3. | Performance | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3.2 | Revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant accounting judgements, estimates and assumptionsRecognition and measurement of revenueStand-alone selling prices and transaction price The stand-alone selling prices for mobile devices are based on the standard list prices at which the Group sells them separately (without a service contract). Stand-alone selling prices for communication services are set based on prices for non‑bundled offers with the same range of services. The transaction price is calculated as the total consideration receivable from the customer over the contract term. Significant financing component In order to determine whether a significant financing component exists, a model was designed, which calculates the financing component on a contract-by-contract basis. If the financing component is less than 5% of the total transaction price allocated to the customer premises equipment (CPE), it is deemed not to be significant and the finance component will not be recognised separately. Google Equiano As part of the Google Equiano arrangement, Openserve will receive an upfront payment for granting the use of terrestrial network to Google for 15 years. Aligned with the Group policy and IFRS 15 principles, management concluded that this has a significant financing element. Management applied judgement and determined an approximate USD rate at which Openserve could be granted USD finance for a similar amount and period to determine the significant financing component. A USD rate was used as revenue will be earned in USD currency and equipment used to build the network was paid for in USD currency. The significant financing element is recognised as a finance cost and the transaction price (deferred revenue and revenue) is increased with the financing component over the 15-year period. Refer to note 2.6 for more details. Customer relationship periods The average customer relationship periods for wholesale, voice and non-voice services are utilised to expense the capitalised installation revenue and cost. Management applies judgements about the data used to determine the customer relationship period estimate. The estimate is based on the historical churn information (refer to note 3.2.3). The churn is determined by considering the service installation and disconnection dates, the weighted customer base ageing and the service connection status of the customers. Changes in average customer relationship periods are accounted for as a change in accounting estimate. Agent vs principal considerations When deciding on the most appropriate basis for presenting revenue or related costs, both the legal form and the substance of the agreement between the Group and the counterparty are reviewed to determine each party's respective role in the transaction. Consideration is given to which party controls the goods or services. If that is not clear, the Group evaluates the following control indicators, among others, when determining whether it is acting as a principal or agent in transactions with customers and the recording of revenue on a gross, or net, basis:
Software, cloud services and related services The Group has applied judgement to determine whether it acts as an agent or principal in these arrangements in accordance with the principles of IFRS 15. One of the judgements made is whether control passes to the Group prior to the passing thereof to the customer. Where the vendor has the primary obligation to fulfil the services to the customers, the Group concluded that control does not pass to the Group and, as a result, it acts as an agent in these arrangements. Included in the Group service offerings, software and related licences are sold with the ability to access the vendor's latest technology via product updates. The assessment of whether the Group acts as a principal or an agent is judgemental. The Group deems the defining characteristic of each arrangement to be whether its material performance obligation is to deliver software, cloud services and related services or to arrange access to such goods or services. A key consideration in assessing whether the Group or the vendor is responsible for the software, cloud services and related services relates to the management of the updates to the software. Where the Group has concluded that the upgrades are critical to the functionality of the software and the effective functionality of the solution, and such updates can only be delivered by the vendor, the Group acts as agent for such software sales as the vendor has the primary obligation to fulfil the services to the customers. Unless the Group obtains the right to direct the use of a piece of software between customers, e.g. gain access to a pool of software licences, the Group has concluded that it does not carry inventory risk for software. The Group generally has pricing discretion in a contract for the resale of software, vendor cloud services and other related services, but has concluded that this factor in isolation does not result in the Group concluding that it can act as a principal in these transactions. Vendor resold services For vendor resold service warranty and maintenance products, a customer purchases a product from the Group that is delivered over time directly by the vendor. These service contracts are sold alongside, but separately from the associated products, and the Group serves as the agent for the contract on behalf of the vendor. The Group's responsibility is to arrange for the provision of the specified service by the vendor, and the Group does not control the specified service before it is transferred to the customer. The Group therefore acts as agent with respect to vendor resold services in which the Group is not primarily responsible for fulfilling the performance obligation. Revenue from sale arrangements where the Group acts as agent is recognised on a net basis, and the commission or gross profit earned on these contracts is recognised as revenue. Franchisee The Group utilises franchise stores to sell its contracts (including those bundled with mobile devices), pre-paid services and mobile devices (without bundling them with a Telkom services contract). The franchisee sells both post-paid and pre-paid contracts. The entity is the principal in a transaction if it obtains control of the specified goods or services before they are transferred to the customer. An entity is an agent if it does not control the specified goods or services before they are transferred to the customer. Telkom accounts for device sales through the franchise stores as a principal as Telkom can unilaterally redirect the handsets between franchisees without the approval of the franchisee to best realise the handset. It has been assessed whether Telkom is a principal or agent for the device obligation on a contract-by-contract basis using the relevant indicators, considering the right of return policy with third-party franchisee. In terms of IFRS 15, Telkom has identified the specified goods or services being provided to the customer, the handset in this instance. A specified good or service is a distinct good or service (or a distinct bundle of goods or services) that will be transferred to the customer. In terms of IFRS 15, Telkom has identified the specified goods or services being provided to the customer, the handset in this instance. A specified good or service is a distinct good or service (or a distinct bundle of goods or services) that will be transferred to the customer. Enterprise revenue Management has assessed that the primary obligation for service delivery to the Enterprise customers remains with Telkom SA SOC Ltd, therefore Telkom recognises gross revenue for the Enterprise customer contracts which were sold to BCX, but not contractually ceded. Similarly, price risk owing to the contracts not ceded is deemed to reside with Telkom. Cognisance is given to the fact that mechanisms exist for a transfer of credit risk between Telkom and BCX. It is on this basis that management has concluded that revenue from such contracts should be recognised in the accounting records of Telkom as a principal with the customers. Bill-and-hold arrangements The Group enters into bill-and-hold arrangements on hardware sales. Judgement is applied to determine if the criteria below are met to, to support revenue recognition in terms of the principles of IFRS 15:
Hardware and software as part of an integrated solution The Group enters into contracts with customers to provide integrated solutions. Contracts are assessed individually to determine whether the products and services are distinct, i.e. the product or service is separately identifiable from the other promises in the contract with the customer and whether the customer can benefit from the goods or services either on its own or together with other resources that are readily available. The nature of the promised goods or services are inputs into a working solution and the customer does not derive value from the stand-alone goods and services. The Group has applied its judgement and views these arrangements, in some instances, as a single performance obligation that needs to be met as the goods and services are not separately identifiable and the customer cannot benefit from either the goods or the services separately. The resulting conclusion impacts the agent versus principal assessment of the revenue recognition for these arrangements. The Group acts as principal in these integrated solution arrangements. The revenue on these contracts is therefore recognised on a principal basis over time using the output method (i.e. value to the customer of the goods or services transferred to date relative to the remaining goods or services promised). Reassessment of leases relating to customer premises equipment (CPE) The Group enters into contracts with customers which involve both the delivery of services and CPE. Prior to the adoption of IFRS 16, these contracts were accounted for as operating leases under IAS 17 (Leases). On adoption of IFRS 16, the Group elected the practical expedient not to reassess whether an existing contract is, or contains, a lease, and management accordingly retained the assessment made under IAS 17 for these existing lease contracts. Subsequent to the adoption of IFRS 16, it was identified that these existing lease contracts, which have reached the end of the initial lease term, continue on a month-to-month basis allowing the customer to exit the contract with no penalty. This is different to the terms which applied during the initial lease term, wherein the customer could not exit without a penalty. According to IFRS 16, if an entity chooses the practical expedient described above, then an entity shall identify a lease by applying the requirements of IFRS 16 only to contracts entered into or changed after the adoption date. However, IFRS 16 is silent on what constitutes a change to an existing contract. Management exercised significant judgement and determined that the lease contracts continuing on a month-to-month basis without an exit penalty, subsequent to the initial lease term, constitutes a change in the contract, and therefore reassessed whether these contracts contain a lease in terms of IFRS 16. Upon such reassessment, it has been determined that while the CPE represents an identified asset, the customer does not have the right to direct how and for what purpose the CPE is used throughout the period of use. The Group, being the supplier, has such a right and therefore such arrangements do not contain a lease. It is on this basis that management has concluded that revenue from such contracts should be recognised under IFRS 15 (Revenue from Contracts with Customers). Nature of goods and services Revenue from contracts with customers The Group has elected to apply the IFRS 15 practical expedient on the significant financing component that allows the Group not to adjust the transaction price for the significant financing component for contracts where the time difference between customer payment and transfer of goods or services is expected to be within 12 months or less. The Group sells products and services both separately as well as part of bundled packages. The Group recognises revenue when it transfers control over a product or services to a customer. Products and services that form part of bundled packages are recognised separately if they are distinct. Further detail is provided below:
Revenue from other contractsLeasesRental income from property and masts and towers is generated by the Group through its subsidiaries. The revenue is recognised as part of the Gyro and Openserve segments. The revenue is accounted for as operating lease revenue and recorded on a straight-line basis in accordance with IFRS 16. Insurance revenueOur insurance customers are covered for the month that they have paid insurance premiums. To have continuous cover and a valid claim, premium payments must be up to date and where a payment is not received on time, the contract lapses subject to insurance business regulatory requirements. Insurance revenue reflects the number of premium receipts to which the insurer is entitled in exchange for services provided on device and funeral cover products. The Group allocates the premium receipts to each period of insurance contract services based on the passage of time. All revenues are presented net of Value-Added Tax (VAT), rebates and discounts. Invoice and payment terms are set out in note 4.3 of the financial statements. Significant financing componentThe Group applies the practical expedient in IFRS 15 paragraph 63 to not recognise a significant financing component for any contract when the goods and services provided are 12 months or less, compared to when the payment is received. Material right considerationsThe Group considers installation fees on month-to-month contracts to provide a material substantive right to the customer as the customer can extend/renew the contract each month without paying an additional installation fee. This installation fee is a separate performance obligation and is capitalised and expensed over an estimated customer relationship period where it is concluded that the installation fee gives rise to a material substantive right. Contract costsContract costs that are eligible for capitalisation as incremental costs of obtaining a contract include commission and connection incentives paid on new contracts that have been entered into. Contract costs are capitalised unless the practical expedient per IFRS 15 paragraph 94 is applied, which states that incremental costs to obtain a contract can be recognised as an expense when incurred if the amortisation period of the asset, that the entity otherwise would have recognised, is one year or less. Contract costs are capitalised in the month of service activation if the Group expects to recover these costs, and is amortised over the contract term. The Group's normal operating cycle for contract costs capitalised are 24 to 36 months and, as such, contract costs capitalised are disclosed as current assets. The amortisation of the contract asset is included in sales commission, incentives and logistical costs based on the nature of the costs being deferred. In all other cases, contract costs are expensed as incurred. Contract assetsContract assets represent the Group's right to consideration in exchange for mobile devices and CPE. The contract asset is recognised at the point where the Group transfers control of the device or CPE to the end customer. The Group's normal operating cycle for contract assets are 24 to 36 months and, as such, contract assets are disclosed as current assets. IFRS 15 is silent regarding the derecognition of contract assets. Therefore, in terms of IAS 8, the Group has adopted a policy of using IFRS 9 derecognition principles and IFRS 7 derecognition disclosure principles when accounting for the derecognition of contract assets. The Group recognises the gain on derecognition within the other income line item and/or loss on derecognition within the other expenses line item on the statement of profit or loss and other comprehensive income. The proceeds received are classified as cash generated from operating activities in the statement of cash flows. Deferred revenue (contract liabilities)Deferred revenue (contract liabilities) is accounted for or recognised at the earlier of the due date of the invoice and the date that the payment is received from the customer before the performance obligation is satisfied. A contract liability is an entity's obligation to transfer goods or services to a customer for which the entity has received consideration (or an amount of consideration is due) from the customer. Deferred installation fees and revenue billed in advance represent customer payments received in advance of performance (contract liabilities). This is included in deferred revenue on the statement of financial position. |
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3.2.1 | Disaggregation of revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refer to note 3.1 for the disaggregated revenue per segment for the Group. Included in Telkom Company revenue is revenue to the value of R4 623 million (31 March 2023: R5 592 million ), which relates to Enterprise customer contracts which were sold to BCX in previous financial years, which have been retained in the name of Telkom SA SOC Ltd. |
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3.2.2 | Transaction price allocated to the remaining performance obligations | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The tables below include revenue expected to be recognised in the future, related to performance obligations that are unsatisfied (or partially unsatisfied) at the reporting date.
All revenue from contracts with customers is included in the amounts presented above. The Group and Company apply the practical expedient in paragraph 121 of IFRS 15 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. |
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3.2.3 | Customer relationship periods | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The customer relationship periods (CRPs) in the current financial year are determined as follows:
There has been no change in the average CRPs in respect of non-voice revenue, voice revenue and wholesale revenue during the 2024 financial year. |
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3.2.4 | Assets and liabilities related to contracts with customers | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The Group has recognised the following assets and liabilities related to contracts with customers: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
3.2.4.1 | Contract assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract assets are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include sending reminders, pinging the accounts for additional debit order collections, suspending the services, handing over the debt to external debt collectors and not receiving the debtors' positive feedback that confirms the amounts as collectable, failure of a debtor to engage in a repayment plan with the Group, blacklisting the customer, and failure to make contractual payments. The decrease in the gross contract asset balance is due to lower CPE sales as a result of stringent credit vetting of customers due to higher default in the current year. The increase in the allowance for expected credit losses is driven by an increase in default rates as a result of the current macro-economic conditions. This also resulted in higher write-offs in the current year. Refer to note 7.1.4 for a detailed credit risk analysis. Sale of contract assets Telkom entered into agreements with financial institutions to factor a ring-fenced group of contract assets. The gross carrying amount of the contract assets factored is R1 083 million (31 March 2023: R1 371 million). Per the arrangements, Telkom retains the contractual right to receive cash flows, and has assumed a contractual obligation to pay the cash flows received to the financial institution. Based on the structure of the agreements, the IFRS 9 (Financial Instruments) "pass through" criteria were met for the derecognition of the contract assets and the contract asset portfolio was derecognised in its entirety as significant risks and rewards were transferred. The total cash inflow related to the derecognition is included in cash flows from operating activities in the statement of cash flows. As part of the agreement, Telkom is obligated to pay the financial institution only from the cash collected from the customers and, as such, Telkom assumes no further obligation in relation to the agreement. In the case that there is a credit note, Telkom will not be required to refund the financial institution for the credit note. Telkom has no continuing involvement with the transferred contract asset. |
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3.2.4.2 | Other current assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Contract costs capitalised relate to commission and incentive costs paid to dealers and sales staff, which are considered incremental to the acquisition and fulfilment of the contract. The contract costs capitalised are amortised as an expense over the term of the contract to which the commission relates. Management expects that the full cost will be recovered through the revenue recognised on these contracts and has consequently not recognised any impairment on the contract costs capitalised.
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3.2.4.3 | Deferred revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The deferred revenue balance consists primarily of deferred installation fees, deferred revenue from the Google cable landing station, deferred revenue from the grant of use of terrestrial network on system 1 and revenue billed in advance due to Telkom's various billing cycles. Deferred revenue increased mainly due to the Google Equiano transaction. Refer to note 2.6 for more details. At the end of the prior year, R1 475 million (31 March 2022: R1 633 million) for Group and R1 123 million (31 March 2022: R1 483 million) for Company was recognised as a current liability. The total revenue recognised in the current year, which related to carried forward deferred revenue associated with installation fee revenue, deferred revenue from the Google cable landing station, deferred revenue from the grant of use of terrestrial network on system 1 and revenue payable in advance, is disclosed in the table below. The amounts recognised as a contract liability will generally be utilised within the next reporting period.
The table above illustrates the portion of the revenue recognised in the current period which related to carried forward deferred revenue associated with installation fee revenue, deferred revenue from the Google cable landing station, deferred revenue from the grant of use of terrestrial network on system 1 and revenue billed in advance. |