Assessing the concerns of the telecommunications industry regarding revenue recognition

Abstract: Revenue is the outcome of the engine of a business that produces the entity’s wealth. The lubricants to keeping the engine running are the marketing, operations and strategy components of the business, while complying with the laws of the countries within which it operates. Key indicators, such as performance, growth, sustainability and the entity’s ability to repay its debts within its agreed payment terms, are fundamental in assessing the health of the business. The underlying element in these indicators is revenue. The revenue received by the entities is invariably derived from contracts with customers. Revenue from contract-based systems is derived from a wide variety of products and services. In some circumstances, revenue may not be systematically recognised over the life of a contract, but instead, the contract revenue should be segmented and taken into account at pre-defined points in time. An industry that fits these circumstances as referred to in the previous paragraph is the mobile telecommunications industry, where revenue is accounted for at pre-determined times over the period of the contract – which is usually when some contractual obligation has been met. The difficult part of revenue recognition for the mobile telecommunications industry is the origin of specific values to the different contract segments. The origin of these values is not always obvious from the actual contracts and often does not follow the way in which the contract operates. The Financial Accounting Standards Board (FASB) has developed numerous autonomous standards for revenue recognition that apply to different industries. However, these standards are extremely complex and have led to variable treatment of similar types of transactions across enterprises. In addition, newly formed businesses may have problems with the various versions of revenue recognition specified in the accounting standards. This is especially so when they do not fit into “deemed normal” industry-specific recommended classifications. Conversely, International Financial Reporting Standards...M.Com