The Ledger

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The Ledger

Posted by Patrick Youngs

IFRS 15 – Value Beyond Compliance

Some telecommunication providers have estimated that compliance with the new revenue recognition requirements might require tens to hundreds of millions of dollars in investment.

But we have been working with several leading firms who have found opportunity in the middle of this challenge. These proactive CFOs are gearing their revenue recognition projects to unlock business insights, transform management reporting and improve their finance team’s strategic capabilities. In this post, we look at how CFOs can use IFRS 15 to unlock value beyond compliance.

Why is IFRS15 (ASC 606) compliance so costly, complex and difficult?

The new revenue recognition standard is the most significant accounting change since the introduction of IFRS over ten years ago, according to Tony Chanmugam, group CFO at BT.

Achieving compliance is much more than a simple policy adjustment. It requires significant change to process and systems.

For the majority, the most prominent system challenge lies in the collecting and managing the contract-level data for millions of customer contracts as well as transactional data required to determine when to recognize what revenue. Nick Read, group CFO of Vodafone, noted that “under the new rules, sourcing and linking the data required to reliably allocate revenue could be challenging given diverse and complex IT systems.“

The complexity of compliance is also increased by making accounting judgments about stand alone selling prices, contract modifications, and the handling of various contract terms and conditions such as discounts, fees, commissions and variable pricing.

Does a portfolio approach simplify anything?

Many telcos originally thought that a ‘portfolio approach’ (with groups of similar contracts calculated together) would simplify their IFRS 15 implementations – but following further analyses, most of the firms we are working with are finding that it doesn’t eliminate the need to collect low-level data and comes with the added complexity of actively managing portfolios.

Opportunities to achieve value beyond compliance

Investment at the levels estimated for revenue recognition compliance needs to deliver more to the business than just accounting compliance so proactive telecom CFOs are incorporating value-add elements into their IFRS 15 projects.

----1. Improve management reporting for greater analytics

----2. Simplify, streamline and automate finance operations

----3. Reduce the cost of finance

 

1. Improve management, performance and analytic capabilities

The contract-level customer and product data required to address IFRS 15 can be tapped to dramatically improve analytics and management/performance reporting. By building systems that integrate, validate and store this data, telcos will be able to calculate metrics such as customer lifetime value and the profitability of individual products, channels and customer segments. It will also enable them to better forecast future revenues and understand the financial impact of business decisions.

Data collection and reliability has always been finance’s key limitation in performing analytics. Data acquisition projects to support IFRS 15 (FASB 606), if done properly, will help telecom providers overcome this barrier while solving the underlying compliance issue.

In addition, the systems (used for rev-rec) should enable finance with instant auditable data to support changes in estimates and judgments inherent in the revenue recognition process such as average customer terms, early termination fee reimbursement rates, etc.

2. The opportunity to standardize, simplify and automate finance operations

A second way that telcos are unlocking value from their IFRS 15 projects is by taking the opportunity to streamline their finance IT architectures.

IFRS 15 presents three main opportunities to improve finance operations:

----a. Streamlining data integration/validation processes;

----b. Forcing firms to gain a single point of accounting control (to apply new rev rec rules);

----c. Providing a rich data store of granular, contract level data that links the General Ledger to the data warehouse.

Telecom providers that we are working with recognized this opportunity very early, and are implementing a revenue recognition engine in tandem with an accounting hub and financial data warehouse. Our recent finance architecture brochure gives an overview of the best-practice architectures and the components finance can install to address IFRS15 while streamlining broader accounting and reporting processes.

3. Reduce the cost of finance

Recent research published on CFO.com highlights that many of the most cost-conscious CFOs achieve efficiencies by standardizing global financial data models and charts of accounts, automating transaction processing and streamlining core accounting processes – exactly the same things that many finance teams need to address the new revenue recognition rules.

In the margin-sensitive, highly competitive telecoms environment, lowering the cost of finance is imperative for many CFOs with the labor component of the total finance cost averaging 60% or higher according to Mary O’Driscoll at AQPC. Many finance processes are constrained by the need for manual data collection and manipulation. Often, finance is unable to deliver insights and answers because sourcing good information is just too difficult.

Conclusion 

Achieving compliance with the new international revenue recognition accounting requirements will challenge telecom providers. The time frames are tight, but providers that are starting now have an opportunity to gear their projects to achieve much value beyond mere compliance.

 

If you’re a telecommunications provider, contact our team at info@aptitudesoftware.com to discuss your IFRS 15 requirements.

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