Issues Regarding Transaction Prices - Assignment Example

FA3 ASSESSMENT 2: BUSINESS LETTER By Student’s Name Code + Course Name Professor’s Name University Cite, State Date The Manager Honest & Blonde (HB), P.O Box 22-23567, Queensland Australia June 24, 2012. TeleFones4U Telecommunications Company, P.O. Box 345-8749, Western Australia. Dear Sir/Madam The focus of this letter is on evaluating the process involved with the firm’s allocation of transaction price and stipulates whether or not it adheres to the current proposed frameworks on the same. Summary of Issues Regarding Transaction Prices: Kindly, note that most of the respondents indicated their respective support for the underlying proposed revenue project and also, they perceived a need to adapt to a sole revenue model that could be used within the entire industry as well as in executing transactions. However some of them were uncertain on the usefulness and practicality of the model in regards to allocation of the transaction price and contract acquisition costs at large. The allocation of a transaction price is proposed on a stand-alone selling price approach and subsequently, it should be estimated by way of a residual approach in the case the prices of either the goods or services are deemed to be uncertain or adopt a model that provides for discounts or contingent amounts on transaction prices of promised commodities in the event that a given criterion is achieved. Notwithstanding, contemplated level of guidance is proposed on the process of choosing stand-alone prices in such cases involving a given estimate that is availed in a range of prices and also, in the course of establishing the prices for specific standardized goods or services that need to be availed to a consumer for a certain agreed contract period. In regards to contractual discounts awarded to a given section of a contract, were deemed to be limited hence an opportunity to distort reflection of the underlying economics of the transaction at hand. For this case, a model that adopts quality of evidence approach is ascertained as opposed to affecting stand-alone prices to specific areas of discounts. As a company, Telefones4U should note that a contingent gap should not be used for the purpose of allocating transaction prices since the resultant accounting results would not conform to the fundamental aspect of the proposed model. In consequence, despite assuming the stand-alone pricing model on contract agreements, it is perceived that some issues might arise in the course of its application. For instance, the allocation approach is likely to result to a significant amount of the transaction price being depicted as being revenues in the course of adopting terms attributing to the contract at hand. It is also evident that problems might arise in relation to reduced streams of network based service revenues for a firm. There is also a likelihood of a firm incurring substantial compliance based costs given that accounting systems fail to recognize the possibility of the information. Comparison that is made between direct and indirect forms of channel are likely to be affected by such aspect as contract acquisition costs as well as the patterns derived from revenue recognition that is deemed to be distinctively different for sales posted through direct and indirect channels. Contingent Cap: The company should understand that a contingent cap would arise whenever a firm selling such a commodity as a handset on a contractual basis is bound to execute one section of the term in conjunction with a non-related section that was agreed upon in the course of conducting business. For instance, in the case of telecommunication companies, a transaction price for a handset sold on contractual basis sets to include both the provision of the handset and the promised network services to the end user. Thus, in the event that the firm only provides the handset but fails to avail a network service as promised would result to a breach of contract. Relative Stand-Alone Selling Price: The term, “applying a relative stand-alone selling price allocation model methodology” describes the requirement directed towards telecommunication companies to effect transaction prices for goods or services offered at a uniform manner. Thus, transaction pricing should not change even in cases where the prices for goods or services transferred to a customer changes from one day to another. However, for most telecommunication companies like Telstra, their businesses rely on “many multiple low-dollar-value, high-volume recurring transactions and contracts” (Telstra, 2012). In addition to this fundamental aspect, both goods and services offered are in constant evolvement in terms of technology and in marketing perspective hence transaction prices vary and also, customers continue to upgrade and downgrade their respective telecommunication bundles. Thus, it would prove a challenge to come up with and apply a stand-alone model methodology for that matter. Issues that Arose Within Paragraph 140 According to Staff Paper (par.140), numerous participants came up with a number of issues that could be attributed to the application of the stand-alone selling price allocation methodology in relation to the contracts. These issues are described as follows; first, there was a concern that a substantial amount of the agreed transaction price would be disclosed as company revenue in the course of meeting the terms to the contract at hand. This concern is mainly attributed to the fact that revenues should only be recognized in the event that a firm is able and willing to meet its integrated commitment of availing promised network services to the customer. Given this predicament, a firm should also be wary of time value for money and impairment purposes since contract assets can be overrepresented. Second, issues were raised in regards to possible future reduction of the constant flow of revenues that is attributed to the associated network services provided to the customer. There would be a substantial level of difference that might arise between the revenues recorded at the time of contract execution and the actual amounts that the firm would receive after it has met its final obligation of providing promised network services to the customer. Third, the participants were raised in relation to the fact that handsets are not necessary sold altogether within the retail market hence a possibility that the transaction price within the aforementioned market would not be a fair representation of handsets that are sold in a bundle. Following this line of reasoning, firms perceived the need to formulate stand-alone prices for such handsets sold in retail market despite the fact that it would catapult the level of subjectivity and also, a possible reduction of the comparability of the firm’s revenue related information. Fourth, the respondents perceived an issue that would arise in the course of estimating a stand-alone selling price and also, in allocating the transaction price especially because there was imminent possibility of increased compliance costs. This increase in the costs is a result of the failure of accounting systems to acquire necessary data needed for the computation purposes. Significantly, the process of estimating stand-alone selling price was attributed to a tedious and complex preparation that involves a substantial volume of contracts and numerous permutations within the contracts. For instance, according to TELUS (2012,p.2),it is ascertained that the process of determining the transaction price is considered as being complicated in nature given that the proposal to integrate variable consideration might or might not materialize in the near future. The fact that management are allowed to estimate variable considerations in the course of contract adoption would necessitate a degree of multiple outcomes that is subjective and exposed to elements of manipulation. Direct and Indirect Distribution Channels: In its operations, Telefones4u should understand that the issue of direct and indirect channel of distribution arises whenever there are problems estimating a uniform transaction price especially because, in direct channel distribution, handsets are sold at a subsidized price and they are provided together with a network services while in indirect channel distribution a dealer of network service is awarded the right to avail the handset on behalf of the firm but a commission hence leading to an inconsistent pattern of revenue recognition models. It is important to realize that in direct channel distribution, the resultant differences perceived on revenue recognition patterns arise whenever a section of the transaction price is apportioned to standardize the subsidized handsets whereas, in indirect channel distribution, the recognized revenue pattern is inconsistent due to the fact that the channel is only focused on only availing network services hence the transaction price is wholly apportioned to availing the aforementioned services to the end user of the product and services. The proposed standard is thus misleading because adopting a different revenue recognition model would not postulate whether a customer was attracted by way of a direct channel or through indirect channel of handset distribution (Staff Paper, Paragraph 141). Impacts of Accounting Systems: According to Staff Paper (Paragraph 144), the concerns on direct and indirect channel of distribution are likely to affect their accounting systems especially because a telecommunication company can opt to recognize a contractual asset taking into consideration the incremental costs attributed to securing the costs and hence a possibility to recover the costs incurred. On the contrary, a telecommunication company might chose to recognize the costs as an expense in the event that the amortization period for the aforementioned costs falls between a year and less. Significantly, the companies perceived a possible issue that would result from an overlooked comparability between direct and indirect channels of distribution. This is attributed to the fact that, in direct channel, the cost of subsidizing a handset acquired by a customer is recognized in the income statement of the firm while the commission that is entitled to a dealer of the handset is recognized as being an asset to the firm hence it is amortized over the exact life of contract at hand. Following this happening, the preparers of the telecommunications industry postulates that the revenue standards should be allowed to them in order to recognize the subsidized fee as an intangible asset and thereby recognize the commission paid to the dealer of the handset as an expense that is incurred within the given year of operations. For instance, in the case of Telecom Italia (2012, p.3), the accounting systems are likely to be affected by the fact that it requires a readily available powerful information system that is constant need of relevant modification processes in regards to both information systems architecture and operating procedures, which is a subject to exposure to substantial material costs as well as imminent capital expenditures. Retrospectively, the underlying information processing is bound to be exposed to a substantial degree of judgment that might affect the comparability of financial statement values between the different telecommunication companies. Opinion Regarding Elimination of Contingent Gap According to Staff Paper (139), the fundamental reason for the Boards not including contingent gap as a methodology for allocating transaction price rests with the fact that the process would affect the accounting outcome so that is its inconsistent with the core principle of the proposed model. I conform to this argument because, the accounting policy for the allocation postulates that handset revenues consists of considerations that are received in the course of executing contracts does not provide a clause for accounting cases where handset revenues are derived from direct channel. However, some of the companies are not congruent to the elimination of the contingent gap. For instance, TELUS does not advocate for the proposed removal of this gap and also, a narrow application of residual techniques given that it would affect the quality of the disclosed financial statements as well as a possible loss of comparability and consistency principles of accounting within the telecommunication industry at large. The firm proposes that alternative to contingent gap like the expansion or modification of circumstances under which residual techniques are adopted to involve possibilities where there is a higher variability within the selling price of goods or services (TELUS, 2012). Conclusion In conclusion, it can be seen that the two options allowed by the company are in one way or another conflict with the proposed exposure draft. The fact that the company is able to avail handset by way of distinguishing single initial deposit of 60% if there were sold separately conflicts the application of a stand-alone price model methodology advocated by the IASB. Subsequently, the firm allows 24-monthly payments of $60 handset package, which seems to conflict with the contingent gap that is being proposed for removal altogether. Therefore, it is important that the Company adheres to the current model of operations as it awaits possible alterations of the proposed model to accommodate such important provisions of telecommunication operations Yours Faithfully, Manager’s Name References List Exposure Draft. 2011. Revenue from contracts with customers, p.1-89. Print Staff Paper. 2012. Revenue recognition: Feedback summary from comment letters and outreach. ISB Agenda 7A, p.1-64 TELUS. 2012. Comment letter No. 283 to IASB.2011-230, p.1-9.Print Telecom Italia. 2012. Comment letter to IASB No. 225, 2011-230.p.1-6 Print Telstra. 2012. Comment letter No. 223 to IASB, 2011-230. P.1-8.Print Read More