Telecoms face costly accounting change over handset revenue

LONDON Mon Dec 17, 2012 12:23pm EST

LONDON (Reuters) - Telecoms companies face costly upheaval to how they treat income from millions of mobile users after accounting rule-setters backed reform on how revenue from subsidized handsets is tallied.

The International Accounting Standards Board (IASB), whose rules are used in over 100 countries from Europe to Canada and Asia, is simplifying how companies book revenues.

It is being done jointly with the U.S. Financial Accounting Standards Board (FASB) to create a global standard so that investors can compare sectors more easily.

The IASB and FASB voted on Monday not to give operators an exemption from the new revenue recognition rule due in 2016 despite heavy lobbying from the industry.

"There will be complexity to some extent. There will be a need to determine what is the appropriate margin to be applied to the handset," IASB staff member Glenn Brady told the meeting.

Global mobile telecoms lobby GSMA had no comment.

Operators typically bundle the cost of a handset with the service contract and book revenue in line with monthly customer payments but this may not give the full picture.

U.S. telecoms group Sprint Nextel had its best quarter in years in the final three months of 2011, signing up a net 1.6 million new customers who flocked to the latest iPhone. The company, however, reported a $1.3 billion loss as it subsidized many more handsets to win those contracts.

The IASB believes such reporting fails to reflect the healthy underlying economics of a growing company that will collect many more monthly fees from customers.

Under the reform, an operator will have to change its systems to recognize more revenue upfront from the handset and less from customers' monthly payments, following the principle that revenue should be recognized when a good like a handset or service is handed over to a customer.

But experts warn of a problems to come.

"Analysts like to see what is the average monthly revenue per subscriber the telecom company is pulling in and suddenly this is going to distort those figures," said John Edwards, a partner at KPMG accounting firm.

"Going forward, some operators may now chose to have two sets of numbers, one for the financial statements, the other for analysts and the market," Edwards said.

The boards on Monday agreed that companies, not just telecoms operators, may be able to calculate revenues on a portfolio basis, thus avoiding the more cumbersome contract-by-contract approach.

A board member said this may not help operators as they have thousands of portfolios due to different service plans.

(Editing by David Cowell)