The implementation of new accounting rules from 2018 makes the interpretation of financial performance even more challenging than usual, but after some initial confusion is likely to highlight positive trends in the telecoms sector. Ovum World Telecoms Financial Benchmarks (available by subscription) tracks quarterly financial results of the world’s largest telecoms service providers.
A multitude of new accounting standards have already come into effect or will be implemented over the next year. These include IFRS 15 (with regional variations such as ASC 606 in the US) relating to revenue recognition, IFRS 9 concerning financial instruments and expected credit losses, and in 2019, IFRS 16 (ASC 842 in the US) regarding leases.
Changes in accounting don’t generally change the real underlying business transactions, but merely alter the lens in the magnifying glass used to examine them. The new standards might cause an initial adverse rebasing of service revenues (particularly postpaid ARPU) at some companies, and a similar reallocation to equipment revenues, where devices have been subsidized. For example, ASC 606 caused a 4.1% reduction in AT&T’s service revenue in 1Q18. Every company is different, of course, and companies such as Telia and Telenor have broadly aligned their policies in advance so that no sudden impact is evident. Total revenues generally show only slight changes under the new rules.
As the year unfolds, profitability may also appear higher in 2018 relative to the past year, because some costs that used to be immediately expensed in the income statement are now deferred and expensed over the contract term. The balance sheet is boosted by these capitalized costs. Cash flows, a true litmus test of business reality, are not usually directly affected over a contract’s duration by the accounting upheaval.
The lower service revenue and postpaid ARPU bases set are likely to magnify future growth in these metrics if fast-increasing data usage is translating into revenue growth. “We must look at the lens through which we see the world, as well as the world we see, and that the lens itself shapes how we interpret the world,” says Stephen R Covey in The 7 Habits of Highly Effective People.
A truly positive development would be if, separately from the accounting, the business of providing data and airtime, disaggregated from device revenues, were revealed to be growing at least in line with inflation. As customers increasingly reach their data bundle limits, with regulatory headwinds abating in some regions and with new services associated with 5G and other technologies in their infancy, perhaps this will become a reality.
Telecom Industry and Operator Benchmarks by Key Financial Metrics: 1Q18, PT0016-000007 (July 2018)
IFRS15 will encourage deeper scrutiny of the business of handset subsidies, GLB007-000028 (January 2018)
Upin Dattani, CFA, Principal Financial Analyst