Audit of Specialized Industries –

Telecommunications
1 July 2021 | 6:00 PM – 7:00 PM
via MS Teams
Agenda

1 Philippine Telecommunications Industry Outlook

2 Accounting and Auditing Considerations

3 Others Matters relating to Audit of Telecommunication

Companies

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Objectives

To provide an overview of the current developments on

A the telecommunications industry

To provide guidance on the significant business risks,

B accounting and auditing considerations specific to the
telecommunications industry

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Audit Process - Overview

Planning Execution Conclusion

• Understand the • Confirm our • Communicate

business understanding results of the
• Perform risk of the SCOTs audit
assessments • Test of Controls • Issue the
• Identify SCOTs • Substantive auditor’s report
and Significant Testing • Issue a
Accounts • General Audit management
• Determine Procedures letter
CRA • FS Review

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Philippine
Telecommunications
Industry Outlook
PH Telco duopoly comes to an end…
Philippines gains additional telecom market competition

Incumbent accelerating network modernization program

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PH Telco duopoly comes to an end…

 DICT issues guidelines on sharing mobile tower infrastructure;

Key  NOW Telecom secures amendment to telecom license enabling it to
Developments offer LTE and 5G services;
 Mobile Number Portability Act not expected to become operational
before mid-2021;
 DICT announces Php3.3 billion plan to roll out 23,100 public Wi-Fi
hotspots across the country;
 Continuous rollout of 5G network;
 Dito starts service launch in March 2021;
 Converge ICT Solutions goes public in October 2020;
 Sun Cellular rebrands into Smart Prepaid

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 Market Overview

Mobile Market

Market Players

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 Mobile data accounted for significant portion of
revenue
Mobile Market

Revenues per Type of Service

(In Million Pesos)
FY20 Revenues per Company
Source – MD&A FY20 of PLDT and Globe
120,000 Globe
Smart and Sun
49% 51%
100,000

80,000

FY19 Revenues per Company

In Million Pesos

60,000

40,000 Globe
44% Smart and Sun
20,000 56%

-
Smart and Sun Globe FY20 Smart and Sun Globe FY19
FY20 FY19

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 Globe leads both postpaid and prepaid
customers
Mobile Market

Postpaid Subscribers Base Prepaid Subscribers Base

Source – MD&A FY20 of PLDT and Globe Source – MD&A FY20 of PLDT and Globe
6,000,000 180,000,000

160,000,000
5,000,000
140,000,000
In Individual Subscribers

In Individual Subscribers
4,000,000 120,000,000 91,513,700
2,690,577
74,132,020
2,513,547 100,000,000
3,000,000
80,000,000

2,000,000 60,000,000

2,396,366 40,000,000
2,154,818 70,779,021 70,721,789
1,000,000
20,000,000

- -
FY20 Postpaid FY19 Postpaid FY20 Prepaid FY19 Prepaid

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 Market Overview

Fixed Line Market

Market Players

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 PLDT leads the fixed line market

Fixed Line Market

Fixed Line Market Subscribers by Major Operators

Source – MD&A FY20 of PLDT and Globe
7000000

6000000

5000000

4000000

3000000

2000000

1000000

0
PLDT Globe

Fixed Line Fixed Broadband

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 PLDT owning fixed line market

Fixed Line Market

FY20 Revenues per Company

Revenues per Type of Service
(In Million Pesos)
Source – MD&A FY20 of PLDT and Globe 30% Globe
PLDT
120,000

70%
100,000

80,000
FY19 Revenues per Company
In Million Pesos

60,000

40,000 30% Globe

PLDT

20,000
70%
-
PLDT FY20 Globe FY20 PLDT FY19 Globe FY19

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Accounting and Auditing
Considerations
Significant Accounts with Related Risks for Telco Companies
• Revenues
Wireless (Postpaid, Prepaid, Interconnection and Roaming)
Fixed Line (Fixed Line and Home Broadband)
• Property and Equipment
• Leases including Asset Retirement Obligation
• Provisions for Local Taxes

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Revenue Recognition

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 Revenue Recognition
Overview
• The revenue recognition standards require the telcos to apply the five-step model to determine when to recognize
revenue from contracts with customers and at what amount.
• The model specifies that revenue is recognized when or as an entity transfers control of goods or services to a
customer at the amount to which the entity expects to be entitled.

Step 1 Step 2 Step 3 Step 4 Step 5

Identify separate Recognize revenue
Identify the Allocate the
Determine the when (or as) each
contract(s) with performance transaction price to
transaction price the performance
performance
customers obligations in the obligation is
contract obligations
satisfied

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 Revenue Recognition
Specific Consideration for Telcos
• Some specific considerations for telcos:

Amortization
Bundled Change to IT
1 Arrangements 4 period of 7 Systems
contracts costs

Contract Incentives to
2 modifications 5 customers

Portfolio
3 Contract Costs 6 approach

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 Revenue Recognition
Specific Consideration for Telcos
1 Bundled Arrangements Illustrative Example
Telco A enters into a 24-month postpaid subscription contract with a customer at
Php1,500/month.
The subscription contract includes wireless services (ie 5GB data, unlimited mobile
• Mainly on wireless contracts that include the voice and SMS to all local network) and a mobile phone with additional cash-out of
sale of a mobile phone along with telco services Php25,000.
(data, voice and SMS). The transaction price (TP) and stand-alone selling prices (SP) in the contract are
summarized below:
• Many telcos provide mobile phones for free or
for a small upfront charge under postpaid plans. % alloc.
• Under the revenue standards, additional Performance based on
Obligation TP SSP SSP Alloc. of TP
revenue is allocated to the handset using the
relative standalone selling price. Wireless services Php36,0001 Php36,000 51% Php31,000
Mobile phone 25,000 35,000 49% 30,000
• Requires judgement in determining the
standalone selling price Total Php61,000 Php71,000 100% Php61,000
Telco A to recognize revenue when the performance obligation will be satisfied:
Other consideration:
• Deferral of upfront fees: In some cases, upfront Performance
fees like activation fees, set-up fees etc., were Obligation Day 1 Month 1 Month 2 Month 3
deferred by telcos. Wireless services Php- Php1,2902 Php1,2902 php1,2902
Mobile Phone
1 TP/SP: Php1,500 X 24 months = Php36,000
30,000 - - -
2 Wireless services – Monthly revenues: Php31,000 / 24 = Php1,290 (rounded-off for illustration purposes)

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 Revenue Recognition
Specific Consideration for Telcos
2 Contract Modification

• Determine whether a change in the scope or price of the contract is to be accounted for as a separate contract or
as a termination of the old contract and creation of a new contract

3 Amortization period of
Contract Costs 4
contracts costs
• Determine accounting treatment for certain costs, such as commissions, an entity incurs in obtaining and fulfilling
the contract
• Capitalization of contract acquisition cost (such as commission paid to agents/ dealers and employee incentives)
and contract fulfilment costs are capitalized and subsequently amortized over the contract period or customer
relationship period.
• Judgment is required to determine the expected average duration of customer retention / customer relationship
period for amortization of contracts costs.

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 Revenue Recognition
Specific Consideration for Telcos
5 Incentives to customers

• Evaluation of accounting treatment for discounts, rebates, subsidies provided to customers.

• Material right granted to customers, such as an option to acquire additional goods or services at a discount or for
free: It is considered as a separate performance obligation and revenue is recognized as an when the option is
exercised or it expires.

6 Portfolio Approach

• Application of the revenue standards to a portfolio of contracts with similar characteristics

7 Changes to IT Systems

• Changes to new IT systems to capture the required data for calculations and disclosures

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Auditing Considerations - Discussion points

1
Retail Revenue
 Postpaid
 Prepaid

2
Wholesale Revenue
 Interconnection and Roaming

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 Inherent risks
1. Complexity of IT systems, high volume of transactions and large estimations in the
determination of the revenue
Postpaid Revenue ROMMs 2. Many complex and changing revenue models impact when and how to recognize revenue

Customer
Customer Switches
Switches Mediation
Mediation Boxes
Boxes Billing
Billing System
System GL
GLSystem
System
Management
Management

Incorrect PFRS 15
adjustment (M/V, P&D)

Billing Updates PFRS 15 !

and Adjustments Adjustments

Inaccurate or incomplete
transfer of call records (C,
E/O)

Customer Usages (Voice,

Customer Revenue
Application and
Approval
Provisioning SMS, VAS ! Billing
Recognition
including Data)

! ! ! ! !
Unauthorized or incorrect Inaccurate or incomplete Incomplete or inaccurate
capture of transaction in the Amounts are billed when
customer set-up (E/O, service is not provided posting of JE to GL (C,
R&O) switch (C, E/O) P&D)
(E/O, R&O)
All billable records are not
included in a billing cycle
(C)

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 ► Due to the volume of contracts, telco companies are expected
to implement a system for the implementation of PFRS 15
► Extend the test of details by reading postpaid contracts and
Postpaid Revenue Audit Considerations evaluating based on the five-step model.
► Revenues posted in GLs are based billing cycles ► Determine proper allocation of transaction price based on
composed of monthly billing per subscriber standalone selling prices of performance obligations (service
fee + device + options)
► Challenge on the determination of the correct
population to obtain samples from and defining the ► Test significant financing component on devices
appropriate sampling unit ► Test the revenue adjustment per client’s system and
► Billing statements are internally-generated documents Multiple summarization and posting to GL.
and provide least audit evidence element
arrangement
► Test billing disputes
(M) Test of
Test of details standalone ► Quick handset turnover in the market
(O,M) selling prices ► Challenge the frequency of updating SSP of
► Determine all postpaid revenue (M) performance obligations for new contracts
scenarios (calls, SMS, data, zero-rated, based on market data
Measurement/
top-up, share-a-load etc.) Completeness
Valuation ► Benchmark SSP on available market
► Perform test calls to simulate all information/suggested retail prices
scenarios.
Existence/ Presentation
► Trace CDR to mediation systems for
appropriate capture/transfer. Occurrence and Disclosure
► Check proper rating in the billing cycle. Non-service
► Trace the billing cycle to the GL posting. Test calls revenue
(C,O,M) (O,M)
► Timing difference posts a
Contract assets challenge in selecting a single set of sample for postpaid
► Leverage on service and nonservice test of details for the (E, V) service and non-service revenue
amortization of contract assets ► GL postings may consist of summarized sales orders for
► Obtain contract asset balance per subscriber each store at the end of each day
► Test existence by checking whether subsequently billed and ► Test a sample of fulfilled sales order
collected ► Extend testing to PFRS 15 adjustments
► For uncollected amounts, test reasonableness by recomputing
the should be contract asset amount
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 Inherent risks
1. Complexity of IT systems, high volume of transactions and large estimations in the
determination of the revenue
Prepaid Revenue ROMMs 2. Many complex and changing revenue models impact when and how to recognize revenue

Charging
Charging and
and
Customer
Customer Switches
Switches Mediation
Mediation Boxes
Boxes Prepaid
Prepaid Card
Card GL
GLSystem
System
Management
Management Systems
Systems

Incomplete or inaccurate posting

Customer ! of wallet transactions to GL (E/O,
C, P&D)
Dealers

Masterfile Unearned Income

Sales to Dealers Provisioning
Maintenance Booking
(Dealers)
! !
Recording of UI without
Unauthorized or incorrect corresponding receipt of
dealer set-up (E/O, R&O) cash (E/O, R&O)
Inaccurate or incomplete
transfer of call records (C,
E/O)
Subscriber

Pre-
Usages (Voice, SMS,
implementation Activation and Revenue
(Product Reloading
VAS including Data) ! Recognition
Unearned Income
Reconciliation
and Decrementation
Masterfile)
! ! ! !
Unauthorized changes to Inaccurate or incomplete Inaccurate call rating (M/V) Amounts are charged to
product master data (M/V) capture of transaction in the revenue when service is not
switch (C, E/O) provided (E/O, R&O)

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 Prepaid Revenue Audit Considerations
► 3/2-way correlation
• Cash to AR-Dealers
• AR Dealers to Unearned Income
3/2-way • Unearned Income to Prepaid Revenue
correlation ► Analyze the relationship of Prepaid Revenue, Unearned
(O,M) Income and AR Dealers/Cash.
Measurement/
► Understand nature of other postings to prepaid revenue,
Completeness unearned income and AR Dealers/Cash which are not in line
Valuation with our expectation.
► Determine all prepaid revenue scenarios (calls, ► Test unusual entries and obtain supporting documents, as
SMS, data, zero-rated, top-up, share-a-load, balance Existence/ necessary.
inquiry etc.) Occurrence ► Test the cash journal entries to confirm if they represent real
► Perform test calls to simulate all scenarios. cash (i.e., cash anchor) or if using a controls reliance
Dealer strategy, test controls over the cash receipts process.
► Trace CDR to mediation systems for appropriate Test calls
discounts
capture/transfer. (C, O, M)
(O,M)
► Check proper rating in the mediation and Unearned ► Recompute allocation of deferred discount and
charging/decrementation in the subscriber wallet. income outright discount based on service income and
reconciliation unearned income balance.
► Trace the CDR to the daily usage report up to GL
posting. (C, O, M) ► Perform trending analysis of outright discount
and prepaid revenue

► Compare unearned income per books and per

wallet systems for dealers and subscribers and
investigate variances

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 Inherent risks
Wholesale Revenue (Interconnection 1. Complexity of IT systems, high volume of transactions and large estimations in the
determination of the revenue
and Roaming) ROMMs 2. Many complex and changing revenue models impact when and how to recognize revenue

Inaccurate or incomplete
capture of transaction in the
switch (C, E/O) Billing system Retail subscriber
Retail invoice

Incomplete parameters
Billing system update (E/O, C, V/M)
GL
Roaming System
Switch Mediation

ROAMING Incomplete/Inac
IN curate revenue
Roaming Invoicing/ recorded (O, C,
Agreement Settlement V)

Unauthorized roaming Clearing House

ROAMING transaction (E/O)
OUT

Billing system
Roaming

Switch
Mediation

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 Wholesale Revenue Audit Considerations
► Revenues posted in GLs are based billing cycles composed
of monthly billing per carrier/roaming partner
► Challenge on the determination of the correct population to
obtain samples from and defining the appropriate sampling
Test of Details unit
(C, O,M) ► Reliance on Service Organization (Clearing House)
► Test the Inter-Operator Tariff Discount and Revenue
Measurement/ Commitment
Completeness
Valuation

Existence/
Occurrence
► Determine all interconnection and roaming revenue Inter-operator
scenarios (voice, SMS and data) discounts and
Test calls
► Perform test calls to simulate all scenarios. Revenue
(C, O, M)
Commitment
► Trace CDR to mediation systems for appropriate ► Recompute the IOT Discount and Revenue
(O,M) Commitment based on the Preferential
capture/transfer. Variable
Consideration Roaming Agreement and Data from Clearing
► Trace the CDR to the daily usage report up to GL House
posting. (CM)

► Understand revenue arrangements

► Test contracts for tiering agreements
► Recompute the impact of the variable
consideration to the revenues

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 Questions

The better the question. The better the answer.

The better the world works.
© 2018 EY LLP. Confidential. All Rights Reserved
Other Matters relating to
Audit of Telco Companies
Other Matters
• Government Intervention
• Customer Experience

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Section divider over two lines or three
lines Thank you

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