we have reflected the aggregate effect of all modifications that occurred before 1 July 2017.

The application of AASB 15 did not affect our cash flows from operations or the methods and underlying economics through which we transact with our customers.

On adoption of the new standard, we have made the following adjustments to our financial statements for the financial year 2019 to reflect the requirements of AASB 15:
• $409 million after tax ($505 million before tax) decrease in opening retained earnings as at 1 July 2017 with corresponding adjustments against relevant line items in the statement of financial position
• $119 million decrease in total income, $154 million decrease in operating expenses, $35 million increase in EBITDA, $22 million increase in net finance costs, $13 million increase in profit before tax and $10 million increase in our net profit after tax for the half-year ended 31 December 2017, and
• $201 million decrease in total income, $277 million decrease in operating expenses, $76 million increase in EBITDA, $39 million increase in net finance costs, $37 million increase in profit before tax and $28 million increase in our net profit after tax for the year ended 30 June 2018.

AASB 15 adoption also resulted in changes to presentation and classification of certain items in the statement of financial position and in the income statement.

Refer to Tables A and B for impacts on our statement of financial position as at 1 July 2017 and 30 June 2018, respectively and to Tables C and D for impacts on our income statement and statement of comprehensive income for the half-year ended 31 December 2017.

(b) First time adoption of the new impairment rules for financial assets
In December 2014, the AASB issued the final version of AASB 9: ‘Financial Instruments’ (AASB 9 (2014)), and AASB 2014-7: ‘Amendments to Australian Accounting Standards arising from AASB 9 (December 2014)’.

AASB 9 is the new principal standard that consolidates requirements for the classification and measurement of financial assets and liabilities, hedge accounting and impairment of financial assets. AASB 9 (2014) supersedes all previously issued and amended versions of AASB 9 and applies to Telstra from 1 July 2018.

We early adopted the previous version of the standard, AASB 9 (2013), from 1 July 2014. This version excluded the impairment requirements, which replaced the incurred loss impairment model used previously with an expected credit loss model for impairment of financial assets. Expected credit losses are based on the difference between the contractual cash flows due under the contract and all the cash flows that we expect to receive. The differences are then discounted at the asset’s original effective interest rate.

We have applied the requirements of the new financial assets impairment model on a prospective basis from 1 July 2018 to balances, which incorporate the relevant restatements on a retrospective basis as at 1 July 2017 on the first time adoption of the new revenue standard.

Given AASB 9 requires us to hold allowances for expected rather than incurred credit losses, the allowance is therefore recognised earlier and most portfolio allowance holdings have increased. The increase in allowance resulted in a $63 million after tax ($89 million before tax) reduction of opening retained earnings at 1 July 2018.

We have elected to apply the AASB 9 exemption and have not restated comparative periods in the year of initial application. As a consequence, the impairment allowance has not been restated in the comparative period but the difference between the previous and restated carrying amounts is reflected in the opening retained earnings as at 1 July 2018. Net impairment losses on financial assets as presented in the income statement in the comparative period were measured under the prior requirements.

Refer to Table B for impacts on our statement of financial position.

(c) Overall impact on adoption of the new accounting policies
Tables A to D summarise the overall impact of changes in the accounting policies on our financial statements.

Table A: Impact of changes in the accounting policies on the statement of financial position as at 1 July 2017

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Table B: Impact of changes in the accounting policies on the statement of financial position as at 1 July 2018

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Table C: Impact of changes in the accounting policies on the income statement

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Table D: Impact of changes in the accounting policies on the statement of comprehensive income

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Changes in the accounting policies impacting retained profits and reserves (foreign currency translation reserve) are presented as restatements directly in the Statement of Changes in Equity.

Key changes in the accounting policies resulting from the adoption of the new accounting standards are explained below.
(d) Changes in the accounting policy for revenue from contracts with customers
AASB 15 establishes principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers, and requires revenue to be recognised in a manner that depicts the transfer of promised goods or services to a customer and at an amount that reflects the consideration expected in exchange for transferring those goods or services. This is achieved by applying the following five steps:
• identify the contract with the customer
• identify the performance obligations in the contract
• determine the transaction price
• allocate the transaction price to the performance obligations in the contract based on their relative standalone selling prices
• recognise revenue when (or as) performance obligations are satisfied.

AASB 15 also provides guidance relating to the treatment of contract costs which are not in scope of other accounting standards, i.e. incremental costs of obtaining a contract and costs to fulfil the contract.

The adoption of the new revenue standard resulted in a number of accounting policy changes, a financial impact to our opening retained earnings as at 1 July 2017 and restatement of the financial performance for the half-year ended 31 December 2017 and the year ended 30 June 2018. Impacts identified primarily related to the timing of revenue recognition, the deferral of costs to obtain a contract with a customer, expensing some of the previously deferred expenditure to fulfil a contract and changes in the classification of revenue and related items in the financial statements. These changes are summarised below.

(i) Our contracts with customers
We generate revenue from customer contracts, which vary in their form (standard or bespoke), legal term (casual, short-term or long-term) and customer segment (consumer, small to medium business and government and large enterprise). AASB 15 impacts differ depending on the type of customer contract, with the main contracts being:
• homogeneous retail consumer contracts (mass market prepaid and postpaid mobile, fixed and media offerings)
• retail small to medium business contracts (mass market and off-the shelf technology solutions)
• retail enterprise and government contracts (carriage, standardised and bespoke technology solutions and their management)
• network capacity contracts (mainly Indefeasible Right of Use)
• wholesale contracts for telecommunication services
• nbn Definitive Agreements (nbn DAs) and related arrangements
• network design, build and maintenance contracts (mainly with nbn co).

(ii) Identifying customer contracts, their combinations and modifications
AASB 15 focuses on legal rights and obligations included in a contract (which may be a combined contract) when determining the contract level and its term for accounting purposes. AASB 15 guidance also assumes that the contract will not be cancelled, renewed or modified. Establishing the contract term for accounting purposes impacts determination of performance obligations and the transaction price to be allocated to goods and services. Therefore, the timing and amount of revenue recognised may be impacted.

Our mobile long-term contracts often offer a bundle of hardware (delivered upfront) and services (delivered over the contract term), where the customer pays a monthly fee and receives a discount, which is allocated between the hardware and services based on their relative selling prices. When determining the customer contract, AASB 15 requires us to assess the combination of two or more contracts entered into at or near the same time with the same customer. As a result, we have changed the accounting treatment of customer contracts sold via our dealer channel, where the previously applied substance over form principle has been overridden by the new contract combination rules. This precluded us from combining separate legal contracts, i.e. with the dealer for hardware and the customer for services. Consequently, no discounts have been allocated to hardware sold via dealer channel, which resulted in a higher hardware revenue at the time of its recognition and lower services revenue over the customer contract term.

Our nbn DAs and related arrangements include a number of separate legal contracts with both nbn co and the Commonwealth Government (being related parties hence treated as the same customer for accounting purposes) which have been negotiated together with a common commercial objective. The nbn DAs were originally signed in 2011 and subsequently modified in 2014 and 2015. These separate legal contracts have been combined under the AASB 15 assessment. However, the combined nbn DAs and related arrangements include a number of out of scope elements. This includes Telstra Universal Service Obligation Performance Agreement and the Retraining Deed, which have both been separately priced and continue to be accounted for as government grants. The Subscriber Agreement also continues to be separately accounted for as other income given the nbn disconnection fees do not relate to our ordinary activities and there is no price dependency on other nbn DAs. On the other hand, the additional payment received under the Information Campaign and Migration (ICM) Deed for the build of nbn related infrastructure, has been combined and accounted for together with the Infrastructure Services Agreement (ISA). ISA also includes payments for sale of our infrastructure assets, which are not in scope of AASB 15, however, the timing of control transfer for these assets and the amount of consideration to be included in the net gain on their disposal have been determined by reference to the AASB 15 principles. The combined accounting contract comprised of nbn DAs and related arrangements has a minimum fixed term of 30 years for accounting purposes.

Prior to the transition date, our accounting was largely aligned to the legal term of the contacts, which in some cases only provided general terms and conditions (including price lists) under which customers could order goods and services in the future. On adoption of AASB 15, the contract term for accounting purposes has changed for a number of our enterprise and government contracts, our wholesale contracts and commercial contracts with nbn co. This is because the five steps apply to goods or services ordered under each valid purchase order or a statement of work raised under the terms of these agreements.

AASB 15 gives far greater detail on how to account for contract modifications than the prior revenue accounting principles. Changes must be accounted for either as a retrospective cumulative change to revenue (creating either a catch up or deferral of past revenues for all performance obligations in the original contract), a prospective change to revenue with a reallocation of revenues amongst remaining performance obligations in the original contract, as a separate contract which will not require any reallocation to performance obligations in the original contract, or both a cumulative change and prospective change to revenue in the original contract.

Prior to the transition date, we accounted for any changes in our retail mass market contracts prospectively. Under AASB 15 we do not expect material impacts from modifications of these contracts because the standard terms and conditions of our homogeneous mass market contracts are normally not re-negotiated and the customers’ rights to move up and down within the plan family are included in each contract from its inception.

However, our bespoke contracts with small business, enterprise and wholesale customers are varied or re-negotiated from time to time. Prior to the transition date, depending on the nature and legal form of the negotiated changes, we have considered the specific facts and circumstances and we have determined the appropriate accounting treatment using the accounting principles that existed at the time. Since transition to AASB 15, the new rules impact any bespoke contract re-negotiations from financial year 2018 onwards. This is because we have elected to apply a transition practical expedient
and reflected the aggregate effect of all of the modifications that have occurred before 1 July 2017 when arriving at the retained earnings adjustments. For the restatement of the financial year 2018, we have not identified material adjustments arising from contract modifications of our bespoke contracts.

(iii) Identifying performance obligations
AASB 15 provides guidance on determining if goods or services are distinct and therefore if revenue should be allocated and recognised when these goods have been delivered or the services performed (i.e. when the customer controls them). The new guidance has resulted in some changes to our prior accounting policy of identifying deliverables which have value to the customer on a standalone basis.

Under some of our enterprise and wholesale arrangements, we receive customer and developer contributions to extend, relocate or amend our network assets to ultimately enable delivery of telecommunication services to end users. Prior to the transition date, the contributed network assets (or cash for network construction activities) have been recognised as sales revenue over the period of the network construction activities if they were a separate deliverable under Interpretation 18: ‘Transfer of Assets from Customers’. Interpretation 18 has been superseded by AASB 15 and we have changed our accounting for these type of arrangements.

Depending on whether ongoing telecommunication services have also been purchased under the same arrangement, on transition to AASB 15 these contracts will be accounted for in a different way.

Where the counterparty makes a contribution for network construction activities and purchases ongoing services under the same (or linked) contract(s), the arrangement is within the scope of AASB 15. The upfront contribution is added to the total transaction price of the customer contract and allocated to the distinct goods and services to be delivered under that contract. Compared to prior accounting, this resulted in a deferral of sales revenue due to the long term nature of these contracts.

However, where the counterparty does not purchase any ongoing services under the same (or linked) contract(s), the arrangement is neither within the scope of AASB 15 nor covered by any specific accounting guidance. Therefore, we continue to account for them consistently with our previous accounting treatment.

Another change to prior accounting relates to material rights, i.e. separate performance obligations in a customer contract which gives the customer an option to acquire additional goods or services at a discount or for free, i.e. these rights are beneficial. In principle, this concept is largely consistent with our prior accounting policy for non-cash sales incentives treated as separate deliverables. However, determination and measurement of material rights (including accounting for their breakage) differs from our past practice. As a result, revenue has been allocated to some of the goods and services we offer for free in our mass market plans or as part of the small business and enterprise loyalty programs and technology funds. However, we have not identified material adjustments on transition to AASB 15 because the value of material rights is usually insignificant compared to the total contract value.

Finally, within the nbn DAs, the build of nbn related infrastructure under the ICM Deed is not considered a separate performance obligation. As a result, on transition to AASB 15, the payment received, for which revenue had already been recognised between the financial years 2012 and 2014, has instead been treated as an advance receipt for performance obligations transferred over the ISA average contracted period of 35 years, leading to an opening retained earnings adjustment on transition of our nbn DAs and related arrangements.

(iv) Determining and allocating the transaction price
AASB 15 removed the requirement for a contingent consideration accounting policy. Prior to the transition date, in the arrangements with multiple deliverables, we limited revenue to the amount that was not contingent upon the delivery of additional items or meeting other specified performance conditions (non-contingent amount). Because our mobile long-term contracts, which offer a bundle of hardware and services, comprise of two legal contracts and under the terms of these contracts, the allocated hardware amount was not contingent on delivery of future services, in the past we recognised the hardware revenue on delivery of the handset. Therefore, on adoption of AASB 15, we did not identify an acceleration of hardware revenue in our mobiles business due to the removal of the contingent consideration rules. Also, we did not identify material adjustments to small business, enterprise or wholesale contracts as generally they have not been impacted by the contingent consideration rules.

In some of our mass market contracts, the amount of consideration can vary, resulting in variable consideration under AASB 15, because of a price concession offered when a customer agrees to an early upgrade of their contract. However, we have not identified a material adjustment for variable consideration in those contracts on transition to AASB 15.

Some of our contracts offer customers the ability to move up and down within the plan family under predefined terms, in which case at contract inception we should only allocate the lower amount we can contractually enforce and account for any excess amount when it is earned. However, due to the low volume of plan changes, we have not identified material adjustments resulting from this accounting change on transition to AASB 15.

If a customer receives any discount(s) when purchasing a bundle of goods or services under one accounting contract, AASB 15 requires a proportional allocation of the discount(s) to all performance obligations, unless the exception allocation criteria are met, in which case the discount(s) can be allocated to only one or some but not all performance obligations. This differs from our prior policy which allocated cash sales incentives to goods or services contributing towards the earning of the incentives. Meeting the allocation exemption criteria is expected to be rare. On transition to AASB 15, we identified some changes in timing of revenue recognition and product allocations in our mobile and fixed mass market contracts and product allocations in our wholesale contracts.

AASB 15 also provides new guidance on how to determine standalone selling prices, by reference to which the total transaction price gets allocated to goods and services within a contract. Despite the fact that our prior accounting policy used relative selling prices as an allocation basis, i.e. a concept similar to standalone selling prices, AASB 15 requires consideration of similar customer circumstances. As a result, we have identified an adjustment related to our mass market mobile contracts where a higher hardware revenue is recognised at the time of delivery of the hardware, and lower services revenue over the customer contract term. Furthermore, revenue allocation between the products in a bundle has changed.

For our bespoke contracts, no material impacts on transition to AASB 15 have been identified because in general, negotiated prices are aligned with the standalone selling prices of distinct goods and services promised under the contracts.

Under some of our mass market contracts, customers obtain a handset or another device on a device repayment plan, i.e. within deferred payment terms. Under AASB 15, Telstra is considered to provide financing to the customer. AASB 15 requires separate accounting for a significant financing component, measured at contract inception using a discount rate that would reflect the credit characteristics of the party receiving the financing in the contract, i.e. the customer. For our mass market customers, this rate is significantly higher than our past practice of using Telstra’s incremental borrowing rate. This change has resulted in a reduction of hardware revenue and a higher interest income being recognised over the contract term.

AASB 15 has also introduced accounting for a significant financing element for arrangements where customers pay for goods or services in advance of receiving them (i.e. Telstra receives financing from the customer). In those circumstances, revenue recognised over the contract term exceeds the cash payments received in advance of performance as interest expense has to be recorded. This change has impacted accounting for some of our domestic and international bespoke network capacity agreements, i.e. Indefeasible Right of Use, which include upfront prepayments and have an average legal contract term between 10 and 33 years.

AASB 15 requires accounting for a financing component only if it is assessed as significant in the context of a contract as a whole. As a result, we have ceased to account for the financing component in our nbn DAs and related arrangements because financing has not been considered significant in these agreements as a whole.

AASB 15 defines a concept of a sale with a right of return and provides clear guidance for accounting for refund liabilities and recognition of the products expected to be returned. We have not identified material impacts for this change but some of our contracts include a right of return and their revenue recognition, measurement and presentation on the balance sheet have been impacted.

(v) Contract costs
AASB 15 provides accounting guidance for incremental costs of obtaining a contract and costs to fulfil a contract. Prior to the transition date, we accounted for these costs under our internal policy based on the Interpretation 1042: ‘Subscriber Acquisition Costs in the Telecommunications Industry’, which has been superseded by AASB 15. Contract costs which meet AASB 15 criteria to be recognised as an asset must be amortised on a basis consistent with the transfer of goods and services to which these costs relate under existing and anticipated customer contract(s) (for example, the customer can renew the contract for the same or subset of same goods and services).

Under prior accounting, incremental costs to obtain a contract, such as directly attributable sales commissions, have been recognised as assets in deferred expenditure and amortised on a straight line basis over the average customer contract term. Under AASB 15 we have identified a net increase in these capitalised costs due to a combination of factors. We have extended the amortisation periods for sales commissions paid on acquisition of the initial contract where these commissions are not commensurate with recontracting commissions. Therefore, the amortisation period for the initial
commissions reflects the expected customer life rather than just an initial contract term. This impact has been partly offset by adjustments for early terminated contracts and commissions related to short term contracts (i.e. one year or less) which have been expensed as incurred under the practical expedient allowed by AASB 15. Under AASB 15, these costs are presented in the statement of financial position as deferred contract costs instead of intangible assets.

We have identified impacts in relation to costs to fulfil a contract. On adoption of AASB 15, we have expensed two major classes of deferred expenditure which were previously included in our intangible assets. These were costs associated with connection and activation activities related to our fixed network contracts and remediation costs related to our nbn DAs and related arrangements. These costs are assessed under AASB 116: ‘Property, plant and equipment’. We continue to recognise as assets and amortise over the contract term certain set up costs that relate to our large enterprise contracts. However, these costs are presented in the statement of financial position as deferred contract costs instead of intangible assets.

Our deferred expenditure also included certain balances related to cash and non-cash sales incentives which have been granted mainly to our small business, enterprise and wholesale customers at contract inception. Under prior accounting, both types of incentives reduced sales revenue over the term of the customer contract on a straight line basis. Under AASB 15, these amounts either represent a discount that should reduce the transaction price (if the incentive is cash) or a material right for additional goods or services (if the incentive is non-cash), which represents a separate performance obligation in the customer contract. Given our prior accounting largely aligned with the new requirements, there are no material remeasurement adjustments related to these types of deferred expenditure. However, they have now been presented as part of a contract asset or contract liability under AASB 15.

(vi) Presentation and classification
AASB 15 adoption also required changes to presentation and classification of items in the statement of financial position and in the income statement. This includes presentation in the statement of financial position of a contract asset or contract liability at the contract level, separate presentation of deferred contract costs and appropriate current and non-current classification of all relevant balance sheet line items. On adoption of AASB 15, a number of existing line items in the statement of financial position have been replaced by the new presentation of contract assets and contract liabilities and new line items have been created (e.g. refund liabilities). AASB 15 also requires disclosure of disaggregated revenue which has been included in our segment disclosure in note 2.1.2.

We have revised presentation of multiple line items in the statement of financial position in order to comply with AASB 15 and best present the financial position going forward. The key presentation changes are summarised in the following table.

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(e) Changes in the accounting policy for impairment of financial assets
AASB 9 requires us to estimate the expected credit losses for our financial assets measured at amortised cost or at fair value through other comprehensive income, except for investments in equity instruments, on either of the following bases:
• 12-month expected credit loss which results from all possible default events within the 12 months after the reporting date, or
• lifetime expected credit loss which results from all possible default events over the expected life of a financial instrument.

The financial assets subject to the new impairment requirements also include contract assets arising under AASB 15: ‘Revenue from Contracts with Customers’.

In general, lifetime expected credit loss measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since its initial recognition. Otherwise, 12-month expected credit loss measurement basis applies. However, the lifetime expected credit loss measurement always applies to trade receivables and contract assets arising under AASB 15 that do not contain a significant financing component. For our lease receivables and for trade receivables and contract assets with a significant financing component, we have elected to calculate lifetime expected credit loss.

(f) Summary of new accounting policies
On adoption of the new accounting standards, our existing accounting policies have been amended to reflect the above changes in revenue recognition, contract costs and impairment of financial assets policies as follows:

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2.2 Income (extract)
2.2.1 Recognition and measurement
In the financial year 2019, we have adopted new accounting policies for revenue recognition.

(a) Revenue from contracts with customers
Revenue from contracts with customers arises from arrangements where the counterparty is a customer that transacts with us to obtain goods or services which are an output of our ordinary activities in exchange for consideration. We apply the five-step approach to our customer arrangements to identify the contract for accounting purposes, i.e. the accounting contract and to determine the amount and timing of revenue to be recognised. The five steps are applied at inception of the accounting contract in order to provide an overview of the contract as a whole. This in turn allows us to determine the accounting for relevant costs to obtain and/or fulfil a contract. The five steps are:

(i) Step 1: Identify the contract with customer
In order to identify an accounting contract, the contract must be legally enforceable. Any components of the contract which are accounted for under other accounting standards are then identified and separated out as they cannot be considered for revenue recognition.

The accounting contract may not align with the legal contract and in some cases multiple legal contracts may need to be combined to form one accounting contract. In other instances, a legal contract may only provide a framework agreement (i.e. an offer) and an accounting contract only exists when the customer commits to purchase goods or services. This is because an accounting contract must have commercial substance. Each party’s rights regarding the goods or services and specified payment terms must also exist. In addition, it has to be probable that the customer is able and intends to pay Telstra. The contract term impacts the identification of performance obligations and the transaction price.

(ii) Step 2: Identify the performance obligations in the contract
After the accounting contract and its term have been established, we determine the performance obligations within the contract. Performance obligations include promised distinct goods or services for which control is transferred from Telstra to the customer and material rights but exclude fulfilment activities (other activities that are necessary under the contract but that do not result in a transfer of goods or services).

Performance obligations can be explicitly stated in a contract or can be implied when the customer has a valid expectation that an additional good or service will be delivered.

A material right is accounted for as a separate performance obligation if we give the customer a beneficial option to purchase additional distinct goods or services, i.e. the customer receives an incremental discount of at least 5% of the transaction price compared to other customers.

We account for a series of goods or services which are substantially the same and have the same pattern of transfer to the customer as a single performance obligation.

A good or service is distinct if it is capable of being distinct, i.e. has standalone value, and it is distinct within the context of the contract, i.e. no transformative relationship exists with other promised goods or services.

(iii) Step 3: Determine the transaction price
After all performance obligations have been identified, we determine the transaction price, which represents the total amount of revenue to be recognised under the accounting contract. In doing so, we assume that the contract will not be cancelled, renewed or modified.

The transaction price may include fixed and/or variable, cash and/or non-cash consideration. It may also need to be adjusted for:
• a significant financing component (if the period between when we would transfer the good or service to the customer and when the customer would pay for the good or service is expected to be greater than one year)
• consideration accounted for under other accounting standards (such as lease repayments)
• amounts collected on behalf of third parties (such government taxes).

Fixed cash consideration is not dependent on future events and is based on the minimum amount of cash we expect to receive in exchange for delivering the minimum level of goods or services the customer has legally committed to purchase at contract inception over the accounting contract term.

Variable consideration receivable and payable is an amount that is variable or contingent on an uncertain future event before the exact amount is known. Examples of variable cash consideration include discounts, rebates, refunds, credits and price concessions. To estimate an amount of variable consideration, we use either the most likely amount or the expected value method depending on which better predicts the variable amount. After estimating it, we constrain the variable consideration to the amount that is highly probable of not resulting in a significant cumulative revenue reversal.

(iv) Step 4: Allocate the transaction price to the performance obligations in the contract
After the transaction price has been determined, we allocate it to the performance obligations generally based on their relative standalone selling price (SSP). SSP is the price for which we would sell the goods or services underlying the performance obligations on a standalone basis, i.e. not in a bundle. We determine SSPs at contract inception using an observable price for a standalone sale of substantially the same good or service under similar circumstances and to a similar class of customers. If no observable price is available, we estimate the SSP using an appropriate method, e.g. adjusted market assessment approach, expected cost plus a margin approach or a residual approach.

Using relative SSPs for allocating the transaction price to performance obligations generally reflects the proportional amount of consideration we expect to receive in exchange for delivering the underlying distinct goods and/or services under the contract. However, in some instances, in order to correctly reflect the amount of revenue, we apply allocation exceptions for variable consideration, discounts or a significant financing component in order to correctly allocate these elements to some but not all performance obligations.

(v) Step 5: Recognise revenue when or as a performance obligation is satisfied
After the transaction price has been allocated to the performance obligations, we determine when revenue should be recognised, i.e. when a performance obligation is satisfied by us which is when control of the distinct good or service is transferred to the customer.

Customers obtain control over a good or service when they benefit from the good or service and decide how to use the good or service.

If any of the following three criteria are met, we recognise revenue over time:
• the customer simultaneously receives and consumes all benefits as we perform (this applies to routine or recurring services)
• our performance creates or enhances an asset controlled by the customer (this is relevant when the asset is built on a customer’s site)
• the asset has no alternative use to us and we have an enforceable right to payment (for example, an asset is being built to order).

If none of the criteria are met, we recognise revenue at a point in time.

We use either input or output methods to measure progress when satisfying the performance obligations over time. Output methods use direct measurements of the value to the customer, i.e. they are based on the goods or services that control has transferred to date relative to the remaining goods or services promised under the contract (for example, milestones reached). It is applied when the value of the goods or services transferred to the customer can be measured directly. Input methods use our efforts or inputs in the satisfaction of the performance obligation relative to the total expected efforts or inputs in satisfying that performance obligation (for example, our labour hours used). It is applied when the value of the underlying goods or services transferred to the customer cannot be measured.

When a performance obligation is satisfied at a point in time, the allocated transaction price is recognised when control is transferred to the customer. In determining whether the control over the good has transferred to the customer, we consider the customer’s obligation to pay, transfer of legal title to the good, physical possession of the good, the customer’s acceptance and risks and rewards of ownership.

(vi) Accounting after contract inception
The five-step approach provides an accounting contract overview at its inception. However, some judgements and estimates may change over the accounting contract term. Where relevant, we account for the following events after contract inception:
• exercised or forfeited customer options (both material rights and marketing offers, i.e. non beneficial options)
• changes in estimates of variable consideration
• changes in how the customer exercises its contractual rights
• special arrangements, e.g. bill and hold or consignment arrangements.

(vii) Contract modifications
From time to time, our contracts are renegotiated after contract inception and their scope and/or price change. We account for a contract modifications either as:
• a separate contract which will not require any reallocation to performance obligations in the original contract
• a retrospective cumulative change to revenue (creating either a catch up or deferral of past revenues for all performance obligations in the original contract)
• a prospective change to revenue with a reallocation of revenues amongst remaining performance obligations in the original contract, or
• both a cumulative change and prospective change to revenue in the original contract.

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(b) Revenue from other sources
Revenue from other sources includes income arising from arrangements other than those accounted for using the five-step approach. This is because in some cases income generated in the course of our ordinary activities does not relate to our performance under contracts with customers or it is explicitly accounted for under other accounting standards.

Contract terminations generally trigger different rights and obligations under the legal contract. These rights and obligations are not related to our performance and were not considered at inception of the accounting contract when applying the five-step approach. Therefore, where relevant, any income over and above the recovery of the consideration due for the delivered goods or services is not classified as revenue from customer contracts. Instead, we classify it as revenue from other sources.

We earn revenue from operating subleases of mobile handsets offered to our retail customers (Telstra as a lessor), which we lease from a third party in a back-to-back arrangement (Telstra as a lessee). We also earn revenue from property operating leases. Operating lease income is recognised on a straight- line basis over the lease term.

We earn revenue from embedded sales type finance leases where Telstra is a dealer-lessor of customer premise equipment. We recognise revenue from sale of these goods at point in time when the control transfers to the customer.

We receive contributions to extend, relocate or amend our network assets. Where the counterparty makes a contribution for network construction activities that is not considered a government grant, and does not purchase any ongoing services under the same (or linked) contract(s), we recognise revenue over the period of the network construction activities.

Other items we classify as revenue from other sources include late payment fees, which are recognised when charged and their collectability is reasonably assured.

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3.2 Deferred contract costs
Deferred contract costs comprise of deferred costs to obtain or fulfil an accounting customer contract.

3.2.1 Recognition and measurement
We capitalise costs to obtain an accounting contract when the costs are incremental, i.e. would not have been incurred if the contract was not obtained and are recoverable either directly via reimbursement by the customer or indirectly through the contract margin. We elect to recognise the incremental costs of obtaining contracts as an expense when incurred if the amortisation period of the assets that we would have otherwise recognised would have been one year or less.

Costs to fulfil a contract are costs incurred in satisfying the performance obligations under a customer contract. These costs relate directly to an identified performance obligation or indirectly to other activities that are necessary under the contract but that do not result in a transfer of goods or services, i.e. they are fulfilment activities. Costs to fulfil a contract can arise from the use of our existing assets, the development or purchase of new assets and from internal workforce or third-party contractors. We capitalise costs to fulfil a contract if all of the following apply:
• the costs are not in the scope of another accounting standard
• the costs relate directly to a contract or a specifically identified anticipated contract (for example, costs relating to services to be provided under renewal of an existing contract)
• the costs generate or enhance resources that we control and will be used to satisfy future performance obligations in the contract
• we expect to recover the costs.

We amortise deferred contract costs over the term that reflects the expected period of benefit of the expense. This period may extend beyond the initial contract term to the estimated customer life or average customer life of the class of customers. We use the amortisation pattern consistent with the method used to measure progress and recognise revenue for the related goods or services. We assess whether deferred contract costs are impaired whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.

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