IFRS 15 adopted, modified retrospective method, effect on current period, telecoms, half year report

Swisscom Ltd – Half year report – 30 June 2018

Industry: telecoms

Notes to the interim financial statements (extract)

1 Changes in accounting principles

Newly applicable IFRS standards effective 1 January 2018

As of 1 January 2018, Swisscom adopted various amendments to existing International Financial Reporting Standards (IFRS) and Interpretations; with the exception of the changes described below, these have no material impact on the results or financial position of the Group.

The newly applicable IFRS standards effective 1 January 2018 have the following impact on equity:

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IFRS 9 “Financial Instruments”

The standard includes new rules for the classification and measurement of financial assets and liabilities, the accounting for impairment and hedge accounting. In certain cases, changes in the classification of financial assets will result from the new provisions. Equity instruments which used to be accounted for at acquisition cost now have to be measured at fair value. Pursuant to the new provisions regarding impairment, losses on financial assets need to be recognised earlier. No changes result for Swisscom in the hedge accounting. The first-time application of IFRS 9 reduced equity on 1 January 2018 by CHF 15 million. The prior year’s figures have not been adjusted.

IFRS 15 “Revenue from Contracts with Customers”

In contrast to the revenue recognition standards previously in force, the new standard provides for a single, principles-based, five-step model which is to be applied to all contracts with customers. In accordance with IFRS 15, the amount which is expected to be received from customers as consideration for the transfer of goods and services to the customer is to be recognised as revenue. As regards determining the date or period, it is no longer a question of the transfer of risks and opportunities but of the transfer of control over the goods and services to the customers. With regards to multi-component contracts, IFRS 15 explicitly rules that the transaction price is to be allocated to each distinct performance obligation in relation to the relative stand-alone selling prices. Furthermore, the new standard contains new rules regarding the costs to fulfill and obtaining a contract as well as guidelines as to the question when such costs are to be capitalised. In addition, the new standard requires new, more detailed disclosure information. IFRS 15 has the following material impact on the consolidated financial statements of Swisscom:

Revenue

  • If a mobile handset is sold as a part of a bundled offering with a mobile phone contract, it is treated as a multi-component transaction. Previously, the subsidy awarded on the mobile handset with such multi-component contracts was assigned in full to the mobile handset and recognised once the contract was concluded. Now, the revenue will be reallocated over the pre-delivered components (mobile handset), with the result that the revenue will be recognised earlier. The total revenue remains unchanged over the duration of the contract.
  • Swisscom provides bundled service offerings which include Internet and TV as well as an optional fixed-line connection with telephony services. The service fees are fixed. In connection with such bundled offerings, routers and set-top boxes are sold which used to be recognised as revenue at the time of sale. Given the technical requirements, the routers and set-top boxes can be used exclusively for Swisscom services. By the same token, Swisscom services can only be used with Swisscom routers and set-top boxes. The routers and set-top boxes thus do not constitute separate performance obligations. The revenue from the sale of the routers and set-top boxes is distributed accordingly over the entire term of the underlying service contract.
  • Activation fees used to be deferred and released to income over the minimum term of the contract. If no minimum contract term was agreed, revenue was recognised on the date of activation. Going forward, activation fees which cannot be refunded and do not constitute a separate service obligation will be included in the total transaction price and allocated proportionately to the individual performance obligations of the customer contract.

Contract costs

  • Handset subsidies and commissions paid to dealers (costs of obtaining a contract) used to be recognised as expense immediately. Going forward, directly attributable contract costs of obtaining a contract will be activated and recognised as an expense over the entire term of the contract.
  • The costs of routers and set-top boxes used to be recognised as an expense at the time of sale, as was the case for recognising revenue. In the future, these will also be activated as directly attributable costs to fulfill a contract and recognised as an expense over the entire term of the underlying service contract.

Swisscom has chosen the modified retrospective approach for the first-time application of IFRS 15. According to this transition method, Swisscom only has to apply IFRS 15 retrospectively to contracts which had not yet been executed as at 1 January 2018. The resulting transition effect was recognised in equity with no effect on profit or loss effective 1 January 2018. The prior year’s figures have not been adjusted.

The transition effective 1 January 2018 resulted in an increase in equity of CHF 308 million. The effect results from the initial recognition of contract assets and liabilities as well as deferred costs of obtaining a contract and costs to fulfill a contract. The development of the IFRS 15 effect is dependent on future business models and products, the sales channel mix, and volume, price and cost trends.

The relevant items in the financial statements under the previous and new accounting policies are set out below:

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