Finance Essay

2493 words - 10 pages


Honest & Blonde
Telephone number
Telephone number:
7 October 2014
Exposure Draft, “Revenue from Contracts with Customers”

Dear Sir,
It is our pleasure to provide our response and comments on the new exposure draft, which is on “revenue from contracts with customers” that was published by the FASB (Financial Accounting Standards Board) in the year 2011. TeleFones4U being one of the biggest telecommunication industry, it is with our great concern to bring your attention to some of the critical points in the new exposure draft. One of the concerns is based on the impact of ...view middle of the document...

The summary of the comments and responses that touch on the allocation of transaction prices are described as follows:
1. Inquire for further clarification and guidelines
Most respondents’ seek for clear clarification and proper guidelines on the two main types of stand-alone selling prices. This included stand-alone price selection. In addition to this, another inquiry was made on how to determine stand-alone prices for those particular goods and services that are moved to the customers during the period of the contract (Halford, 2012). A question is raised on whether an organization can use a single stand-alone selling price to allocate its transaction prices in a fixed price contract. As per the proposed exposure draft, the response to this question is that; an organization’s different goods or services are treated as a one performance obligation if and only if, those goods and services are transferred to consumers using one channel. This response has got the implication on communication entities, and, therefore, a clear guidelines and clarification is of importance. TeleFones4U also seeks for further guidance on the application of the residual approach in a case where the prices of goods and services vary greatly.
2. Allocation of discounts
It is noted that the ways that have been provided by the proposed exposure draft on how to allocate discounts to contracts are too strict. This is so because; it does not give a clear reflection of the economics of the transactions. TeleFones4U believes that stand-alone price selling price provides the basis of evident performance obligation. Therefore, it can be used to determine the allocation of discounts and to where the discount belongs. From the new proposed accounting, in the early stages of cost accounting, the discounts for the handsets will decrease. Therefore, the additional charges on the handsets will have to be discounted using a suitable discount rate. The higher rate of discounting will lead to reduction on additional charges and hence a reduction in the overall revenue.
3. The basis for allocation
Currently, entities in the communication industry use an accounting basis known as ‘contingent cap’. In this type of accounting, an entity provides contracts to its consumers by providing them with transactional prices. The consumer is sold a mobile handset at a price. With the same price, the customer is provided with an agreement to have access to network coverage at no cost. This accounting technique is dependent on the limited amount of transactional price that is allocated to a satisfied performance obligation, and does not depend on whether the consumer continues to perform the contract. When it comes to determining whether goods or services are to be approached as either separate performance obligation or not, wholly depends on the promise of the entity. The entity management task that claims to implement and create a contract do not make any transfer of goods or even...

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