We are seeing more and more operators announcing new handset-financing programs. Part of the reason for this is that they are attempting to move away from the burden of handset subsidies.
Additionally, operators may also be preparing for the upcoming changes to the revenue-recognition standard that will, if implemented, have a significant impact on their service revenue.
For the sake of completeness, let’s start with the basic definition of total revenue in the telecom industry:
Total revenue = Service revenue + Handset revenue*
One would therefore assume that all revenue associated with providing telecom services is allocated to service revenue while all revenue linked with handset sales is allocated to handset revenue.
If only it were that simple.
In reality, service revenue actually includes a part of handset revenue that relates to subsidized handsets purchased on pay-monthly plans. The price that a customer pays upfront for a subsidized handset is recognized as handset revenue. Each monthly payment made by this customer includes a handset component related to the subsidized handset and a services component related to using telecom services.
Pay-monthly plan = Monthly service revenue = Handset component + Service component
The total monthly payment is recognized as service revenue. The handset part of service revenue is not service revenue in its true sense and inflates the true service revenue. Operators see handsets as a key factor in attracting new customers despite the initial loss they suffer due to the handset subsidy, as revenue is apportioned across the length of the contract. Such accounting practices are widely used by operators worldwide and are set out within the existing accounting guidelines.
However, this could soon change.
The two main global accounting bodies are working to finalize a new revenue-recognition standard that is to set new rules about how to account for and report on contracts with customers. Compared with the existing policy, which sees a bundled sale as a single customer contract, these new rules split a customer contract into two separate components: selling handsets and providing telecom services.