IFRS Compliancy: Accounting for change
24 May 2013 |
The telecoms industry could be facing one of the most radical overhauls of its accounting practices and systems as it attempts to become compliant with new International Financial Reporting Standards (IFRS). Alex Hawkes investigates.
It has been described as a watershed moment in telecoms accounting history. In December 2012, the International Accounting Standards Board (IASB) confirmed that it was going ahead with proposed revenue recognition reporting standards.
The new International Financial Reporting Standards (IFRS), which had been under consultation for three years, will mean operators will have to change the way they recognise revenue, reallocating it based on contractual performance obligations.
In particular, it pushes operators to account at the customer or portfolio level for the wide variety of bundled offerings unique to telecoms business models.
The move was initially fiercely resisted by the telecoms community when it was first put to them by the IASB in 2011. Most operators keep revenue and cost accounting entirely separate – and the need to link billing and the costs of handsets, per draft, presents a complex and costly challenge for the industry as a whole.
“There are various numbers being thrown around but anywhere between €10 and €30 billion is being forecast as the collective cost for telcos to implement this globally,” says David Sheriff, CEO at Microgen, which is helping telecommunications companies become IFRS compliant. “It’s a huge unexpected cost.”
Keeping to the right timeframe
While the collective industry appeal against the proposals was unsuccessful, the IASB did concede on the timeframes for implementation – with the standards coming into force as of January 1 2017. By which point all telecoms operators globally will have to comply with the regulations. “This is the date they will actually have to report under these guidelines, it’s not the date they will have to start doing the accounting, as a lot of what they do will be retrospective,” Sheriff explains further. “This means putting systems in place prior to that date in order to capture the correct data and accounting for the retrospective reporting.”
By Sheriff ’s estimation this means telecoms operators must start considering how they will implement changes to their accounting systems this year, and begin work on actual projects next year. “It will involve quite considerable changes to the way they do accounting,” says Sheriff.
Perhaps one of the largest changes for operators will be finding ways to account for individual parts of service bundles. Service bundles have become increasingly complex over time, and grown to include flat rate services and specific app subscription services.
Many operators will be required to make considerable adaptations to their infrastructures to provide the kind of granular and accurate reporting that is demanded under IFRS.
“It’s going to mean the operators will have to extract data from a number of different systems. A lot of telcos will have separate cost and allocation systems. And it’s going to require bringing those individual elements together,” says Sheriff.
The telecoms industry is no stranger to consolidation, and the high volume of mergers and acquisitions that have occurred in the market adds a further degree of complexity. “There are a lot of disparate unconnected billing systems out there - general finance systems that are not actually integrated.”
There is also a view in the market that larger operators generally have more complex accounting environments, and will therefore inevitably incur higher costs as a result of complying with the new regulations.
Weighing up all available compliancy options
So what are some of the options available to operators as they attempt to prepare their accounting systems?
Microgen has identified three approaches available to operators. Firstly, they may want to look at changing their legacy billing and inventory systems. Many billing systems are old, but customer-facing and business critical. They also do not account for component costs. Microgen claims this presents a financial and operational risk for operators, with one leading European operator allegedly stating it could cost as much 20 million euros to implement and would require 10 to 15 years to do so.
Another approach is to bring revenues and cost together in general ledger. The potential complication in doing this is some of the granular data levels required to process the information are not available in the general ledger today, nor may it be feasible to bring such data volumes into these systems.
The third and final approach would be to establish an automated processing and accounting layer between the billing systems and the general ledger, which is said to remove the need for changes to these critical systems.
Not all doom and gloom for operators
Whichever route an operator decides to adopt, Sheriff says there could be some significant long-term benefits from complying with the new IFRS standards.
“I don’t think it’s a punitive set of rules the industry is dealing with here,” he says. “It will bring greater clarity and understanding of their profitability. They will really be able to go down to a more granular level with profit revenue, as well as gain a better understanding of customers which could ultimately lead to a better provision of services.”
From a shareholders perspective, it will also bring greater transparency, offering them a deeper insight into their investment’s revenues, profits and costs.
“The hope is that it will improve everyone’s lives, but you never know with regulation,” says Sheriff. “The ISAB’s intention is to bring more transparency across companies and the wider industry.”
Sheriff also thinks operators should make the best of the extended compliancy timeframe offered by the IASB. “If you look at the impact regulations have had on the financial services in the UK, it’s become very clear that imposing a series of strict regulations in a very short timeframe has not worked,” he says.
“The ISAB has gone down a strategic approach – we hope what the telcos recognise is that they do have the time to do this properly and not have to revisit it again in the future.”
Some good news for the wholesale community
Understandably, the industry appears to have held off complying with the new IFRS regulations until the appeal process had come to an end. “To our knowledge, no operator has actually commenced any form of systems implementation. Some have already begun working with management consultancies – setting out what they need to do, working out what the impacts might be and identifying data sources,” says Sheriff.
There’s also some welcome news for the wholesale segment, which is largely thought to be facing less complexity in the mobile market as it pursues compliancy with the new regulations.
“As the volume of customers is relatively low and wholesalers usually would be providing a single service, then the complexity to be IFRS compliant in theory, is not as great as where there are a very high volume of customers, handsets etc, so the impact of IFRS should be less,” says Sheriff.
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