Prepaid airtime and breakage

A prepaid airtime breakage example

In a month, customers top up CU 10.0 million and use 6.0 million of airtime and data. From several years of data, the operator expects 5% of every top-up never to be used before it expires.

Because 95% of top-ups are expected to be used, each unit of airtime used also releases a proportionate share of the expected breakage: 6.0 x 5% / 95% = 0.32 million. Total revenue for the month is 6.32 million and the contract liability at month end is 3.68 million, of which about 0.18 million is expected breakage still to be released.

What does IFRS 15 say about breakage?

Customers' unexercised rights are breakage. If the operator expects to be entitled to breakage, it recognises the expected amount as revenue in proportion to the pattern of rights exercised by customers, but only to the extent it is highly probable that a significant reversal will not occur, the variable consideration constraint. If it does not expect to be entitled to breakage, it recognises it when the likelihood of the customer using the balance becomes remote, typically at expiry.

How is breakage estimated?

From historical data on top-ups and their eventual use, by product and channel, over a long enough period to be reliable. Changes in expiry rules, pricing or customer behaviour, such as the shift to data bundles, can make history less reliable, in which case a more cautious estimate or waiting until expiry is appropriate.

How are prepaid balances shown in the accounts?

As contract liabilities, usually current because most balances are used within months. Operators disclose the opening and closing contract liabilities and how much of the opening balance was recognised as revenue during the year, which for prepaid airtime is usually most of it.

What if unused balances must be handed over?

In some jurisdictions, unclaimed customer balances must be remitted to the government after a period. Those amounts are never the operator's revenue: they stay as a liability until paid over, and are excluded from breakage.

How are bonus airtime and bundles treated?

Free airtime given with a top-up, such as 20% extra, is not free in accounting terms: the top-up price is allocated across the paid and bonus airtime, so revenue per unit used is lower. Bundles sold for a fixed period, such as a weekly data pack, are recognised over the period or as the data is used, depending on the terms, with any unused allowance at expiry recognised then.

What are common mistakes with prepaid revenue?

Recognising breakage at the point of sale; releasing all breakage at expiry when it could be estimated, which delays revenue; and failing to update breakage rates when customer behaviour or expiry rules change.

How are dealer discounts on vouchers treated?

Operators sell vouchers to distributors at a discount to face value. If the distributor is the operator's customer, the operator measures revenue at the discounted price it receives. If the operator controls the service to the end user and the distributor acts as its agent, revenue is the face value and the discount is a selling cost. Many operators conclude the distributor is a customer, but the terms of each channel need assessing. See telecom revenue recognition and telecom accounting.

This guide is general information. It is not tax or legal advice for your situation.