IFRS 15 adopted, modified retrospective method, effect on current period, policies, telecoms

Swisscom Ltd – Annual report – 31 December 2018

Industry: telecoms

Notes to the consolidated financial statements (extract)
Amendments to International Financial Reporting Standards and Interpretations which are to be applied for the first time in the financial year
As from 1 January 2018 onwards, Swisscom adopted various amendments to existing International Financial Reporting Standards (IFRS) and Interpretations, which, with the exception of the amendments below, have no material impact on the results or financial position of the Group.

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Further information as to the changes in IFRS which must be applied in 2019 or later are set out in Note 6.3. The new IFRS Standards adopted have the following impact on shareholders’ equity as of 1 January 2018:

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IFRS 9 “Financial Instruments”
The Standard encompasses new rules to classify and measure financial assets and liabilities, the recognition of impairments and the recording of hedging relationships. The new provisions have resulted in changes to the classification of other financial assets. In addition, equity instruments which until now were measured at cost must now be measured at fair value. The classification and carrying amounts of other financial assets in the accordance with the previous and new provisions are as follows:

 

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Under the new provisions relating to impairments, impairment losses on financial assets are to be recognised earlier. Impairment losses on financial assets as of 1 January 2018 increased by CHF 32 million before income taxes as a result of the initial adoption of IFRS 9. No changes for Swisscom will ensue from the recording of hedging relationships. Equity as of 1 January 2018 declined by CHF 15 million as a result of the initial adoption of IFRS 9. The prior year’s comparative figures were not restated.

IFRS 15 “Revenue from Contracts with Customers”
In contrast to the provisions in force until now, 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 point of time or over-time criteria, it is no longer a question of the transfer of risks and rewards but of the transfer of control over the goods and services to the customer. With regards to multi-element contracts, IFRS 15 explicitly rules that the transaction price is to be allocated to each identified performance obligation in proportion to the relative stand-alone selling prices. Furthermore, the new standard contains new rules regarding the costs to fulfill and to obtain 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 presentation and disclosure information. IFRS 15 will have the following material impact on the consolidated financial statements of Swisscom:

Revenues
• If a mobile handset is sold as part of a bundled offering with a mobile-phone contract, it is considered as a multi-element contract. Previously in such multi-element contracts, the subsidy granted on the mobile handset was allocated in full to the mobile handset and recognised accordingly in full upon conclusion of the contract. Under the new rules, the revenue is to 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 whole duration of the contract.
• Swisscom makes bundled offerings which include broadband and TV as well as an optional fixed-line connection with telephony services. Service fees are fixed. Routers and set-top boxes are sold in conjunction with such bundled offerings which previously were recognised as revenue in full at the time of sale. Because of their technical requirements, the routers and set-top boxes can be used exclusively for Swisscom services. Conversely, Swisscom services can only be used with Swisscom routers and set-top boxes. For this reason, the routers and set-top boxes do not constitute separate performance obligations. Revenues from the sale of routers and set-top boxes are thus distributed over the term of the underlying service contract.
• Previously, connection fees were deferred and recognised as revenue over the minimum contract period. Should no minimum contract period exist, the revenue was recognised at the time of activation. Non-refundable connection fees which do not constitute a separate performance obligation in future are considered as part of the total transaction price and allocated to the separate performance obligations arising under the customer contract on a pro-rata basis.

Contract costs
• Handset subsidies and commissions paid to dealers (costs to obtain a contract) were previously expensed immediately. In future, directly attributable costs to obtain a contract are capitalised and expensed over the life of the contract.
• The costs of routers and set-top boxes were previously expensed at the time of sale in accordance the revenue recognition policy. In future, they will also be capitalised as directly attributable costs to fulfil a contract and expensed over the term of the underlying service contract.

Swisscom has elected to apply the modified retrospective approach for the initial adoption of IFRS 15. In accordance with this transitional method, Swisscom must apply IFRS 15 retrospectively only for those contracts which had not been fulfilled as of 1 January 2018. The cumulative effect in applying the standard was recognised in equity as of 1 January 2018, with no effect on the income statement. The prior year’s comparative figures were not restated. Equity as of 1 January 2018 increased by CHF 311 million as a result of the adoption of the new standard. The impact is the result of the initial recognition of contract assets and liabilities as well as deferred costs to obtain a contract and costs to fulfill a contract. How IFRS 15 will impact future results will depend on future business models and products, the mix of distribution channels as well as future movements in volumes, prices and costs.

Presented below are the relevant financial-statement positions measured in accordance with the previous and new accounting policies:

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1.1 Segment information (extract)
Accounting policies
In the following paragraphs are described the accounting policies which are valid as from 1 January 2018. The amendments to the previous accounting policies are described in the note “Amendments to International Financial Reporting Standards and Interpretations which are to be applied for the first time in the financial year”.

Telecommunication services
Telecommunication services encompass mobile and fixed-network services in domestic and foreign locations. Mobile-phone services comprise the basic charges; in addition, they include the domestic and international cellular traffic relating to calls made by Swisscom customers within Switzerland and abroad. Swisscom offers subscriptions with a monthly flat-rate fee, the revenue for which is recognised on a straight-line basis over the minimum term of the contract. Depending on the type of subscription, revenue is recognised on the basis of the minutes used. The minimum contract term, as a rule, is 12 or 24 months. If a mobile handset is sold as part of a bundled offering with a mobile-phone contract, it is considered as a multi-element contract. Multi-element transactions are grouped into portfolios for revenue accounting. The transaction price for multi-element contracts is allocated to each identified performance obligation on the basis of relative stand-alone selling prices. In this process, the stand-alone selling prices of each component is considered in relation to the sum of the stand-alone selling price of each performance obligation under the contract. The stand-alone selling prices of mobile handsets and subscriptions correspond to Swisscom’s list price and the minimum contract term. Non-refundable connection fees not representing separate performance obligations are taken into account in the transaction price and allocated on a relative stand-alone selling prices basis to the individual performance obligations under the customer contract. In the event that there is no minimum contract term, the revenue is recognised at the time of connection.

Fixed-network services comprise principally the basic charges for fixed telephony, broadband and TV connections as well as the domestic and international telephony traffic of individuals and corporate customers. In addition, Swisscom makes bundled offerings comprising broadband and TV connections with an optional fixed-line telephony connection. These subscription fees are flat-rate. The minimum contract term is twelve months. Revenues are recognised on a straight-line basis over the term of the contract. Revenue for telephone calls is recognised at the time when the calls are made.

Solutions
The service area of communications and IT solutions comprise principally advisory services and the implementation, maintenance and operation of communication infrastructures. Furthermore, the area includes applications and services, as well as the integration, operation and maintenance of data networks and outsourcing services. Revenue from customer-specific orders is recognised using a measure of progress method which is measured on the basis of the relationship of the costs incurred to total anticipated costs. Revenue arising on long-term outsourcing contracts is recognised as a function of performance to date provided to the customer. The duration of these contracts, as a rule, is between 3 and 7 years. Transition projects in connection with an outsourcing contract are not recorded as separate performance obligations. Maintenance revenues are recognised on a straight-line basis over the term of the maintenance contracts.

Sales of merchandise
Mobile handsets, fixed-line devices and miscellaneous supplies are recognised as revenue at the time of delivery or provision of the service. Swisscom sells routers und TV-boxes to be used for services provided by Swisscom. As these are only compatible with the Swisscom network and cannot be used for networks of other telecommunication service providers, they are not recorded as separate performance obligations. Revenue is deferred and recognised over the minimum contract term of the related broadband or TV subscription.

Wholesale
The services comprise principally leased lines and the use of the Swisscom fixed network by other telecommunication service providers (roaming). Leased-line charges are recognised as revenue on a straight-line basis over the terms of the contract. Roaming services are recognised as revenue on the basis of the call minutes or at contractually agreed charges as of the time of providing the service. Roaming fees charged to other telecommunication service providers are reported on a gross basis.

1.2 Operating expenses (extract)
Accounting policies
In the following paragraphs are described the accounting policies which are valid as from 1 January 2018. The amendments to the previous accounting policies are described in the note “Amendments to International Financial Reporting Standards and Interpretations which are to be applied for the first time in the financial year”.

Costs to obtain a contract
Swisscom pays commissions to dealers for the acquisition and retention of mobile-phone customers. The commission payable is dependent on the type of subscription. Costs to obtain a contract are deferred and amortised over the related revenue-recognition period. In addition, the handset subsidies granted to the customer at the same time a Swisscom mobile-phone subscription is entered into, are reimbursed to the dealer. These costs are deferred and amortised on a straight-line basis over the contract term as costs to obtain a contract. The amortisation period corresponds to the related revenue-recognition period. See note 1.1.

Costs to fulfill a contract
In connection with a broadband or TV subscription, the customer must purchase a router or TV box in order that the customer can use the services of Swisscom. Routers and TV boxes may be used exclusively for services provided by Swisscom. The cost of routers and TV boxes are reported as costs to fulfill a contract and amortised over the minimum term of the contract. The start-up costs incurred to transfer and integrate outsourcing transactions with corporate customers are deferred and amortised against income on a straight-line basis over the duration of the operating contract. The amortisation period corresponds to the related revenue-recognition period. See note 1.1.

 

 

 

 

 

 

 

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