IFRS 15, IFRS 9, quantified effects of future adoption, telecoms

Koninklijke KPN N.V. – Annual report – 31 December 2017

Industry: telecoms

[2] Summary of significant accounting policies (extract)

Future implications of new and amended standards and interpretations (extract)

IFRS 15 ‘Revenue from Contracts with Customers’

This new standard introduces new guidance on the recognition and measurement of revenues and also provides a model for the sale of some non-financial assets that are not an output of a company’s ordinary business activities. KPN will adopt IFRS 15 retrospectively and will restate the 2017 financial information for comparison purposes in the 2018 Consolidated Financial Statements. In 2018, KPN will record a cumulative transitional adjustment at 1 January 2017, the date of initial application.

In 2017, KPN implemented for IFRS 15 a IT solution for collecting and integrating data from various sources. New IFRS 15 related processes and controls are implemented. Teams consisting of members of the core project team and representatives from Finance and Business functions, IT and source system experts have validated the results. The core project team has ensured that IFRS 15 is well understood and implemented consistently across the company.

Key impact of IFRS 15

In 2017, KPN completed the analysis of the cumulative transitional adjustment as at 1 January 2017. Accounting for all customer contracts in progress but not yet completed or starting after the date of application has been analyzed and revised for IFRS 15 impact, if any. The following impact of IFRS 15 will be visible in the 2018 Consolidated Financial Statements. The revenue profile of approximately 60% of KPN’s revenues is impacted by the transition to IFRS 15. Under IFRS 15, service revenues will be EUR 317m lower in 2017, mainly driven by the reclassification of handset sale revenues to non-service revenues and proceeds from handset sales via partners in the indirect channel no longer being recognized as service revenues. Based on our analysis equity as at 1 January 2017 will increase by EUR 222m, and at 31 December 2017 by EUR 127m. Net income for the year 2017 will decrease with EUR 95m and EBITDA with EUR 113m under IFRS 15. From 2018 onwards, we expect that service revenues will be at a structurally lower level compared to previously reported under IAS 18 due to the reclassification of handset revenues and different accounting treatment of handset sales through the indirect channel as explained in more detail below. The transition to IFRS 15 will have no impact on the cash flow from operations and on the overall contract profitability.

Main differences between IAS 18 and IFRS 15

See the tables on page 84 for the IFRS 15 impact on KPN’s Consolidated Statement of Profit or Loss 2017 and on KPN’s Consolidated Statement of Financial Position. In March 2018, KPN will issue a more detailed analysis of the impact of the restatements by segment. The most significant differences with KPN’s current accounting policies include the following:

  • Postpaid mobile contracts via KPN shops and website:

Under our current accounting policy, revenue related to the sale of handsets in postpaid mobile contracts is recognized up to the non-contingent cash received upfront, i.e. the amount the customer pays for the handset when it is delivered to the customer. Under IFRS 15, additional revenue will be allocated to the handset at the start of the contract. The amount of revenue is calculated based on the relative standalone selling price of the handset, regardless of the actual contract pricing. As an example, compared to the current accounting policies, a postpaid subscription with a handset will result in recognition of higher non-service revenues upon delivery of the handset to the customer and lower subscription fees (service revenues) during the subscription period. On adoption of IFRS 15, this change will pull forward revenue in the periods being restated, and KPN will recognize a contract asset for all open contracts at 1 January 2017.

  • Postpaid mobile contracts via third parties:

Under IFRS 15 handset-related dealer fees result in an unbilled receivable on the statement of financial position that will decrease when instalments are billed to the end-customer, i.e. handset-related fees will no longer be expensed as incurred as part of the costs of goods and services (see Note 6). The handset instalment payments are no longer accounted for as service revenues, but netted against the receivable. Under our current accounting policy, transaction-related dealer fees are expensed as incurred as part of the costs of goods and services. Under IFRS 15, transaction related dealer fees paid to acquire or retain subscribers are capitalized and recognized on a straight-line basis over the contract term of the underlying customer contract.

  • Installation service consumer customers:

Under our current accounting policy, no revenue is recognized if the installation service is provided free of charge. Installation services offered to consumer customers are generally considered a separate performance obligation. Under IFRS 15, revenue is then allocated to the installation service at the start of the contract, based on its relative standalone selling price, regardless of the actual contract pricing. The revenue recognition profile will change with upfront recognition of revenue for the installation service and a corresponding reduction in ongoing wireline service revenue over the contract period. The difference between the amount of revenue recognized and the amounts charged to the customer will be recognized as a contract asset.

  • Transition phase of projects for business customers:

Under our current accounting policy transition costs relating to fixed-price contracts involving managed ICT services are capitalized and subsequently amortized to profit or loss on a straight-line basis during the period the services are provided. Under IFRS 15, these transition costs are already recognized in the P&L during the project phase and also corresponding revenue is recognized earlier if the transition project is a separate performance obligation to which costs and revenues are allocated.

  • Variable consideration:

Revenue for variable consideration, including revenue related disputes, is currently recognized when it is probable that these will flow to the company and under IFRS 15 only when it is highly probable. As a consequence, such revenue may be recognized later when this higher threshold is met.

  • Recognized contract assets will be included in the calculation of the provision for expected credit losses under IFRS 9 as set out on page 85.
  • There will be a corresponding effect on income tax in relation to the above impacts.
  • Consumer credit legislation:

As of 1 May 2017, KPN is legally required to treat a handset combined with a postpaid subscription as a consumer loan under the Dutch Financial Supervision Act (Wft, Wet op het financieel toezicht) if the consumer customer repays the handset in monthly instalments and the credit amount is above EUR 250. The separate legal entity KPN Finance B.V. is the contract party in the loan agreement in both direct and indirect channels. The outstanding consumer loans in KPN Finance B.V. amount to EUR 114m at 31 December 2017. These consist of EUR 1m unconditional receivables classified in ‘Trade and Other Receivables’ and EUR 113m for conditional receivables that are not yet invoiced and are eliminated upon KPN group consolidation under IAS 18. As set out above, IFRS 15 considers this a contract asset for both consumer and business customers. As of 1 January 2018, the contract with consumer customers for the instalment payments of the handset has changed in both direct and indirect channels, resulting in an unconditional IFRS 9 receivable. Taken into account the low interest rates and contract duration, these receivables do not include a significant financing component.


IFRS 9 ‘Financial Instruments’

This standard introduces new requirements for classification and measurement, impairment and hedge accounting of financial instruments and is effective as of 1 January 2018. KPN will adopt IFRS 9 retrospectively (except hedge accounting which will be applied prospectively) and will restate the 2017 financial information for comparison purposes in the 2018 Consolidated Financial Statements. In 2018, KPN will record a cumulative transitional adjustment at 1 January 2017 to revise historical financial data.

IFRS 9 impacts the valuation of certain contract assets which will be recognized as a result of IFRS 15.

The most significant differences of IFRS 9 with KPN’s current accounting policies are:

  • Available-for-sale financial assets:

Fair value movements recorded in OCI are no longer recycled through the P&L (other financial results) for all assets recognized on the balance sheet as of 1 January 2018. This means that a decrease in the fair value which is considered permanent or a sale of these assets will no longer impact the P&L. There was no permanent decrease in fair value in 2017.

  • Provision for trade receivables and contract assets:

In addition to the provision for overdue trade receivables measured under the current accounting policy, a provision is recorded for the expected loss on trade receivables and contract assets not yet overdue.

  • Hedge effectiveness testing of the cross-currency swaps and interest rate swaps:

Cross-currency basis spreads are no longer included in the risk designation. This may lead in the future to differences in the amounts recorded for hedge ineffectiveness.

See table on page 84 for the IFRS 9 impact on KPN’s reported 2017 results and the Corporate Statement of Financial Position.