IFRS 15 – Implementation in the technology and ... …

1 international financial reporting StandardsDer 15. ifrs Kongress 2016 in BerlinIFRS 15 Implementation in thetechnology and telecommunicationindustryMichael Br cksDeutsche Telekom AGAndreas GroteErnst & Young GmbH123 Revenue Recognition at Deutsche Telekom AG background and project milestonesChallenges and questions of interpretationDisclosure requirementsAGENDA2* Customer Relationship Management** Sales and Distribution As of 2018, the existing system landscape will not be able to depictrevenue according to the new revenue recognition requirements. The solution design (portfolio approach, contract-by-contract) hassignificant impact on the cost of Implementation . Corresponding interfaces between CRM* and SAP SD** systems anda Revenue Engine as well as between the Revenue Engine andSAP FI & CO (general ledger) are needed.

2 In the pilot project at Telekom Deutschland GmbH it has becomeevident that cost savings (due to Implementation of the portfolioapproach) amount up to approximately 95% in comparison to acontract-by-contract and project milestones at Deutsche Telekom AGKEY usually receive subsidised handsets whenentering into minimum-term service customer s perspective the subsidised handsetrepresents an incentive for (re-)entering into the our business model handset subsidies are viewed ascosts of acquiring the customer (SAC*).ARPU** is applied by users to compare the performance oftelecoms regarding the provision of telecommunications price for the handset 50 Contractual price for the service 30 per monthbundled with*SAC: Subscriber Acquisition Cost** ARPU: Average (Monthly) Revenue per UserWe are practicing amass-market business modelwith millions of customers and thousands ofcustomer-specific agreementswhich can change every provide comparability between telecoms,industry-specific KPIshave been and project milestones at Deutsche Telekom AGHOW DOES TELECOMMUNICATIONS BUSINESS MODEL WORK?

3 Customer agreement(24 months)4 BillingRevenue fromMultiple ElementArrangementsContingent Revenue CapBillingRevenue fromMultiple ElementArrangementsReallocationCurrent AccountingIFRS 15 Telecommunications industry held very intensive discussions with IASB to retain thecontingent revenue cap. IASB s rationale for eliminating the contingent revenue cap presented in ifrs Contingent revenue cap and the portfolio approach to allocation .Background and project milestones at Deutsche Telekom AGELIMINATION OF CONTINGENT REVENUE CAP5(2) Massive impact on KPIs based on regular subsidised mobile contract Hardware revenue Service revenues ARPU (average revenue per customer) *(1) Segregation of revenue: recognition of a net contract positionMajor Challenge of the proposed regulations: Cash Revenue* Defined as service revenues divided by the number of subscribersBackground and project milestones at Deutsche Telekom AGMAJOR CHALLENGE6(1) Identification of the contract with a customer:A customer enters into a DSL contract with a6 monthscontract term.

4 He receives aWi-Fi routerfor an amount of100 upon contract inception. For voice and internet accessthe customer pays50 on a monthly basis. If the Wi-Fi router was sold separately (non-subsidised), the company would have charged200 .Minimum contract term:6 monthsPrice for Wi-Fi Router:100 SSP* for the Wi-Fi router:200 Monthly price for the service:50 Monthly SSP for the service:50 Illustrative example on an individual contract with acustomer * stand-alone selling pricesBackground and project milestones at Deutsche Telekom AGEXAMPLE: SUBSIDY OF A WI-FI ROUTER7(3)Determinationof thetransactionprice( )SSPin ( )SSPin %( )RelativeSSP(2)Identificationofseparatep erformanceobligations(4)Allocation of the transaction price100 400 200 300 500 40%60%100%Wi-Fi routerDSL contract-160 240 *400 (5)RevenuerecognitionSatisfied atinceptionSatisfied overduration-* monthly: 240 / 6 = 40 300 Background and project milestones at Deutsche Telekom AGEXAMPLE.

5 SUBSIDY OF A WI-FI ROUTER8 Journal entries (Wi-Fi Router) in 10010016060020406080100120140160180 ifrs 15 Revenuelocal GAAP (= IAS 18) local + adjustment = ifrs 15 Revenue Deutsche Telekom uses anadjustment posting approachon general ledger level Amounts from billing areposted on both ledgers local and ifrs Adjustments for ifrs 15 arethen posted in ifrs ledger onadjustment accounts RevRec adjustment entriesand current ifrs ledger entrieswill be summed up in financialstatements to show ifrs 15revenue amountsNotesBackground and project milestones at Deutsche Telekom AGJOURNAL ENTRY POSTING IGood A:100 Service : [..] as a practical expedient, an entity may apply this Standard to aportfolio ofcontracts(or performance obligations) with similar characteristics if the entity reasonablyexpects thatthe effects on the financial statements of applying this Standard to the portfoliowould not differ materiallyfrom applying this Standard to the individual contracts (or perfor-mance obligations) within that Adjustment entryContract Asset 120 with acustomer with acustomer Adjustment entryContract witha customer Adjustment entryContract Asset 120 Background and project milestones at Deutsche Telekom AGPORTFOLIO APPROACH - PRACTICAL EXPEDIENT10 Relative SSP Router.

6 ConceptionalRelative SSP with acustomer and project milestones at Deutsche Telekom AGPORTFOLIO APPROACH - ALLOCATION TRANSACTION PRICE11 Price for the Wi-Fi router (TPR):100 Price for the DSL service (TPS):300 SSP for the Wi-Fi router (SSPR):200 SSP for the DSL service (SSPS):300 Contract deliverables DSL Service Wi-Fi Router54132 Contract /Portfolio StructureMeasurementSSP DeliverablesMeasurementConsiderationTP AllocationRevenueRecognitionPortfolioSpe cification SSP TP ( ifrs Revenue - Billing)per deliverableper periodSSP Deliverables 15 Mil. (50k * (6 50 )) 10 Mil. (50k * 200 ) 25 Mil. TP Deliverables 15 Mil. (50k * (6 50 )) 5 Mil. (50k * 100 ) 20 Mil. Delta Adjustment 3 Mil. +3 Mil. CA:+3 Mil. CA: (6 0,5 Mil. ) 0 Allocation 12 Mil. ( SSP 0,8) 8 Mil.

7 ( SSP 0,8) 20 Mil. Fixed-lineprivate customersAggregation month contractsAllocation to eachdeliverable(rel. SSP)Background and project milestones at Deutsche Telekom AGPORTFOLIO APPROACH - ALLOCATION TRANSACTION PRICE12 Divergence from current, well-established revenue recognitionmodel is strongly disapproved byusers being surveyed by ongoing cost ofcompliance as a result ofmonitoring tens of millions ofcustomer-specific comparability within theindustry for key performanceindicators:The new model will be highlysensitive to accounting estimates( with regard to stand-aloneselling prices) and thereforemanagement between billing andrevenue recognition will result insignificant one-time cost toadjust/replace IT systems andinterfaces. Operators incurring higher costs toconnect customers to their network(through higher handset subsidies)will be rewarded by front-loadingof and project milestones at Deutsche Telekom AGIFRS 15: IMPACT ON TELECOMMUNICATIONS13 Receive data from several systems Map contract data across several systems Work up data to be atperformance obligation/component level Determine if adjustment is necessary Run through IASB five step approach for each contract each month Calculate & post adjustment journal entriesFor each business model, each month, for each contract , one needs toData processing and mapping is in most cases not feasible!

8 Background and project milestones at Deutsche Telekom AGCONTRACT-BY-CONTRACT APPROACH - DISADVANTAGES14No adjustmentsNo IT projectAre there triggersthat lead tocash revenue?Definition of event-drivenadjustment functionsSpecification of ITrequirementsand key figuresIT projectTriggers: Subsidy* of a handset Discounts Activation fees ..Key figure dimensions: Minimum contract duration Distribution channel New/existing customerIs the deviation material?Current billing data * Subsidy: Transaction price of the handset < SSPB ackground and project milestones at Deutsche Telekom AGIMPLEMENTATION OF PORTFOLIO LEVEL1560J F M A M J HardwareConnection FeeSubsidised HardwareConnection 5 5 5 5 5-246 6 6 6 6 6-10 -10 -10 -10 -10 -10-12 -12 -12 -12 -12 -12-30month where correction appliesmonthof the correctionvectors60 -10-30+5.

9 DR: Contract AssetCR: Hardware RevenuesDR: Service Revenues CR: Contract Asset ..January:Background and project milestones at Deutsche Telekom AGADJUSTMENT VECTOR AND MONTHLY CORRECTION 16 Business PortfoliosAdjustment FunctionsConnection feesMobileprivatecustomersAllocation factor / Cost + MarginDiscountsContract modificationsPostpaidwithhardwarePostpai dwithouthardwarePrepaidEarly extension of contractsConnection feesDiscountsEarly extension of contractsContract modificationsMobile private customers:3 different portfolios5 different adjustment functionsNew/existing customerMinimum contract termDirect/indirect distributionSale/LeaseDimensionsRelative SSP HardwareSAP Billing RevenueHardwareKey FiguresBackground and project milestones at Deutsche Telekom AGEXAMPLE - MOBILE PRIVATE CUSTOMERS17 Group Rollout Revenue RecognitionImpact Study and AnalysisPreparation & Decision IT ProjectIT RealisationMilestonesDeliverables Materiality Log One Pager IT/ TechnicalRequirements Testing Concept Testing ResultsAudit certificateAuditor provides ongoing assurance activities123 Project OrganisationAgreed Milestone & WorkshopPlan with NatCoAgreed Milestone &Workshop Plan with NatCoConduction Kick-Off &CoachingAnalysis Results and MaterialityLog reviewedTesting concept

10 ReviewedAgreed Milestone & WorkshopPlan with NatCoAdjustment functions & keyfigures reviewedImplementation andCustomising of IT-SolutionConduction ScopingWorkshopsBusiness-requirementsrev iewedTesting and error trackingreviewedCompletion Contract Analysis IT-requirements reviewedCompletion DeliverablesDecision on RevRec-EnginesolutionReview DeliverablesIT Technical solution designreviewed123456712345671234 Background and project milestones at Deutsche Telekom AGPROJECT MODEL - OVERVIEW Master Template ImpactStudy Master Template BusinessTransaction Matrix Master Template AccountingEvaluation18 Background and project milestones at Deutsche Telekom AGMASTER TEMPLATE IMPACT STUDY19 Design and implementationof the solution for customer acquisitioncost at TDGD esign and Implementation ofthe revenue solution at TDGGo Live ifrs 152012201420152016201720132018todayGo live for normal operation monthly accounts Auditor s report (part 1)Go live for normal operation monthly accounts Auditor s report (part 2)= Design of processes and internal controls (ICS)