Carphone Warehouse 2016 Annual Report Download - page 139

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137
26 Financial risk management and derivative financial instruments continued
h) Network commission receivables consumer behaviour risk
Under certain arrangements with MNOs, the commission revenue on mobile phone sales depends on consumer behaviour after
the point of sale. A discounted cash flow methodology is used to measure the fair value of the revenue and associated
receivables at the point of sale, by estimating all future cash flows that will be received from the MNO and discounting these
based on their timing of receipt. Subsequently network commission receivables are measured at the present value of the
estimated future cash flows discounted at the effective interest rate determined at the date of sale.
The key inputs to the model are:
• revenue share percentage – the percentage of the consumer’s spend (to the MNO) to which the Group is entitled;
• minimum contract period – the length of contract entered into by the consumer;
• out-of-bundle spend – additional spend by the consumer measured as a percentage of total spend;
• consumer default rate – rate at which consumers disconnect from the MNO;
• spend beyond the initial contract period – period of time the consumer remains connected to the MNO after the initial
contract term; and
• upgrade propensity – the percentage of consumers initially connected by the Group estimated to be subsequently upgraded
by an MNO.
The last four inputs are based on extensive historical evidence obtained from the networks, and provision is made for the risk of
potential changes in consumer behaviour. Reliance on historical data assumes that current and future experience will follow past
trends, there is therefore a risk that changes in consumer behaviour reduce the total cash flows ultimately realised over the
forecast period, however, the directors consider that the quantity and quality of data available provides an appropriate proxy for
current trends.
The table below provides the sensitivity of the carrying value of the network commission receivables to a reasonably possible
change in input to the discounted cash flow model:
Sensitivit
y
(1)
Unobservable inputs
Relationship of unobservable inputs to
remeasurement of carrying value
Favourable
£million
Unfavourable
£million Range(2)
Out-of-bundle spend The higher the spend, the higher
the carrying value
47 (47) 7.5% – 25.9%
Consumer default rate The higher the default rate, the
lower the carrying value
13 (13) 1.2% – 18.2%
Spend after the initial contract term The higher the spend, the higher
the carrying value
30 (30)
1.0 months – 5.5
months
Upgrade propensity The higher the propensity, the
higher the carrying value
10 (10) 16.9% – 24.9%
(1) The sensitivity represents the favourable and unfavourable effect on the income statement of remeasuring the carrying value for a reasonably possible
change in the value of the input used. Whilst the nature of inputs is consistent across all MNOs the value applied differs on a MNO by MNO basis. The
sensitivity analysis performed has applied a reasonably possible change on an input by input and MNO by MNO basis. The amounts shown above are
the cumulative sensitivities for each input across all MNOs.
(2) The reasonably possible range disclosed represent the high and low range of each unobservable input, across all MNOs, over the previous three years.
The sensitivities, which fall within this range, have been applied to the unobservable inputs on a MNO by MNO basis.
The significant unobservable inputs in determining the amortised cost carrying values used in the table above are the same
significant unobservable inputs that would be required if the network commission receivable was measured at fair value on
the balance sheet. In addition, the fair value would be impacted by changes in interest rates and counterparty credit risk.
In addition to those sensitivities disclosed above, changes to revenue may be made, where for example, more recent information
is available, and any such changes are required to be recognised in the income statement. Changes in relation to network
commission receivable for sales originating in previous years totalled £26 million (2014/15: £33 million).
00_DC 2016 Annual Report.pdf 137 11/07/2016 18:34