Telecom Accounting Challenges & Strategies
The telecom industry faces unique hurdles when considering accounting and producing financials. This article addresses the areas of accounting for investments; challenges around property, plant, and equipment (PP&E); accounting for grants received; and revenue recognition.
Accounting for Investments
There are multiple methodologies to account for your investments. One of the more common methodologies is consolidation. This method is used when ownership in the investment is greater than 50%.
In instances of ownership of 50% or less and when fair value is readily available, the fair value could be used to account for the investment.
The equity method is used when an investor has “significant influence” over the investee. This method applies when ownership is generally between 20 and up to 50%; however, according to the SEC1 there are instances where 3 to 5% ownership can be considered significant influence. In addition, there are qualitative factors that need consideration. For example, influence over governance of the investee could create significant influence that may require the equity method. In general, equity method investments are not recorded at fair value due to the cost associated with third-party valuations required to calculate the fair value of the equity method investment.
Accounting for investments can become complicated and may require significant judgments; as such, discuss with a professional.
Accounting for Distributions
Accounting for distributions received from investments depends on the method of accounting that is used to record the investment. If the equity method is used, the distribution received will be recorded as a reduction of investment. If the fair value or measurement alternative (cost method) is used, the distribution received will be recorded as dividend income.
While each company has its own work order process based on the organization’s needs, there are many similar challenges that companies face in accounting for PP&E. For example, an issue that commonly comes up is that work orders are not closed to appropriate in-service accounts. The destination account should be appropriate to make sure that transactions are correctly recoded. This can be challenging when invoices have multiple types of equipment or activity is not broken down with enough detail; so this causes confusion. To avoid this, break down the activity as much as possible. Have a high-level review to make sure the vendor and items match the invoice.
Another issue is that work orders are not closed in a timely manner. The accounting department should communicate with the other departments so it knows when projects are ending and the closing process can begin. Closing the work order does not need to wait until the customer is hooked up as this is not necessarily indicative of the project’s completion.
Interest during construction should be calculated and capitalized. Check if your accounting software has a built-in function to calculate interest during construction. If nothing else, prepare a spreadsheet or use a proprietary template to calculate based on the weighted average cost of debt. Materiality and cost-benefit considerations should be considered as well.
Finally, equipment retirements are often not recorded in a timely manner. There could be tax benefits by retiring the equipment, and there could be regulatory issues as well. An annual review of continuing property records can help with timely recording of retirements.
Accounting standards have been in a state of catch-up, resulting in some for-profit companies being forced to analogize to different areas of GAAP or International Accounting Standards (IAS) due to a lack of accounting guidance related to grants received by for-profit companies. Due to the pandemic, there has been an unprecedented amount of money provided by government agencies in the form of grants. FASB issued Accounting Standards Update (ASU) 2021-10 in an effort to catch up with these changes due to COVID-19. This ASU updates the disclosure requirements to achieve more consistency in the notes to the financial statements. Companies have two accounting methodologies to choose from, which are IAS 20 or Accounting Standards Codification (ASC) 958-605. Accounting for grants can be complicated, so discuss it with a professional.
Revenue Recognition Reminders
Remember that this accounting standard isn’t set it and forget it. Due to the competitive nature many companies face, new marketing bundles are frequently added or changed. As changes and updates are made, the allocation of the discounts need to be recalculated. Careful analysis is needed to account for the discounts. Reach out to your financial advisors as needed. Commissions paid to personnel for various reasons are a common thing companies are considering. Per the guidance, an entity shall recognize as an asset the incremental costs of obtaining a contract with a customer if the entity expects to recover those costs, typically over the customer contract term.
With ASC 842-10-15-3 (ASC 842), there are new standards that might impact what is considered a lease. ASC 842 became effective for nonpublic companies on January 1, 2022, noting that all leases will be recognized on the leases balance sheet. Operating leases and finance leases (formerly capital leases) are distinguished from each other, but their classification as operating or finance lease under ASC 840 should not substantially change under ASC 842. During this time of adjustment and compliance, it is important to:
- Identify the leases at your company
- Develop a timeline and key milestones for compliance
- Identify and collect all leases and relevant data
- Analyze the data
- Implement accounting and reporting
- Have ongoing accounting (centralization, new leases, modification, monitoring, etc.)
Using a specialized software such as LeaseVision from FORVIS could help automate lease entries for companies with 100 leases or fewer.
The telecom industry has the potential for increased growth for the foreseeable future as internet access is increasingly vital in today’s economy. Companies must remain vigilant to comply with accounting standards. In addition, do not hesitate to raise questions in your accounting department. For more on accounting challenges and strategies in the telecommunications industry, view our webinar recording on the topic or reach out to a professional at FORVIS through our Contact Us form.