IFRS 15, description of effects of future adoption with quantification, telecoms

Deutsche Telekom AG – Annual report – 31 December 2017

Industry: telecoms


In May 2014, the IASB issued IFRS 15 “Revenue from Contracts with Customers.” Application of the standard is mandatory for reporting periods beginning on or after January 1, 2018. This standard provides a single, principles-based five-step model for the determination and recognition of revenue to be applied to all contracts with customers. It replaces in particular IAS 18 “Revenue” and IAS 11 “Construction Contracts” and has a material effect on the presentation of Deutsche Telekom’s results of operations and financial position. Depending on the business model applied, the new provisions affect the following issues in particular:

  • In the case of multiple-element arrangements (e.g., mobile contract plus handset) with subsidized products delivered in advance, a larger portion of the total remuneration is attributable to the component delivered in advance (mobile handset), requiring earlier recognition of revenue in future. This leads to the recognition of what is known as a contract asset – a receivable arising from the customer contract that has not yet legally come into existence – in the statement of financial position.
  • At the same time, it results in higher revenue from the sale of goods and merchandise and to lower revenue from the provision of services.
  • The extent of the changes resulting from the initial application of IFRS 15 that are described above therefore largely depends on the business models used by the subsidiary in question. Whereas the sale of subsidized handsets in connection with the conclusion of service contracts in the retail business is still common in the Germany operating segment, handsets are not sold at a discount at all or only to a limited extent in the United States and to some extent in the Europe operating segments; payment-by-installment models or leased models are offered to customers instead.
  • In the future, expenses for sales commissions (customer acquisition costs) must be capitalized and recognized over the estimated customer retention period.
  • On first-time application of the standard, both total assets and shareholders’ equity will increase due to the capitalization of contract assets and customer acquisition costs for contracts not yet fully completed.
  • Deferral, i.e., later recognition of revenue in cases where “material rights” are granted, such as offering additional discounts for future purchases of further products.
  • Contract liabilities (which, as deferred revenue, were already recognized as liabilities in the past) must be netted against the contract assets for each customer contract.
  • For the purposes of determining whether Deutsche Telekom sells products for its own account (principal = gross revenue) or for the account of others (agent = net revenue), there are no material changes for the existing agreements.

Deutsche Telekom will utilize the option for simplified initial application, i.e., contracts that are not completed by January 1, 2018 will be accounted for as if they had been recognized in accordance with IFRS 15 from the very beginning. The cumulative effect arising from the transition will be recognized as an adjustment to the opening balance of equity in the year of initial application. Prior-year comparatives will not be adjusted; instead, Deutsche Telekom will provide an explanation of the reasons for the changes in items in the statement of financial position and the income statement for the current period as a result of applying IFRS 15 for the first time.

The effects were analyzed as part of a Group-wide project for implementing the new standard. Based on management’s current estimate, Deutsche Telekom expects the transition to the new standard to result in a cumulative increase in retained earnings of between EUR 2.2 billion and EUR 2.6 billion before deferred taxes as of January 1, 2018. This effect will be mainly attributable to the first-time recognition of

  • Contract assets that, under IFRS 15, would have led to the earlier recognition of revenue from the sale of goods and merchandise, and
  • Deferred customer acquisition costs that, under IFRS 15, would have resulted in the later recognition of selling expenses.

The change in the forecast transition effects before taxes compared with previous quarters is due on the one hand to the final interpretation of the judgments of IFRS 15 and on the other to an updated simulation of the impact of the transition.

As regards the new standard’s impact on the consolidated income statement, Deutsche Telekom expects the overall share of revenue from the provision of services to decrease, and the overall share of revenue from the sale of goods and merchandise to increase, by around 2 percentage points. As outlined above, IFRS 15 will also result in earlier recognition of revenue and later recognition of expenditure. On the assumption that business development remains unchanged, this will mean the following for a mass market characterized by a large number of customer contracts that are being concluded at different points in time:

  • Higher revenue, on the conclusion of new contracts, from the sale of goods and lower selling expenses from the capitalization of contract assets and customer acquisition costs, partly offset by
  • lower service revenues and higher selling expenses arising the amortization of capitalized contract assets and customer acquisition costs for existing contracts.

Compared with the current accounting method, major effects on earnings can thus also arise if business development changes, for example, if volumes or prices change or if there are changes to business models or products offered.