Analyzing Unearned Revenue Transactions and Multiple-Element Arrangements Telstra Corporation Limited is an Australian telecommunications and technology company that offers a full range of communications services in all telecommunications markets. In Australia, Telstra provides 17.2 million mobile services, 7.0 million fixed voice services, and 3.4 million retail fixed broadband services. Excerpts from the company’s revenue recognition footnote follow.

Revenue Recognition Our categories of sales revenue are recorded after deducting sales returns, trade allowances, discounts, sales incentives, duties and taxes.

Services revenue Revenue from the provision of our telecommunications services includes telephone calls and other services and facilities provided, such as internet and data. We record revenue earned from:

• telephone calls on completion of the call; and

• other services generally at completion, or on a straight line basis over the period of service provided, unless another method better represents the stage of completion.

Installation and connection fee revenues that are not considered to be separate units of accounting are deferred and recognised over the average estimated customer life. Incremental costs directly related to these revenues are also deferred and amortised over the customer contract life. In relation to basic access installation and connection revenue, we apply management judgement to determine the estimated customer contract life. Based on our reviews of historical information and customer trends, we have determined that our average estimated customer life is 5 years.

Sale of goods Our revenue from the sale of goods includes revenue from the sale of customer equipment and similar goods. This revenue is recorded on delivery of the goods sold. Generally we record the full gross amount of sales proceeds as revenue, however if we are acting as an agent under a sales arrangement, we record the revenue on a net basis, being the gross amount billed less the amount paid to the supplier. We review the facts and circumstances of each sales arrangement to determine if we are an agent or principal under the sale arrangement.

Revenue arrangements with multiple deliverables Where two or more revenue-generating activities or deliverables are sold under a single arrangement, each deliverable that is considered to be a separate unit of accounting is accounted for separately. When the deliverables in a multiple deliverable arrangement are not considered to be separate units of accounting, the arrangement is accounted for as a single unit. We allocate the consideration from the revenue arrangement to its separate units based on the relative selling prices of each unit. If neither vendor specific objective evidence nor third party evidence exists for the selling price, then the item is measured based on the best estimate of the selling price (BESP) of that unit. The revenue allocated to each unit is then recognised in accordance with our revenue recognition policies described above.

Required

a. Explain in layman’s terms how Telstra records revenue from sales of bundled contracts.

b. Telstra sells a number of prepaid mobile packages for voice, text, and data. Assume a customer pays

$100 in cash for a prepaid plan and Telstra activates service immediately. Explain how and when Telstra recognizes the $100 as revenue.

c. Assume that, at the beginning of the fiscal year, a customer makes a volume purchase of 200 iPhones and signs a two-year contract with Telstra for a voice and data package for each phone. The total discounted sales price is $480 per phone, and Telstra pays Apple $640 for each iPhone. Telstra loses money on the handset but makes it up by locking the customer into a long-term service contract. This contract includes free future software upgrades for two years. Because there is no reliable vendorspecific objective evidence, Telstra estimates a BESP of $64 for the future software upgrades. Allocate the consideration received for the 200 units to each respective element in the arrangement, based on its relative selling price (the sale is on account).

d. Use the financial statement effects template to record the original sale in part c., above, and the accounting adjustment at the end of the first fiscal year after the sale.