PAYGo Accounting Brief

October 2021
 Acknowledgments
Acknowledgements

This PAYGo Accounting Brief was implemented under the PAYGo

PERFORM initiative, a partnership of CGAP, GOGLA, and IFC Lighting
Global to develop a standardized and transparent set of key
performance indicators for the PAYGo sector.

The brief was authored by MFR, a global rating agency specializing in

inclusive and sustainable finance.

PAYGo PERFORM and this PAYGo Accounting Brief are implemented in

partnership with CDC, UNCDF, FMO, and [IFC donors]
 Table of 1. Introduction

contents 2. Revenue recognition

3. Outstanding receivables

Provisioning policy and

4. Credit loss reserve

Write-off and Revaluation

5. policy

6. Possible next steps

1 Introduction
 1 Risk of current accounting
differences
Introduction

The PAYGo PERFORM KPI pilot identified several different approaches undertaken by PAYGo
firms in key accounting treatments. Beside the impact on the PAYGo PERFORM KPIs, the
current variety of practices, including more and less prudent approaches, may expose PAYGo
firms to risks:

Regulation: aggressive approaches sometimes lead to regulatory over-reactions (e.g.

interest rate caps in several emerging markets; reversal of all interest accrued on
1 portfolio under moratorium in Bolivia in 2020). Room for improvement in the
consistency between the nature of operations and the legal status of firms may
generate some compliance risk, e.g. carrying out leasing activities without being
incorporated as a leasing company.

Investors: different accounting standards and practices may make the PAYGo industry
less attractive in the eyes of non-specialized investors due to the higher effort needed
to understand the Financial Statements, the KPIs and their accuracy and comparability
2
limitations. Investors may feel more comfortable in an environment that appears
transparent to them and where benchmarking is possible, e.g. the CGAP Microfinance
Consensus Guidelines of 2003 positively contributed to an investor friendly
environment for MFIs.
 1 Accounting impact on PAYGo
PERFORM KPIs
Introduction

No IFRS 9 / IFRS 9 • Write-Off Ratio Portfolio

Provision, write-off and • Repossession Ratio (Value) Quality
revaluation policy
• Provision Expense Ratio (Cashflow) Financial
• Unit Provision Cost Performance
Recognition of CoGS: • EBT Margin (Cashflow)
IFRS 16 • Contribution Margin (Cashflow)
Operating lease / other • Cost of Goods Sold Ratio (Cashflow)
• Liquidity <90 days / Total cost
• Unit Contribution Margin
Recognition of revenue: • Unit Device Cost
no IFRS / IFRS 15 or
IFRS 16 Finance lease • Sales Model Company &
(and estimate cash • Sales Distribution Model Operational
price) / IFRS 16 • % Country Sales KPIs
Operating lease
Details of accounting impact on KPIs in next sections
See IFRS and PAYGo PERFORM KPIs in annex
 1 Case for a PAYGo Accounting
Brief
Introduction

Given the impact of accounting practices on

PAYGo PERFORM KPIs, investors’ appetite and
potential regulatory risk, IFC Lighting Global,
GOGLA and CGAP decided to produce a
PAYGo Accounting Brief, implemented by
MFR, as part of the PAYGo PERFORM KPIs
toolkit.

“
It’s hard to require a certain method. But
there needs to be awareness. As long as
the accounts are IFRS approved they aren’t
illegal, but different standards can change
the picture
A PAYGo Firm
 1 Goals of the PAYGo
Accounting Brief
Introduction

✓ To increase awareness and transparency on the different accounting treatments

used in PAYGo firms, and their impact on financial reporting and the PAYGo
PERFORM KPIs.
✓ To encourage disclosure of accounting principles that are important for an accurate
interpretation of the KPIs and of the Financial Statements.
✓ To support more meaningful analysis of PAYGo PERFORM KPIs and Financial
Statements (one firm or different firms).
✓ To be a starting point for further elaboration on these subjects, including industry
discussions about potential gradual harmonization in future, to the extent possible .

The Brief is not intended:

x To prescribe specific accounting policies.
x To constitute a comprehensive IFRS study.
x To calculate KPIs and measure performance.
x To forecast the future evolution of accounting policies.
 1 Benefits of harmonization
and disclosure
Introduction

Benefits of harmonization of accounting policies to the extent possible:

1 Prudential and transparent financial reporting, in line with
internationally recognized standards and good practices.
2 Meaningful and comparable PAYGo PERFORM KPIs, resulting in
Long
enhanced benchmarking.
term
3 Investments facilitated by more clarity in reviewing Financial
Statements (harmonized patterns as an element of comfort) and
hence a better understanding of the risk profile and the
performance of firms.
4 Legal status clarity and trust from regulators.
5 Contract transparency and consumer protection.

Short
In the short-medium term, transparently disclosing the accounting term
policies used and considering them in the interpretation of the KPIs
would already be beneficial for points 2 and 3 above.
 1 Sources
Introduction

Literature review (IFRS, national Limitation: inputs elaborated to the

regulations applicable to PAYGo extent that Financial Statements were
firms) shared by PAYGo firms
Workshops with representatives of 24 Some accounting presentation
PAYGo country firms, including choices in the Audited Financial
accounting policies and Statements are determined by the
implementation, as part of the PAYGo external auditors and not by the
PERFORM KPIs pilot (2020) PAYGo firm
Audited Financial Statements (mainly PAYGo firms’ information and
2019) of 11 PAYGo country firms Financial Statements are kept
(reviewed in 2021) confidential and used by MFR only
and for the sole purpose of this brief.
Follow-up interviews with
Results are presented in aggregate
representatives of 10 PAYGo country
and anonymized form
firms on accounting policies,
opportunities and challenges (2021)
 1 Unit of analysis
Introduction

• The unit of analysis in the PAYGo • The primary object of analysis are the
Accounting Brief is one PAYGo firm Financial Statements of the PAYGo firms
incorporated in its country of operating in each country, because this is
operation. This is referred to as a where PAYGo business operations are
PAYGo firm recorded
• It is recognized that some PAYGo • Accounting standards may differ across
firms are subsidiaries of international PAYGo firms in different countries
groups that own multiple PAYGo firms belonging to the same international
in multiple countries group
• However, the international group
Financial Statements (consolidated or
holding type, e.g. including the equity
and debt investments in the
subsidiaries) are not the primary
object of the PAYGo Accounting Brief
2 Revenue recognition
 2

“ “
Revenue recognition

Before doing any analysis, It would be bullish to recognize

you should ask which 100% revenues upfront: your
revenue recognition method costs may be front-loaded, but
is used they will never be 100% upfront
A PAYGo Firm A PAYGo Firm

“ A small sentence in the

contract can change the IFRS
applicable
A PAYGo Firm
“ IFRS 16 Operating lease
isn’t perfect, but it
correlates better with the
costs and benefits of the
business
A PAYGo Firm
 2 IFRS 15 and IFRS 16
Applicability
Revenue recognition

Yes Yes
Contract transfers Ownership is transferred
ownership to customer at the beginning

No No

Operating lease Finance lease Instalment plan

Yes
Value of good is small or Value of good is small or Yes
contract is < 12 months contract is < 12 months

No Option
No Option

IFRS 16 IFRS 16
Operating lease Finance lease
IFRS 15
 2 Different revenue recognition
in PAYGo firms
Revenue recognition

IFRS 16 IFRS 16
No IFRS IFRS 15
Finance lease Operating lease

Full upfront Product income Cash price Operating

(or less upfront; upfront; income based
provision) Finance income Finance income on payments
over time over time schedule

Higher share in Francophone Africa:

several firms now moving to IFRS.

PAYGo firms in the sample adopting the practice: majority some few
 2 Different financial
statements of PAYGo firms 1
Revenue recognition

Different accounting standards result in different recognition of revenues in Financial

Statements.
The next slide illustrates the recognition of the sample transaction described below as of
31st Dec 2021 depending on the accounting standard adopted:

• A unit is sold to a customer on 1st Jan 2021 under a 2 years PAYGo contract for a total
value of USD 250;
• The cash price of the same unit is USD 150;
• The upfront deposit paid by the customer is USD 50;
• The total follow-on payments payable by the customer are USD 200;
• The follow-on payments from the customer are scheduled for USD 80 in 2021 and for
USD 120 in 2022.
• The collection rate from the customer in 2021 is 70%
 2 Different financial
statements of PAYGo firms 2
Revenue recognition

No IFRS IFRS 15 IFRS 16 IFRS 16

Finance lease Operating lease
Profit and loss
Revenue 250 Revenue 200 Finance income 50 Lease revenue 130
Product income 150 Selling profit 30
Gross revenue 250 Revenue 150
Fin. inc. discount (50) Cost of sales (120)
Finance income 50
Cost of sales (120) Cost of sales (120) Lease asset amort. (60)
Loss provision (40) Loss provision (40) Loss provision (20) Loss provision (20)

Balance sheet
Assets Assets Assets Assets
Trade receivables 90 Trade receivables 90 Net lease receivables 70 Trade receivables 24
Gross receivables 130 Gross receivables 130
Loss reserve (40) Loss reserve (40) Loss reserve (20) Loss reserve (20)
Lease assets 60
Liabilities
Deferred fin. Income 50

Mock-up: selected items, data not real and for illustration purposes only
Variations within each IFRS category (order, other) presented in next sections.
 2 Different product and finance
income in PAYGo firms 1
Revenue recognition

IFRS 15:61 definition

Consideration Product income Finance income
Upfront deposit + = Price of the unit if sold + Consideration –
Follow-on cash Product income
payments
From PAYGo contract Obtained as difference
Unit is also sold cash
Covering costs arising
Yes No exclusively from PAYGo
arrangement, and not incurred
otherwise, e.g. credit losses,
credit risk management,
From cash contract Estimate additional finance cost.
Covers mark-up, CoGS, sales, needed
service, maintenance, finance
and other costs in cash sale
model
 2 Different product and finance
income in PAYGo firms 2
Revenue recognition

• Judgment used in estimating cash price, when unit is not sold cash (e.g. credit
losses factored in or not factored in Finance income)
• Different terms: the longer the term, the higher the finance income %;
• Different term concepts: contractual (IFRS 15) or effective (more prudential)

Different split (%) observed in firms:

Finance income further broken
down in 1 firm into Service income
Product 60 55 50
income
70 and Finance income: both
recognized over time, on a straight
45 50 line and declining basis
Finance 30 40
respectively
income

Opportunity: common criteria for comparability, based on benchmarks of products sold cash
 2 Different product income
disclosure in PAYGo firms
Revenue recognition

Product income (IFRS 15)

✓ Gross revenue and finance income discount disclosed

separately (difference = Product income)

 Product income disclosed net of finance income discount

( = gross revenue – finance income discount); Gross
revenue information not available

PAYGo firms in the sample adopting the practice: majority some few
 2 IFRS 15 and IFRS 16
comparison for PAYGo firms
Revenue recognition

Which IFRS is applicable depends on the product, the nature of the operation described in customer
contracts and on the accounting choice of the firm.
IFRS 15 and IFRS 16 Finance lease are similar in some of their mechanisms. However, the sale nature
of operations under IFRS 15 and the lease nature of operations under IFRS 16 entail significant
differences in some accounting areas and possible regulation applicability:

Evenly spread Applicable Credit loss Regulatory

revenue and cost VAT provision requirements

 ✓
IFRS 15
 higher cost lower cost
less evenly spread

IFRS 16 Finance lease Intermediate cost
higher cost if
financial
✓ ✓
IFRS 16 Operating lease regulation is
more evenly spread lower cost
applicable
 2 IFRS 15 and IFRS 16:
local authorities
Revenue recognition

Local authorities may have different incentives for PAYGo firms to adopt
different accounting standards:

• Tax authorities may favor IFRS 15, resulting in higher and more upfront
sales and revenues, resulting in higher VAT and profit taxes. For the same
reason, provisioning policies resulting in under-provisioning of the credit
risk may be favored, and more prudential provisioning may be questioned.

• On the other hand, regulators may favor IFRS 16, resulting in more
prudential revenue recognition, as well as strict provisioning policies, to
appreciate the performance of the firm, detect risks earlier than later, and
preserve the stability of the firm in the system.
 2 IFRS 15 and IFRS 16:
revenues and cost
Revenue recognition

IFRS 15 IFRS 16 Finance lease IFRS 16 Operating lease

Revenues and costs concentrated in year 1. Revenues and costs (i.e.

If sales suddenly drop: potentially negative margin in lease asset amortization)
subsequent years in case of excessive product income recognized evenly over
recognition, resulting in revenue recognition being the contractual duration,
more upfront than cost recognition. resulting in higher
alignment between
revenue and cashflow
from customers.
 2 IFRS 15 and IFRS 16:
VAT
Revenue recognition

IFRS 15 IFRS 16 Finance lease IFRS 16 Operating lease

VAT applicable as the VAT applicable as VAT applicable as

invoice is issued, i.e. invoices are issued, invoices are issued,
upfront, at the time of i.e. upfront and over i.e. over time as lease
sale, calculated based time as lease payments accrue
on the full price of the payments accrue
good. Firms can stop
Firms can stop issuing issuing invoices to
VAT payable to tax new invoices to customers in the
authority upfront, customers in the event of default,
regardless of whether event of default, avoiding VAT
the customer will pay avoiding in part VAT payables to the tax
VAT to the firm payables to the tax authority that will not
authority that will not be paid by
be paid by customers. customers.
 2 IFRS 15 and IFRS 16: credit loss
provision
Revenue recognition

IFRS 15 IFRS 16 Finance lease IFRS 16 Operating lease

Calculated on trade Calculated on net Calculated on trade

receivables, originated lease receivables, i.e. receivables,
upfront at the time of the sum of lease originated for the
the sale and including payments receivable amounts of invoices
the full price of the discounted at issued over time and
good (minus the down the interest rate not paid yet
payment) implicit in the lease
 2 IFRS 15 and IFRS 16: regulatory
requirement
Revenue recognition

IFRS 15 IFRS 16 Finance lease IFRS 16 Operating lease

Commercial IFRS 16 is the standard typically adopted by leasing companies.

regulation, easier to Leasing companies are usually subject to financial regulation (even
comply with if regulation is still in process of evolving in many cases). PAYGo
firms adopting IFRS 16 may raise questions around why they are
not currently subject to financial regulation.

Financial regulation requires prudential and performance

standards (e.g. capital requirements, solvency, credit loss
provisioning), which most likely poses a significant challenge to
the majority of PAYGo firms in what is currently a young industry.

However, the firms currently adopting IFRS 16 are not subject to

the financial regulations in the emerging markets of operation.
 2 IFRS 15 and IFRS 16:
possible evolution
Revenue recognition

1 IFRS 16 finance lease presents several aspects coherent with the lease-to-own nature of the majority
of PAYGo operations. It is possible that some firms may evolve over time towards IFRS 16 finance
lease, being subject to financial regulation or not .

2 However, IFRS 15 always remains an option, when contracts to customers are clear on the outright
sale nature of the agreement (as opposed to lease-to-own), or even when the nature of the operation
is leasing, provided that the value of contracts is small.

3
Moreover, accounting standards are in constant evolution in PAYGo firms, e.g. one international
group may move from a combination of standards (e.g. IFRS 15, IFRS 16, no IFRS), to a higher
number of firms using IFRS 16; another international group may move from IFRS 16 to a
combination of standards.

4
Given that industry harmonization is unlikely be achieved in the medium term, it is paramount for
investors and interested parties to be aware of the financial reporting standards used, their
consequences on the KPIs and implications for comparability.
 2 Revenue recognition impact on
PAYGo PERFORM KPIs
Revenue recognition

PAYGo PERFORM KPIs for Financial Performance use cashflow instead of revenue to avoid the effect of
different revenue recognition methods on the resulting KPI. Using cashflow instead of revenue is necessary
1 considering the accuracy expectations of stakeholders conducting financial analysis. To the extent that revenue
may converge in the long term towards harmonized recognition methods, it may be possible to move back
from cashflow to revenue.

On the other hand, the PAYGo PERFORM Company and Operational KPIs employ revenue as the effects of
2 differing revenue recognition approaches (see slide “Revenue recognition impact on PAYGo PERFORM KPIs”)
may not dramatically distort the Company and Operational analysis.

One area of potential distortion is the impact on several PAYGo PERFORM Financial Performance KPIs of the
different recognition of Cost of Goods Sold (CoGS) in IFRS 16 Operating lease compared to the other standards
3 (see slide “Cost recognition impact on PAYGo PERFORM KPIs”). The most feasible way to address this in the
short term seems to carefully consider the margins of non comparability with other firms when analyzing the
financial performance of firms adopting IFRS 16 Operating lease.
 2 Revenue recognition impact on
PAYGo PERFORM KPIs
Revenue recognition

To the extent the Sales model is PAYGo, the

IFRS 16 Operating lease
numerators of the following Company and
Amount of payments operational KPIs will be higher, intermediate or
scheduled in the period, lower in year 1 if the firm: does not adopt IFRS;
adopts IFRS 15 or IFRS 16 Finance lease; or
and not the full cash price
adopts IFRS 16 Operating lease:

Sales revenue PAYGo year 1 Sales Model: Sales Revenue PAYGo /

Sales Revenue
No
IFRS IFRS 15 Sales Distribution Model: Sales
Revenue B2C / Sales Revenue
IFRS 16 Finance lease
% Country sales: Sales Revenue
Higher (or lower) if Country 1 / Sales Revenue
higher (or lower) cash
price
 2 Revenue recognition impact on
PAYGo PERFORM KPIs
Revenue recognition

Financial Performance KPIs whose

IFRS 16 Operating lease
result is higher (↑) or lower (↓) in year
Lease asset amortized over 1 under IFRS 16 Operating lease
time, and not recognized compared to other standards:
100% upfront
↑ EBT Margin
CoGS in year 1 ↑ Contribution Margin (Cashflow)
↓ Cost of Goods Sold Ratio

No IFRS (Cashflow)

IFRS 15 ↑ Liquidity <90 days / Total cost

↑ Unit Contribution Margin
IFRS 16 Finance lease
↓ UnitConsider
Device Cost
accounting in KPIs
analysis
3 Outstanding
receivables
 3 Different outstanding
receivables in PAYGo firms
Outstanding receivables

IFRS 16 IFRS 16
No IFRS IFRS 15
Finance lease Operating lease

Full trade receivables: Net lease Trade

full price of the good receivables: lease receivables:
(minus the down payments receivable amounts of
payment) discounted at invoices issued
the interest rate over time and
implicit in the lease not paid yet

PAYGo firms in the sample adopting the practice: majority some few
 3 Different receivables disclosure
in PAYGo firm
Outstanding receivables

✓ Gross outstanding receivables and deferred finance

income disclosed separately
 Outstanding receivables presented net of deferred
finance income, reducing the outstanding receivables
Outstanding unnecessarily. Deferred finance income is not meant to
receivables reduce an asset (as the Credit loss reserve does with
impaired receivables), but to move part of the income
to future exercises, without reducing the amount of the
asset.
 Customer receivables presented with other receivables
Deferred ✓ Liability (to Gross outstanding receivable (assets
finance income
unnecessaincome postponed to future periods)
(IFRS 15)
 Contra-asset rily reduced)

More (✓) or less () disclosure. Firms in the sample adopting the practice: majority some few
 3 Outstanding receivable impact
on PAYGo PERFORM KPIs
Outstanding receivables

IFRS 16 Operating
lease Suggested to calculate the Portfolio Quality
KPIs using the Outstanding receivables as per
PAYGo PERFORM definition (i.e. full trade
receivable), extracted from the operating
Outstanding receivables system, and not from the Financial Statements
if this differs from the PAYGo PERFORM
definition.
In this case, the impact of the different
IFRS 16 accounting approaches on the Outstanding
IFRS 15
Finance lease receivables is a possible difference between the
value used to calculate KPIs and the value in
No IFRS
the Financial Statements, that can be solved
with transparent reconciliation.

Opportunity to disclose the reconciliation between outstanding receivables in Accounting

and in Operating system (for KPIs)
4 Provisioning policy,
Credit loss reserve
 4
Provisioning policy, Credit loss reserve

“ Provisioning is notoriously judgmental, and

it can only prove sufficient at the end of the
contract.
A PAYGo Firm
 4 IFRS 9 applicability to
receivables IFRS 15/ IFRS 16
Provisioning policy, Credit loss reserve

Lease
Trade receivable has significant financing component
receivable
Yes No

Option

IFRS 9 General approach IFRS 9 Simplified approach

Yes
Significant ↑ in credit risk Lifetime Expected Credit Loss
(ECL)
No
12 months ECL
 4 Different credit loss provision
in PAYGo firms 1
Provisioning policy, Credit loss reserve

No IFRS IFRS 9 IFRS 9

Simplified General

Provision Lifetime 12 months

based on Expected ECL and
sales Credit Losses lifetime ECL.
(ECL)

PAYGo firms in the sample adopting the practice: majority. Some few
 4 Different credit loss provision
in PAYGo firms 2
Provisioning policy, Credit loss reserve

✓ Disclosed as contra-asset
Credit loss  Receivables disclosed net of reserve only
reserve ✓ Movement in the reserve disclosed: opening balance,
write-off, addition, reversal, end balance

Receivables
• No IFRS or IFRS 15: Full receivables
basis for
provision • IFRS 16 financial leasing: net lease receivables
• IFRS 16 operational leasing: Invoices issued not paid yet

✓ Disclosed
Credit loss  Part of cost of sale, or sales disclosed net of provision
provision
expense • Top position (e.g. under sales revenue)
• Mid position (e.g. before / in administrative expenses)

More (✓) or less () disclosure. Firms in the sample adopting the practice: majority some few
 4 Credit loss provision impact
on PAYGo PERFORM KPIs
Provisioning policy, Credit loss reserve

The same credit risk may be The following Financial Performance KPIs
provisioned for at more or less are affected:
prudent levels depending on:
• Provision Expense Ratio (Cashflow)
IFRS 9 simplified or general
approach / no IFRS 9 • Unit Provision Cost

Assumptions used in The more the risk is anticipated through

provisioning: what probability of prudent provisioning, the more evenly
default is associated with spread the cost will be over time. If
receivables by risk category provisions are not sufficient, direct write-
off cost is added to Profit and Loss, with
Receivable basis used for the risk of high concentration of cost of
provisions calculation (see risk in given periods.
Outstanding receivables)

Opportunity to complement KPIs on provisions with risk coverage analysis to account for
variations in applying IFRS 9
5 Write-off and
Revaluation policy
 5

“
Write-off and Revaluation policy

One thing is to lose a customer. Another thing is to lose

a customer and a kit.

A PAYGo Firm

“ Legally we have control, but in pratice it isn’t always

possible to repossess. Write off should be spread out over
the portfolio life though in practice it tends to be more
lumpy.
A PAYGo Firm
 5 Different write-off in PAYGo
firms
Write-off and Revaluation policy

No IFRS IFRS 9

No regular write-off Systematic write-off, credit risk

thresholds triggers

Opportunity to write-off regularly (e.g. monthly) to spread cost over

time

PAYGo firms in the sample adopting the practice: majority some few
 5 Repossession in PAYGo firms
Write-off and Revaluation policy

• The later repossession takes place, the more likely it will be that the
repossessed value is lower than the outstanding receivable of the unit
repossessed.

• The difference, i.e. the unrecovered amount, is written-off in all the firms in the
sample.
Value Off-set by

Repossessed ↑ Inventory
IFRS 9 Outstanding receivable of
B5.5.55 unit repossessed
Unrecovered ↑ Write-off
 5 Different write-off and
revaluation in PAYGo firms
Write-off and Revaluation policy

Written-off ✓ Direct write-off disclosed as part or close to loss

amount provision expenses

• Residual market value of the asset – cost to

Revaluation repossess
of units
• Residual market value of the asset – cost to resell
repossessed
• Residual market value of the asset

More (✓) or less () disclosure. Firms in the sample adopting the practice: majority some. few
 5 Write-off and revaluation
impact on PAYGo PERFORM
Write-off and Revaluation policy

KPIs

• IFRS 9 / no IFRS 9 The following Financial Performance KPIs

• Write-off policy of firms: are affected:
definition of default, write-off • Write-Off Ratio
triggers and frequency
• Repossession Ratio (Value)
• Amount of receivables booked
(see Outstanding receivables) To improve comparability, the Write-Off
Ratio numerator may include the amount
• Repossession strategy: how of equipment written-off due to customer
often, how early default in addition to the amount of trade
• Revaluation policy for units receivables written-off in case of IFRS 16
repossessed Operating lease (different receivables
booked).

Opportunity to analyze Write-Off Ration and Repossession Ratio (Value) jointly, to add
value to the individual KPI analysis.
6 Possible next steps
 66 Possible next step 1
Policy next steps
Policy next steps

The following items may be object of future internal discussion within firms and / or
industry consultations:

1 Align the nature of business, contract to customers and regulatory status: adopt
the accounting standard associated to the type of transaction (sale; finance lease;
operating lease) that best describes the nature of PAYGo business, aligning the
contract language (is ownership transferred, and when), considering the fiscal
implications. In case of IFRS 16 adoption, firms shall assess the likelihood that this
may contribute to being identified as leasing companies, and the consequent risk
that leasing regulation requirements may not be commensurate to the capacity of
young firm. International grups of PAYGo firms may consider the opportunity of
gradual convergence to common group-level standards to the extent possible.

2 Adopt prudential provisioning policies, adequate to cover the effective credit

losses, for financial statements to provide a fair representation to safeguard
results in future periods.
 6 Possible next step 2
Policy next steps

3 Consider industry consultations to develop disclosure guidelines for financial

reporting of PAYGo firms including good practices to achieve best disclosure in
preparing the financial statements under each accounting standard (including
initial inputs from this brief).
4 Explore the opportunity to build industry benchmarks for firms consideration
and, if they wish, convergence, on topics where practices currently differ across
firms, e.g. Product and finance income split under IFRS 15 (to support firms
which need to estimate the cash price),
5 Produce a standard accounting form where each firm may indicate the
accounting practices adopted and reconcile differences between the financial
statements and the amounts reported to calculate the KPIs. The accounting form,
accompanying the PAYGo PERFORM KPIs, would help facilitating their analysis
by external parties (e.g. investors).

6 Consider the knowledge of the accounting implications on the KPIs as it will

have built at the time of the next review of the PAYGo PERFORM KPIs.
Annexes
 Acronyms
Annexes

CoGS: Cost of Goods Sold

FFSS: Financial Statements
IFRS: International Financial Reporting Standards
KPI: Key Performance Indicator
 Resources
AnnexesAnnexes

IFRS - Home PAYGo PERFORM KPI data

PAYGo PERFORM initiative

PAYGo PERFORM KPI Pilot report

PAYGo PERFORM KPI Technical guide

 IFRS adoption
AnnexesAnnexes

IFRS required or allowed in

majority of PAYGo countries
(for domestically accountable
companies).
Source: Use of IFRS around the
world overview sept 2018
More: IFRS - Who uses IFRS
Standards?
 IFRS 9 (1/2)
AnnexesAnnexes

About

IFRS 9 is effective for annual periods beginning on or after 1 January 2018 with early
application permitted.

IFRS 9 specifies how an entity should classify and measure financial assets, financial
liabilities, and some contracts to buy or sell non-financial items.

IFRS 9 requires an entity to recognise a financial asset or a financial liability in its

statement of financial position when it becomes party to the contractual provisions of
the instrument. At initial recognition, an entity measures a financial asset or a
financial liability at its fair value plus or minus, in the case of a financial asset or a
financial liability not at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition or issue of the financial asset or the financial
liability.
Source: IFRS - IFRS 9 Financial Instruments
 IFRS 9 (2/2)
AnnexesAnnexes

Financial Assets
When an entity first recognises a financial asset, it classifies it based on the entity’s business
model for managing the asset and the asset’s contractual cash flow characteristics, as follows:

Amortised cost —a financial asset is measured at amortised cost if both of the following
conditions are met: the asset is held within a business model whose objective is to hold assets in
order to collect contractual cash flows; and the contractual terms of the financial asset give rise
on specified dates to cash flows that are solely payments of principal and interest on the
principal amount outstanding.

Fair value through other comprehensive income —financial assets are classified and measured
at fair value through other comprehensive income if they are held in a business model whose
objective is achieved by both collecting contractual cash flows and selling financial assets.

Fair value through profit or loss —any financial assets that are not held in one of the two
business models mentioned are measured at fair value through profit or loss.

When, and only when, an entity changes its business model for managing financial assets it
must reclassify all affected financial assets.
 IFRS 15 (1/2)
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About
IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with earlier
application permitted.

IFRS 15 establishes the principles that an entity applies when reporting information about the nature,
amount, timing and uncertainty of revenue and cash flows from a contract with a customer. Applying IFRS
15, an entity recognises revenue to depict the transfer of promised goods or services to the customer in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services.

To recognise revenue under IFRS 15, an entity applies the following five steps:
Identify the contract(s) with a customer.

Identify the performance obligations in the contract. Performance obligations are promises in a
contract to transfer to a customer goods or services that are distinct.

Source: IFRS - IFRS 15 Revenue from Contracts with Customers

 IFRS 15 (2/2)
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Determine the transaction price. The transaction price is the amount of consideration to which an
entity expects to be entitled in exchange for transferring promised goods or services to a
customer. If the consideration promised in a contract includes a variable amount, an entity must
estimate the amount of consideration to which it expects to be entitled in exchange for
transferring the promised goods or services to a customer.

Allocate the transaction price to each performance obligation on the basis of the relative stand-
alone selling prices of each distinct good or service promised in the contract.

Recognise revenue when a performance obligation is satisfied by transferring a promised good

or service to a customer (which is when the customer obtains control of that good or service). A
performance obligation may be satisfied at a point in time (typically for promises to transfer
goods to a customer) or over time (typically for promises to transfer services to a customer). For
a performance obligation satisfied over time, an entity would select an appropriate measure of
progress to determine how much revenue should be recognised as the performance obligation is
satisfied.
 IFRS 16
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About

IFRS 16 is effective for annual reporting periods beginning on or after 1 January

2019, with earlier application permitted (as long as IFRS 15 is also applied).

The objective of IFRS 16 is to report information that (a) faithfully represents lease
transactions and (b) provides a basis for users of financial statements to assess the
amount, timing and uncertainty of cash flows arising from leases. To meet that
objective, a lessee should recognise assets and liabilities arising from a lease.

IFRS 16 introduces a single lessee accounting model and requires a lessee to

recognise assets and liabilities for all leases with a term of more than 12 months,
unless the underlying asset is of low value. A lessee is required to recognise a right-
of-use asset representing its right to use the underlying leased asset and a lease
liability representing its obligation to make lease payments.

Source: IFRS - IFRS 16 Leases

 PAYGo PERFORM KPIs 1/8
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Please re fe r to the PAYGo PERFORM Technical Guide for a de ta i l e d w a l k -

through of each KPI, helpful analysis, and background for the i n i t i a t i v e .

Portfolio Quality Indicator Definition Calculation

Outstanding Receivables Value of the company’s gross outstanding receivables streams Gross Outstanding Receivables as Reported on
the Balance Sheet at a Fixed Point in Time

Growth in value of the company’s gross outstanding receivables

Growth in Outstanding
Receivables streams ( Gross Outstanding Receivables [T]

Gross Outstanding Receivables [T-1]

) -1

Collection Rate Ratio of all collected receivables payments over total receivables payments due Cash Receipts
for a period (does not include deposits) From Follow-on Payments During the Period
Scheduled Follow-on
Payments During the
Period
Receivables at Risk (RAR) Identifies risky proportion of receivables portfolio. Recommended to use both 1. Gross Outstanding Receivables
Consecutive Days Unpaid or Collection Rate below threshold to identify risky > [X] Consecutive Days Unpaid
portion of receivables portfolio.a Gross Outstanding Receivables
Key thresholds are > 30 days for consecutive days unpaid and
< 50% collection rate since activation, although using ranges of thresholds 2. Gross Outstanding Receivables
(e.g., CDU of 30, 90, 180 and CR < 70 and 50%) will likely provide valuable of Customers with Collection Rate < [Y]%
insights. Gross Outstanding Receivables
When difficult to use both methods, consecutive days unpaid is recommended
as a standalone measure.

a There can be meaningful overlap between the two different measures so care must be taken to avoid double counting.
 PAYGo PERFORM KPIs 2/8
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Portfolio Quality Indicator Definition Calculation

Write-off Ratio The sum of the remaining payments of receivables streams Outstanding Receivables
that have been written-off in a given period divided by the sum for Written-off Contracts During the Period
of the remaining payments of the receivables streams for the Average Outstanding Receivables
entire portfolio During the Period

Repossession Ratio The sum of the remaining payments of receivables streams of Outstanding Receivables
repossessed units in a given period divided by the sum of the of Units Repossessed During the Period
remaining payments of the receivables streams for the entire Average Outstanding Receivables
portfolio During the Period

Contractual Credit Period Average nominal number of days between system acquisition and Contractual Repayment
expected final payment Term (Days) of Active Units

Number of Active Units

Effective Credit Period Effective (actual) length of time taken for an average customer to Effective Repayment
pay off their solar device Term (Days) of Repaid Units

Number of Repaid Units

 PAYGo PERFORM KPIs 3/8
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Unit or Firm
Definition Calculation
Level Indicator
Total Cash Receipts The total cash receipts received from PAYGo customers – including The Sum of Customer Deposits and Follow-on
from PAYGo Customers customer deposits and follow-on payments Payments Received from All PAYGo Customers Over
a Period of Time

Cost of Goods Sold Ratioa Total cost of goods sold expressed as a proportion of cash receipts Cost of Goods Sold
received from customers Total Cash Receipts
from Customer

Sales and Maintenance Sum of all sales and maintenance costs expressed as a proportion Sales and Distribution Cost
Cost Ratioa of cash receipts received from customers + Servicing and Maintenance Cost
+ Other Variable and Semi-variable Costs
Cash Receipts from Customers

Provision Expense Ratioa The cost of credit provisions expressed as a percentage of Provisioning Expenses
cash receipts Cash Receipts
from Customers

Total Contribution Margin a The total profit based on variable costs for the PAYGo solar firm Cash Receipts from Customers
as a proportion of the total cash receipts received from – Total Variable and Semi-variable Costs
customers Cash Receipts from Customers

a Cash Receipts
 PAYGo PERFORM KPIs 4/8
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Unit or Firm
Definition Calculation
Level Indicator

Financial Expense Ratioa The cost of financial expenses expressed as a percentage of cash Financial Expense
receipts Cash Receipts
from Customers

Fixed Operating Other fixed costs expressed as a percentage of cash receipts Other Fixed costs
Cost Ratioa Cash Receipts
from Customers

Fixed Cost Ratioa Sum of all fixed costs (Marketing, Sales, etc.) of a PAYGo solar firm Financial Expense + Other Fixed Costs
divided by total cash receipts received from customers Cash Receipts from Customers

Total EBT Margin a The total profit after all costs for the PAYGo solar firm as a Cash Receipts from Customers – Total Costs
proportion of the total cash receipts received from customers Cash Receipts from Customers

Unit Follow-on Payments Sum of contractual follow-on payments until system is permanently Receivables Generated During the Period
unlocked, net of customer deposits, per unit sold Number Of PAYGo Units Sold
During the Period

Unit Customer Deposits Total contractual PAYGo customer deposits per unit sold Customer Deposits
Number of PAYGo Units
Sold During the Period

Unit Cash Sales The total cash received from Cash sales per unit sold Cash Receipts
from Cash Customers During the Period
Number of Units
Sold Cash During the Period

a Cash Receipts
 PAYGo PERFORM KPIs 5/8
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Unit or Firm
Definition Calculation
Level Indicator
Unit Device Cost The total Cost of Goods Sold during the period per unit sold Cost of Goods Sold
Number of Units Sold During the Period

Unit Sales and The total cost of installing the device at the customer site, Sales and Distribution Cost
Distribution Cost transportation cost (from warehouse to customer) per unit sold Number of Units Sold
During the Period

Unit Servicing and The total cost of servicing a customer (i.e., collection of payments, Servicing and Maintenance Cost
Maintenance Cost customer service) and providing maintenance of installed units Expressed as Monthly Equivalent
× Effective Credit Period Expressed in Months
Average Active Units

Unit Provision Cost The contractual follow-on payments that will not be recognized due Provisioning Expenses
to write offs on a per unit basis Average Active Units
 PAYGo PERFORM KPIs 6/8
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Unit or Firm
Definition Calculation
Level Indicator

Unit Contribution Margin The average profit based on variable costs on a unit basis
for a particular product [ (Unit Customer Deposits + Unit Follow-on Payments)

×
Number of Units Sold PAYGo

Total Number of Units Sold

]
+
( Unit Cash Sales ×
Number of Units Sold Cash

Total Number of Units Sold

)
– Unit Device Cost

– Unit Sales and Distribution Cost

– Unit Servicing and Maintenance Cost

– Unit Provision Cost

Liquidity The liquidity of a company represented by cash and liquid assets Cash and Liquid Assets Convertible
convertible in the next 90 days to Cash in the Next 90 Days at End of Period
Total Costs Over the Next 90 Days
 PAYGo PERFORM KPIs 7/8
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Company Indicator Definition Calculation

Sales Model Percentage of sales revenue (0 – 100%) by sales model: Sales Revenue Generated
PAYGo and Cash per Individual Sales Model During the Period
Total Sales Revenue During the Period

Sales Distribution Model Percentage of sales revenue (0 – 100%) by sales distribution Sales Revenue Generated by Individual Sales
model: B2B, B2C, and Other Distribution Model During the Period

Total Sales Revenue

During the Period

Country Sales Percentage of sales revenue (0 – 100%) by country Sales Revenue During the Period by Individual Country

Total Sales Revenue During the Period

Total Net Sales Total number of units sold during the period, net of returned (Total Number of Units Sold During the Period)
and repossessed units – (Returned and Repossessed Units)

Repeat Sales Percentage of sales revenue (0-100%) from repeat customers Sales Revenue Generated by Units Sold
(current or former) to Existing or Former Customers During the Period
Total Sales Revenue Generated
by all Units Sold During the Period

Product Sales Percentage of sales revenue (0-100%) by product category. Sales Revenue by Product Category During the Period
Product categories are as per GOGLA standards Total Sales Revenue During the Period
 PAYGo PERFORM KPIs 8/8
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Operational Indicator Definition Calculation

Average Selling Price Average price of units sold, by sales model: PAYGo and Cash FOR THE CASH MODEL:
Cash Sales Revenue During the Period
Number of Cash Units Sold
During the Period

FOR THE PAYGo MODEL:

(Customer Deposits Collected + Receivables

Generated from Units Sold During the Period)

Number of PAYGo Units Sold During the Period

Sales per Distribution Percentage of sales revenue (0-100%) by distribution channel: Sales Revenue
Channel agents, wholesalers, shops, financial institutions, e-platforms, by Distribution Channel During the Period
governmental projects Total Sales Revenue During the Period

Sales Points Rate Fraction of sales points that have gone inactive over the previous Sales Points Inactive Over the Previous 90 Days
90 days, grouped by distribution channel – Agents (%), per Individual Distribution Channel
Wholesalers (%), Shops (%) and/or Other (%) Total Sales Points [T-1]

Net Promoter Score (NPS) Percentage of customers who rate their likelihood to recommend (% of Responses which are 9 and 10)
the service to friends or family as high, net of the percentage of – (% of Responses which are 0-6 Responses)
customers who rate as low.

The NPS should be calculated based upon customers’ responses This will Result in a Score Between 100 and –100.
to the question, ‘On a scale of 0 to 10, how likely are you to
recommend the product/service to a friend or family member,
where 0 is not at all likely, and 10 is extremely likely.’