hey jfc or grant62, page-9

revenue recognition, 2003 losses to increase Hi,

The Trading Halt concerned agreement with ASIC on the revenue recognition approach that is to apply to the "airtime contract" and the "equipment contract" that amounts to NTG's "Synergy Package". The impact of this is:
1)
in 2003, to increase the losses before tax to between $50 -60m; and
2)
in 2004, to increase profits before tax to between $10 -20m (all things being equal).

The text of the announcement is below:

REVENUE RECOGNITION

NTG has agreed with ASIC the basis of revenue recognition associated with the “airtime contract” and “equipment contract’ which comprise NTG’s “Synergy Package”.

As NTG has previously announced, NTG has been in discussions with ASIC about the revenue recognition principles associated with the Synergy Package and, in particular, how revenue should be allocated between the airtime contract and the equipment contract.

To date, NTG had recognised the revenue associated with the equipment contract and the airtime contract on the basis as if each of those contracts were separate contracts. This treatment was in accordance with the view that the revenue streams were separable and recorded at their fair values and accepted by NTG’s auditors.

ASIC has requested NTG to change its Synergy Package revenue recognition principles on the basis that, in ASIC’s view, the two contracts are in substance multiple elements of one contract and the applicable accounting standards should be interpreted accordingly. Based on this view, ASIC has requested that part of the upfront revenue received in connection with the equipment contract be allocated to the airtime contract on a straight line basis over the life of the airtime contract.

As there is no specific Australian Accounting Standard in relation to “multiple-element arrangements”, the issue of how revenue received in connection with such arrangements ought to be treated depends on whether or not those arrangements are treated in substance as multiple elements of one contract. As stated above, to date, NTG had recognised the revenue associated with the equipment contract and the airtime contract as if each of those contracts were separate contracts. NTG has agreed to adopt ASIC’s interpretation of the substance of the Synergy Package in light of recently released USA guidance in relation to this issue and in the interests of resolving the matter expeditiously and at a minimum cost to NTG.

The agreed changes to the Synergy Package revenue recognition principles, and their application to the historical revenues associated with the Synergy Package from the time it was introduced by NTG in 2000-01 Financial Year will appear as a change in accounting policy in the 2003 full year accounts. These changes will only affect the accounting treatment of revenue associated with the Synergy Package (in that a portion of that revenue will now be deferred). It does not affect the cashflow received by NTG under that package. NTG is currently calculating the extent to which the agreed revenue recognition principles will affect the company’s 2003 results. It is anticipated by NTG that this change in accounting policy will significantly increase NTG’s forecast net loss before tax in respect of the 2003 financial year, including adjustment for 2001 and 2002. Quantifying the impact of this change is complex and time consuming and NTG will advise the market when the precise effect of the change in accounting policy on NTG’s results has been calculated.

A preliminary analysis (including some additional write-off of goodwill and inventories, and provisions for doubtful debts) indicates that the Net Loss Before Tax for 2003 will be in the order of $50million to $60million. It is anticipated that the impact of the change in 2004 will be to increase Revenue and Profit Before Tax by some $10million to $20million.

The agreed revenue recognition principles will, defer income for which cash has presently been received to future years, and result in an increase to revenues in 2004 – 2006. Under the restructure of the company announced on 1 July 2003, the new revenue recognition principles will not impact the revenue recognised from the wholesaling of airtime, which is now the core business of the company.