PowerPoint PresentationWhere the Industry Stands & What Do We Do Now
Our goals for today
Look at the Offers
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• Review Revised A-CAM I & A-CAM II Offers • Revenues & Obligations • Deployment Milestones • Pros & Cons
• Remaining Legacy is Still Better for Some • Revenues Ahead • Buildout Obligations • Pros & Cons
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• FCC feels a forward looking model with “Significant, Verifiable Deployment Obligations” will deploy broadband & with more accountability than Legacy Regulation does
• Model-based support is more easily monitored & regulated
• At the same time, the FCC still places reliance on a model with Suspect Assumptions & Data Sources
• 477 reporting data • Greenfield engineering assumptions • Census data almost a decade old & frequently does not
accurately place locations within a census block
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General Overview of A-CAM
• CostQuest model with greenfield fiber buildout • 2010 census data & business location data sources • Eligible census block location based on model • Buildout obligations • Timelines • Speeds • Compliance gap penalties
• Key conditions changed in successive offers
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Offer Overview for Revised A-CAM I
• $200 replaced $146.10 for fully-funded locations • Expanded offers in most cases
• Caused some shifts from capped locations (e.g. $155) to fully-funded • 2016’s A-CAM carriers on a Glide-Path A-CAM carriers, already
at $200 per location, got no additional funding or material changes to their obligations
• No changes in the total number of eligible location counts • but Revised offer sets support through end of 2028
• But, the big change was the increase in the 25/3 Mbps deployment obligations based on density & the milestones for 25/3 Mbps deployments
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Revised A-CAM I Deployment Obligations
• 10/1 Mbps Milestones remain in place in fully- funded census blocks, whether or not the new offer is taken
• 25/3 Mbps Obligations, due by Year 10 of the Existing A-CAM term, now begin in Year 4 of the New Offer
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Offer Overview for A-CAM II
• A-CAM II is similar to revised A-CAM I • CostQuest model with greenfield fiber buildout • 2010 census data & business location data sources • Eligible census block location only
• Buildout obligations • Timeline: 40% of eligible locations in 2022, rising 10%/year, through 2028 • Speeds: 25/3 Mbps location for buildout Obligations • Compliance gap penalties: No change
• A-CAM II Key differences • Offer no longer limited to carriers with less than 90% of locations at 10/1 Mbps • Own fiber/coax cable deployment does not exclude census blocks • Unsubsidized competitive overbuild exception is increased to 25/3 Mbps • NO challenges allowed • FCC Form 477 data updated (December 2017)
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• A-CAM II revised offers • Only 37 companies received revised offers
• Mostly decreases
• Everyone received 30 extra days to decide • Election deadline extended to July 17, 2019
• FCC seeking comments on location shortfalls • How it impacts compliance gap & penalties still unknown • Good news they are at least seeking comments on the
issue
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Location Clarification for A-CAM A-CAM II Public Notice DA 19-650
• Guidance on Final Deployment Obligations • Reasonable request locations are not part of the deployment
obligations • 5% allowance on fully-funded locations shifts to capped locations
» Based on density, so some come back in as mandatory 4/1 Mbps locations others go to reasonable request locations
• Compliance gap applies per year » Not only at final year » Potentially much larger impact & back to our original interpretation
• No mention of 10% penalty waiver of unmet Final Deployment Obligations
» We recommended including 10% penalty if you are even one location short in your decision to adopt A-CAM II
• If waived in the future that will be additional funding • If not waived your decision is based on current rules
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Example with an A-CAM II Offer • Included & excluded Reasonable Request
Locations from obligations (location counts)
A-CAM II Annual Support
4/1 Mbps Locations
Average Support
per Location
Penalty
686,090 686 33.0 17.0 670 630 (40) 1.89 $967.69 (731,571) (686,090) 5,443,236
686,090 686 33.0 17.0 670 601 (69) 1.89 $967.69 (1,261,196) (686,090) 4,912,847
A-CAM Support Pros
• Fixed support for a full 10 years • Fixed unless you do not have enough locations • Glide path transition makes up for some of the
shortfall between A-CAM II offer & previous legacy support
• With FTTH speeds, deployment milestones should not be an issue
• Not subject to budget control mechanism (BCM) • Competition will not impact support over 10 year
window
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• Locations • Many A-CAM I & likely many A-CAM II carriers
will not have enough locations NOW to cover all of the eligible locations they have or would agree to buildout
• Uncertainty over losses of locations over 10 year window • Compliance gap reductions & 10% penalty
• What happens in Year 11? • Looks a lot like a price cap carrier
• Still could be impacted by FCC Rule changes
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• A system we know • Much less dependent on having locations,
particularly in certain areas inside of your exchange (eligible census blocks)
• Support can increase • If BB-Only/CBOL demand & increases • If average schedule lines Increase • If cost company & costs increase
• Generally much lower buildout obligations
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• Support can decrease if BB-Only/CBOL demand decreases
• Subject to BCM • Could be subject to future FCC Rule changes • Competitive overlap • Possible reverse auction if more than 95% of
census blocks are covered by an unsubsidized voice/internet competitor
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Legacy Support Unknowns
• BCM • Percentage reduction amounts? • Future changes to budget (past five years
out)
• Competitive overlap changes • Could be subject to rule change that if 95% or
greater of study area is competitively served, reverse auction occurs
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• Locations • Year 11
• Competitive overlap, for example • BCM
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So What Does It All Mean?
• Yes, risks either way • The “end” comes, but later • For A-CAM, locations matter today & throughout • For Legacy, BCM & more possible rule changes
• Business Data Services (BDS) • Right now for A-CAM Carriers
• Consumer Broadband &-Only Lines (CBOL)
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The “End” Options Are Still Fluid
• Rural costs remain higher than urban • Low density • Ubiquity of evolving technologies such as IoT, 5G • Rural support needs expected to continue
• Communications industry regulation needs • Unsubsidized competitive overlap • Threat that future rural support may be auctioned
» What does this do to valuation of rural investment? » When does this become sensible regulatory policy?
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Business Data Services (BDS)
• A-CAM I & II adopting carriers (BDS) • FCC 18-146, [Report & Order, Second Further
Notice of Proposed Rulemaking & Further Notice of Proposed Rulemaking], Released October 24, 2018
» Allows A-CAM I carriers (later another order allowed A- CAM II carriers) who are cost-based to elect a new framework for setting special access rates » Grants forbearance from cost assignment & separations rules & related reporting requirements
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Business Data Services (BDS)
• A-CAM I & II adopting carriers (BDS) • Three different types of special access regulation in
BDS framework » DS3 bandwidth or below to incentive regulation » Lower capacity circuit-based end user channel terminations prove competitive & are not subject to ex ante pricing regulation » DS3 bandwidth or above related from ex ante pricing regulation & granted forbearance from tariffing requirements
BDS Pros & Cons
• BDS Pros • Cost savings by eliminating annual cost study • Pricing flexibility • Lower special access pricing to be more
competitive
BDS Pros & Cons
• BDS Cons • Nothing remaining ROR • Forever election • Cost Study requirement is only a
forbearance of a rule not a rule change • Costs incurred to set rates
Business Data Services (BDS) Is Right For Me… …If You’ve Taken A-CAM
• Understand the decision making process • Consider BDS pricing models • Consider BDS implementation costs • If you are NOT a material recipient from
NECA’s TS Special Access Pool
Consumer Broadband -Only Loop (CBOL) • FCC 16-33, [Report & Order, Order on Reconsideration,
& Further Notice of Proposed Rulemaking], Released March 30, 2016
• CBOL, a.k.a. data only &/or naked DSL • The FCC established funding for broadband-only • CAF-BLS on CBOL
• Not subject to all of the caps HCL USF is • Only subject to overall BCM
CBOL Pros & Cons
• CBOL Pros • Generally higher USF than voice based USF • Customer demand, in most areas • More options for customers to choose what
works for them • Can match competitors, if they are offering,
broadband-only plans
revenues • Once offered, hard to go back to requiring voice
service • Strain on budget, assuming many companies roll
out CBOL • Some coops may have issues as membership is
tied to voice service (consider bylaw changes)
To CBOL or Not to CBOL
• How Do I Decide? • Get a revenue impact analysis • CBOL tariffing/ detariffing • CBOL rate development • End user pricing, plans, etc. • A-CAM I or II vs. Legacy
» Incentive for Legacy, where A-CAM just a loss of local revenues
A-CAM World: Where Do I Stand
• Locations to meet buildout obligations • Consider BDS as A-CAM fine tuning • CBOL Might Boost My Legacy Support • A-CAM III or further revised A-CAMs may come • Role of unsubsidized competitive overlap • Competitive markets may bring USF auctioning
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LECs Now Provide Better Service Despite Heightened Regulation • The 2019 World of A-CAM & Legacy
Courtesy: NTCA
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• Webinars, seminars & articles • Many are CPE-eligible • Some recent Articles:
• FCC Removes Local Rate Floor Requirement • CAF Report & Order • Changes to Iowa Telecommunications Property Taxes • ESOP Webinar • Budget Control Mechanism • Revenue Recognition
BKD Thoughtware®
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James Becker Senior Managing Consultant | BKD 1120 S. 101st Street, Suite 410 Omaha, NE 68124 402.392.1040 Ext. 22641 402.431.9805 Direct jbecker@bkd.com
Bob Abrams Senior Managing Consultant | BKD 8517 Excelsior Dr., Suite 301 Madison, WI 53717 608.664.9110 Ext. 40949 608.410.4768 Direct rabrams@bkd.com
bkd.com | @bkdllp
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
Thank You!
Industry
Implementation Strategies
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ASU 606 – Revenue Recognition Overview • May 28, 2014 – Accounting Standards Update
(ASU) 2014-09, Revenue from Contracts with Customers, is released
• Single, converged, comprehensive approach to revenue recognition, regardless of industry
• Replaces virtually all existing U.S. generally accepted accounting principles (GAAP) for revenue recognition
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ASU 606 – Revenue Recognition Overview • Effective dates for non-public companies
• First annual reporting period beginning after December 31, 2018
• Interim reporting periods within annual reporting periods beginning after December 15, 2019
• Calendar year-end company – start accounting in 2019
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• Full retrospective method – restatement of prior year(s)
• Modified retrospective method • Recognize the cumulative effect of initially applying the
new revenue recognition guidance as an adjustment to opening balance of retained earnings
• Method chosen by the majority of companies
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• Modified retrospective method considerations • Apply new standard to all new contracts • Existing contracts, either
• All existing contracts, or • Contracts that are not completed
• Potential for lost revenue
Step 4 • Allocate transaction price to performance obligations
Step 5 • Recognize revenue when (or as) performance obligation is
satisfied
• Month-to-month with no upfront fees • Month-to-month with nonrefundable upfront
payments • Non-cancellable contracts with early termination
penalties
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• Service order/activation fees – no performance obligation
• Installation fees – performance obligation • Equipment Installment Payment (EIP) Plans –
performance obligation
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Performance Obligations - Identification • Step 2 is one of the most critical steps in the
new revenue framework • Major revenue streams
• Local service • Internet • Video
• Bundled service usually includes a discount
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Performance Obligations - Identification • Example – Residential triple-play Telco contracts with customer to provide cable television, internet & landline voice services for a fixed monthly fee Customer can benefit from each of the three services on their own None of the contracted services are highly interrelated or interdependent Telco would conclude that each of the three services is a distinct good or service This contract would have three performance obligations
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Performance Obligations - Identification • Example – Residential triple-play • However, as a practical matter, because the three
services are provided concurrently, Telco can decide that it is acceptable to account for the bundle as one performance obligation if they have the same pattern of transfer
• Classification of revenue on the income statement will need to be considered. Required classifications are
• Services • Sales of goods • Gains & losses
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Performance Obligations - Identification • 606-10-55-18 Practical Expedient
• If a company has a right to invoice a customer at an amount that corresponds directly with its performance to date, then the company can recognize revenue at that amount
• Example – In a service contract, an entity may have the right to bill a fix amount for each time period (e.g. month)
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Performance Obligations – Allocation of Discounts • If the sum of the standalone selling prices of a
bundle of services exceeds the consideration, then the discount is generally allocated proportionately to all performance obligations in the contract
• However, this does not apply if there is evidence that the entire discount relates to only one or more, but not all performance obligations
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Performance Obligations – Allocation of Discounts • Paragraphs 606-10-32-37 states • “An entity shall allocate a discount entirely to one or
more, but not all, performance obligations in the contract if all of the following criteria are met
• The entity regularly sells each distinct good or service (or each bundle of distinct goods or services) in the contract on a standalone basis
• The entity also regularly sells on a standalone basis a bundle (or bundles) of some of those distinct goods or services at a discount to the standalone selling prices of the goods or services in each bundle
• The discount attributable to each bundle of goods or services described in above is substantially the same as the discount in the contract, & an analysis of the goods or services in each bundle provides observable evidence of the performance obligation (or performance obligations) to which the entire discount in the contract belongs”
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Performance Obligations – Allocation of Discounts • Discount allocated entirely to one or more, but not all, performance
obligations in a contract • Telco enters into a contract with a residential customer to sell phone,
internet & television services for a total amount of $120. Telco regularly sells the products individually for the following prices
• Telco also regularly sells phone & internet services together for $75 • The contract includes a discount of $20 on the overall transaction ($140 –
$120), which is allocated proportionately to the three services in the contract when applying the relative standalone selling price method
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Performance Obligations – Allocation of Discounts • However, because Telco regularly sells phone & internet services as a
bundle for $75 (at a $20 discount compared with their total selling price of $95 ($55 +$40)) & television services for $45, it has evidence that the entire discount should be allocated to the phone & internet services
• The discount of $20 is individually allocated to those two services with reference to their relative standalone selling prices as follows
• Telco will recognize revenue of $32 for phone, $43 for internet & $45 for television services
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Selling price ratio Price allocation Calculation
Phone $40 42% $32 (75 * 42%) Internet $55 58% $43 (75 * 58%)
Total $95 100% $75
Commission Expenses
• Companies may pay a commission to personnel for new customer sign-ups
• Sales commission meet the criteria for recognition as an asset as a cost to obtain a contract
• Amortize asset on a systematic basis, consistent with the pattern of transfer of the service
• Over length of the contract • No contract, use judgement to calculate average customer term
Churn = Customers who churned / Beginning customers Lifetime = 1 / Churn
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• Set up a contra-account within customer service expenses
• Credit the expense account for costs deferred as a contract asset
• Debit the expense account for the amortization of the commission expense
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Nonrefundable Up-front fees – Activation & Installation • Many telecom contracts include nonrefundable up-front
fees that are paid at or near contract inception • Must assess whether the fee relates to the transfer of a
promised good or service to the customer • Fees administrative in nature are not separate
performance obligations • Activities that improve the telecom’s network do not
transfer a good or service to the customer
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Nonrefundable Up-front Fees – Activation & Installation • Outside wiring installation
• Connecting the house to the network • Extension of its own network • Doesn’t transfer a good, no performance obligation
• Inside wiring installation • Customer can benefit from wiring on its own • Customer could have obtained service from a third
party • Transfers a good, is a performance obligation
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Lease Standard Amendment ASU 2018-11 • Practical expedient provides lessors with an
option to not separate non-lease components from the associated lease components if
• The non-lease components otherwise would be accounted for in accordance with the new revenue standard &
• The lease component & the associated non-lease components have the same timing & pattern of transfer
• The lease component, if accounted for separately, would be classified as an operating lease
• Major opportunity for CPE – set top boxes
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Performance Obligations – Up- front Payments – Example Telco enters into a 12-month service contract in which customer is provided a VOIP system & broadband plan for $500 up front and $75 per month. Telco has identified the VOIP system & broadband plan as separate performance obligations
Telco sells the VOIP system separately for a price of $850. Telco offers a 12-month broadband plan at the same level of service for a price of $50 per month
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Standalone selling prices Selling Price Ratio Price Allocation Calculation
VOIP System $850 59% $826 (1,400 * 59%) Broadband Service $600 41% $574 (1,400 * 41%)
Total $1,450 100% $1,400
• At the inception of the contract – entry Contract Asset ($826-$500) $326.00 Equipment Revenue $326.00
• Monthly service fee billing – entry Receivable $75.00 Broadband service revenue ($574/12) $48.00 Contract Asset $27.00
Implementation & Documentation Considerations • Identify portfolio of services
• Monthly recurring, usage based, contract services, point of sale
• Identify revenue streams within portfolios • Monthly voice, video & internet, long-distance &
switched access, special access & installations & repairs, equipment sales, directory
• Document elements of the contract • Document services done for free/concession
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Monthly Recurring Services
Usage Based Services
Contract Services Point of Sale
Group : [5000] Local network services 5001 BASIC AREA REVENUE (250,000.00) Y (250,000.00) 5060 OTHR LOCAL EXCH REV-HU,RC (5,000.00) Y (5,000.00) Total [5000] Local network services (255,000.00)
Group : [5080] Network access services 5001.2 DSL WITH INTERNET FEE 150,000.00 Y 150,000.00 5081 INTERS END USR REV-SLC (80,000.00) Y (80,000.00) 5081.1 INTERS END USR REV-FUSC (25,000.00) Y (25,000.00) 5081.2 ACCESS RECOVERY CHARGE (30,000.00) Y (30,000.00) 5082.1 INTERSTATE-SWITCHED (9,000.00) Y (9,000.00) 5082.2 NECA POOLING & FIXED SUPPORT (2,000,000.00) ? 5083 INTERSTATE-SPEC ACCESS (50,000.00) Y (50,000.00) 5084.2 INTRASTATE-SWITCHED (100,000.00) Y (100,000.00) 5084.3 INTRASTATE-SPEC ACCESS (10,000.00) Y (10,000.00) 5084.7 WIRELESS SERVICES (5,000.00) Y (5,000.00) 5100 LONG DSTNCE MSG REVENUE (100,000.00) Y (100,000.00) Total [5080] Network access services (2,259,000.00)
Group : [5120] Internet services 7991.15 NONRGULTD REV-INTERNET (1,000,000.00) Y (1,000,000.00) Total [5120] Internet services (1,000,000.00)
Group : [5170] Video services 7991.5 TV SELECT REVENUE (100,000.00) Y (100,000.00) 7991.6 TV PRIME REVENUE (1,000,000.00) Y (1,000,000.00) 7991.7 TV-DVR REVENUE (50,000.00) Y (50,000.00) 7991.8 TV-STB REVENUE (100,000.00) 842? 7991.9 TV EQUIP SALES REVENUE (5,000.00) Y (5,000.00) 7991.10 TV-HBO+CINEMAX REVENUE (10,000.00) Y (10,000.00) Total [5170] Video services (1,265,000.00)
Group : [5180] Computer sales and services 7991.11 COMPUTER SALES (50,000.00) Y (50,000.00) 7991.111 COMPUTER REPAIR (50,000.00) Y (50,000.00) Total [5180] Computer sales and services (100,000.00)
Group : [5200] Miscellaneous revenue 5230 DIRECTORY REVENUE (25,000.00) Y (25,000.00) 5240 RENT (50,000.00) 842? 5260 MISCELLANEOUS REVENUE (50,000.00) Y 7991.20 TOWER RENT (60,000.00) 842? 7991.3 NONREG REV-INSIDE WIRE (5,000.00) Y (5,000.00) Total [5200] Miscellaneous revenue (190,000.00)
(2,405,000.00) (214,000.00) (60,000.00) (130,000.00)
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• Bundled services • Equipment sold with services • Installation services • Maintenance services • Activation/service order fees • Concessions/free products & services • Commissions & other contract costs
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Summary
• Great opportunity to take a fresh look at how revenues & the related costs are recorded
• Companies will be able to question how they currently bill customers & record contracts with customers
• Impact on total revenues recorded for a month or year might not be significant
• Documentation of revenue recognition processes & procedures will be the greatest benefit
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Questions?
recognition • www.bkd.com/webinar/2018/10/revenue-
recognition-considerations-telecommunications- companies
BKD Thoughtware®
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bkd.com | @bkdllp
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
Thank You!
Financial Impacts
Regulatory Effects
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What Changes? • All leases will be recognized on the balance sheet of
lessees • Operating leases
• Lease liability • Right of Use Asset • Don’t appear anywhere under today’s rules
• Finance leases (formerly capital leases) • Lease liability • Lease assets • Similar to today’s rules
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• Increase comparability & transparency among entities • Decade-long joint project between FASB & IASB • Eliminate off-balance sheet risk & improve comparability • More reflective of true substance of leasing transactions • Lessor accounting remained relatively unchanged
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Effective Dates • Early adoption is permitted
• FASB recently met & is proposing delay for one more year • New effective date – for annual reporting periods beginning after
December 15, 2020. Public entities were not allowed this delay • A Public entity is defined as any one of these
• A public business entity • A not-for-profit entity that has issued – or is a conduit debt obligor for – securities
traded, listed or quoted on an exchange or over-the-counter market • An employee benefit plan that files or furnishes financial statements to the SEC
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• Modified retrospective transition approach • Essentially allows companies to continue to use previous
GAAP until existing leases expire or are modified Cannot carry forward prior classification errors though
• ASU 2018-11, Targeted Improvements, for Lease Standard EXCEPT – still have to record the right of use asset & lease liability
• Record only in period adopted with a cumulative effect presentation for opening retained earnings in period adopted OR
• Record in all periods presented
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Transition – Practical Expedients
• ASU 2018-11, Targeted Improvements, for Lease Standard • Lessor does not need to separate nonlease components
from an associated lease component • Leave combined & account for as operating lease • Both of the following must be met
• Timing & pattern of transfer of the nonlease component(s) & associated lease component are the same
• Lease component, if accounted for separately, would be classified as an operating lease
• Similar to what was already offered for lessees in ASU 2016-02
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Transition – Practical Expedients
• Practical expedients (All three or none) • Lessee need not reassess whether any expired or existing contracts
are or contain a lease • Lessee need not reassess lease classification for any expired or
existing leases • Lessee need not reassess initial direct costs for any existing lease
• Practical expedient – hindsight in evaluating lessee options to extend or terminate a lease or to purchase underlying asset
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• L& Easements • ASU 2018-010 - Contracts not previously treated as
a lease don’t have to be evaluated for lease under ASC 842
• Apply ASC 842 to any new contracts for easements & apply as necessary
• Continue existing accounting for easements entered into before adoption of the standard
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• Identify & educate • Develop timeline & key milestones • Identify & collect ALL leases & relevant data • Analyze data – key elements • Implementation – accounting & reporting • Ongoing accounting – centralization, new leases,
modifications, monitoring…& much more
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options • Interest rate • Lease payment
• Fixed • Incentives paid by lessee • Variable (CPI, market
interest rate or other) • Frequency
• Exercise price of purchase option
• Penalties for termination, if any
• Residual value guarantees • Initial direct costs • Non-lease components
Example Contracts that Could be Leases • Arrangements involving the use of
• Buildings • Equipment • Trucks • Trailers • Outsourced arrangements for business operations
& staff (IT function, warehousing) • Data center • Hosting or other IT arrangements • Dark fiber agreements, etc.
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Contracts not Under ASC 842
• Leases of intangible assets • Leases to explore for or use minerals, oil,
natural gas & similar nonregenerative resources
• Leases of biological assets, including timber • Leases of inventory • Leases of assets under construction
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What is a Lease? • Right to control use of identified property, plant
or equipment for a period of time in exchange for consideration
• “Control” means the customer has both • The right to obtain substantially all of the
economic benefits from use of the asset • Right to direct use of the asset
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What is a Lease?
• Substantive substitution rights • Even if asset is specified, if lessor has the
substantive right to substitute, the lessee doesn’t have control & there is no lease
• Substantive substitution right occurs only when • Supplier has practical ability to substitute (lessee
can’t stop it) • Supplier would benefit economically from
substitution
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What is a Lease? • Portions of assets
• A capacity portion of an asset can be an “identified asset” if it is physically distinct
E.g. floor of a building, segment of a fiber cable connecting a single customer to a larger network
• Capacity of a portion of an asset that isn’t physically distinct is not an “identified asset” (not a lease)
E.g. capacity of a fiber cable unless it represents substantially all of the capacity of the asset & gives the customer right to obtain substantially all the economic benefits from use of the asset
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What is a Lease? • For a lease with a term of 12 months or less, a lessee is
permitted to make an accounting policy election not to recognize lease assets & lease liabilities
• If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term
• Consideration of renewal options… • Don’t continually renew one-year leases to avoid the
Finance Lease accounting • Does require some disclosure • Leases with RELATED PARTIES should be recognized
consistently with the classification criteria above on the basis of legally enforceable terms
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What is a Lease?
• EXAMPLE # 1 • Entered a 15-year contract for fiber-optic cable • Right to use two specified, physically distinct dark fibers • Customer decides how to use the fibers
• What equipment to connect to • What data & how much data fiber will transport
• Telco (supplier) is responsible for repairs & maintenance of fiber • Do we have a lease?
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What is a Lease? • EXAMPLE # 1
• Entered a 15-year contract for fiber-optic cable • Right to use two specified, physically distinct dark fibers • Customer decides how to use the fibers
• What equipment to connect to • What data & how much data fiber will transport
• Telco (supplier) is responsible for repairs & maintenance of fiber • Do we have a lease?
YES
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What is a Lease? • EXAMPLE # 2
• Entered a 15-year contract for fiber-optic cable • Right to use specified amount of capacity (equivalent of two
strands of 24 strand fiber) • Telco (supplier) makes decisions about transmission of data • Telco (supplier) is responsible for repairs & maintenance of fiber • Do we have a lease?
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What is a Lease? • EXAMPLE # 2
• Entered a 15-year contract for fiber-optic cable • Right to use specified amount of capacity (equivalent two strands
of 24 strand fiber) • Telco (supplier) makes decisions about transmission of data • Telco (supplier) is responsible for repairs & maintenance of fiber • Do we have a lease?
NO
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What is a Lease? • EXAMPLE # 3
• 12-month lease of a vehicle with annual renewals at option of lessee
• Lessee has historically not extended these types of leases • Do we have a lease?
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What is a Lease? • EXAMPLE # 3
• 12-month lease of a vehicle with annual renewals at option of lessee
• Lessee has historically not extended these types of leases • Do we have a lease?
YES Except
• ROU Asset is not recorded if short-term lease exception is elected
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What is a Lease? • EXAMPLE # 4
• Entered a 12-month contract for dark fiber • Additional 12-month renewals at option of lessee • The fiber is critical to the operations of lessee • There are no other available options for lease of
comparable fiber • Do we have a lease?
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What is a Lease? • EXAMPLE # 4
• Entered a 12-month contract for dark fiber • Additional 12-month renewals at option of lessee • The fiber is critical to the operations of lessee • There are no other available options for lease of
comparable fiber • Do we have a lease?
YES
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• Installation of servers on premise for purpose of network service
• Contract is for two years • Servers can be reconfigured & replaced at the discretion
of supplier • Do we have a lease?
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• Installation of servers on premise for purpose of network service
• Contract is for two years • Servers can be reconfigured & replaced at the discretion
of supplier • Do we have a lease?
NO
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• Lease of an entire fiber strand between parent & subsidiary
• There is no written contract or enforcement action between parties for cancellation
• The fiber is critical to the subsidiary’s operations • No comparable fibers are available • Do we have a lease?
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• Lease of an entire fiber strand between parent & subsidiary
• There is no written contract or enforcement action between parties for cancellation
• The fiber is critical to the subsidiary operations • No comparable fibers are available • Do we have a lease?
NO
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What is a Lease? • EXAMPLE # 7
• A specific server is installed & customer data is maintained on the server
• Contract is for three years • Replacement will only happen in case of malfunction • Do we have a lease?
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What is a Lease? • EXAMPLE # 7
• A specific server is installed & customer data is maintained on the server
• Contract is for three years • Replacement will only happen in case of malfunction • Do we have a lease?
YES
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What is a Lease? • EXAMPLE # 8
• Contract for a building rental at a fixed amount for five years
• Itemized amounts for real estate taxes & insurance are included in the fixed price
• Do we have a lease?
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What is a Lease? • EXAMPLE # 8
• Contract for a building rental at a fixed amount for five years
• Itemized amounts for real estate taxes & insurance are included in the fixed price
• Do we have a lease? YES
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Lease Term • Defined as the non-cancellable period for which a lessee
has the right to use an underlying asset, including • Periods covered by an option to extend that the lessee is reasonably
certain to exercise • Periods covered by an option to terminate if lessee is reasonably
certain not to exercise • Periods to extend or terminate in which the option is controlled by
the lessor • “Reasonably Certain” is similar to “Reasonably Assured” (a
high threshold)
Lease Payments • Determine at the commencement date & include (initial
measurement) • Fixed payments, including in-substance payments, less any lease
incentives • Variable lease payments that depend on an index or rate • Exercise price of an option to purchase the underlying asset • Payments for penalties for terminating the lease • Fees paid by lessee to entity for structuring the transaction (Such
fees are not included in the fair value of the underlying asset) • Residual value guarantees – amounts probable of being owed by
lessee
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Discount Rate
• Three Options for the Discount Rate • Use the stated or implicit rate in the contract • Use the lessee’s incremental borrowing rate • Practical expedient which allows the use of a risk-
free rate for a term similar to the lease • Must be applied to all contracts • Only available for non-public business entities
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Key Factors of Lease • 10-year lease of building • Annual lease payments of
$100,000 • Lease payments increase
each year by CPI • CPI is 125 at
commencement date • 0% (for ease of example) • Year 2 – CPI to 128
Solution
• $2,400 – variable lease cost
*unless lease modification occurs
Lease Classification • Finance Lease, if the lease meets any of the
following (a) Transfer of ownership of asset at end of lease term (b) Option to purchase asset that is reasonably certain to be
exercised (c) Lease term is the major part of the economic life (d) PV of sum of lease payments & residual guarantee
amount to at least substantially all of the fair value (e) Underlying asset is of specialized nature, with no
alternative value to lessor at end of lease term
• If none of the above criteria are met, it’s an Operating Lease
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• Standard does not contain a bright line on major part or substantially all
• “Reasonable Approach” • When determining lease classification, one reasonable
approach would be to conclude: • 75% or more of the remaining economic life of the
underlying asset is a major part of the remaining economic life of the underlying asset
• 90% or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset
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Additional Practical Expedients
• Lessees & Lessors may make an accounting policy election by class of underlying asset to NOT separate lease & nonlease components
• Advantages – easier accounting • Disadvantages – results in larger lease liability &
ROU Asset
Finance Lease Operating Lease
Balance Sheet Balance Sheet Right of Use (ROU) Asset Right of Use (ROU) Asset
Lease Liability Lease Liability
(on lease liability) Lease/Rent expense (straight- line)
Amortization expense (on ROU Asset)
Cash Flow Statement Cash Flow Statement Operating Activities – interest payments
Operating Activities – cash paid for lease payments
Financing Activities – Cash paid for principal payments
Accounting – Initial Measurement
• ROU asset & lease liability • Same process for operating or finance leases
• Lease liability = PV of future lease payments • Discounted rate in lease OR • Incremental borrowing rate
• ROU assets = Lease liability + Initial direct costs + Payments made at or before
lease commencement
Tower Annual lease payments
$15,000
Annual Years Payment
Year 1 100,000$ Year 2 100,000 Year 3 100,000 Year 4 100,000 Year 5 100,000
500,000$
NPV at 3.5% $451,505 Lease liability 15,000 Initial direct costs
466,505$ ROU asset
• Each payment has two components (interest & principal). Part I –
• Lease liability $XXX • Interest expense XXX
• Cash XXX • Amortization of the right-to-use asset (similar to how depreciation
on a capital lease is currently reported)* Part II –
• Amortization of ROU $XXX • ROU asset XXX
• Variable lease payments not in lease liability recorded as expense when incurred
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*Shorter of useful life or lease term, unless ownership transfers or reasonably certain to exercise purchase option – requires useful life of underlying asset.
Implementation of Financing Lease
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Assumption - Right to use Cell Tower asset transfers at the end of the lease term – Financing lease
Amortization Annual Lease Liability Interest Lease ROU of ROU
Payments NPV @ 3.5% Cash Expense Liability Asset Asset
Year 1 100,000 451,505 (100,000) 15,803 84,197 (66,644) 66,644 Year 2 100,000 367,308 (100,000) 12,856 87,144 (66,644) 66,644 Year 3 100,000 280,164 (100,000) 9,806 90,194 (66,644) 66,644 Year 4 100,000 189,969 (100,000) 6,649 93,351 (66,644) 66,644 Year 5 100,000 96,618 (100,000) 3,381 96,619 (66,644) 66,644 Year 6 - - - - - (66,644) 66,644 Year 7 - - - - - (66,641) 66,641
500,000 (500,000) 48,495 451,505 (466,505) 466,505
Sheet1
Amortization
Annual
Implementation – Operating Lease Operating Leases
• Single lease expense is recognized that runs through operating expenses for the current year
• Part I - o Amortization of ROU Asset $XXX
• Cash XXX
• Part II - o Lease liability $XXX
• ROU asset $XXX • Overall cost of the lease is allocated over the lease term on a
straight-line basis • Variable lease payments not in lease liability recorded as
expense when incurred
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Assumption – No purchase option or transfer of rights at the end of the lease term – Operating lease
Annual Lease Liability Lease ROU Lease Payments NPV @ 3.5% Cash Expense Asset Liability
Year 1 100,000 $451,505 (100,000) 100,000 (84,197) 84,197 Year 2 100,000 $367,308 (100,000) 100,000 (87,144) 87,144 Year 3 100,000 $280,164 (100,000) 100,000 (90,195) 90,195 Year 4 100,000 $189,969 (100,000) 100,000 (93,351) 93,351 Year 5 100,000 $96,618 (100,000) 100,000 (96,618) 96,618
500,000 (500,000) 500,000 (451,505) 451,505
Sheet1
Annual
• Right-to-use asset & lease liabilities should be presented separate from one another & from other assets & liabilities.
• No netting of assets & liabilities • Split between current & long-term • Separate maturity analysis of undiscounted cash flows
• Short-term lease costs, policy disclosure, & if significant, short-term lease commitments.
• Variable lease costs not included in lease liabilities • Lease transactions with related parties
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• FCC 18-179 Order Adopted FASB Rules • Operating leases
• Lessor to record long-term lease receivable in acct 1410 • Lessor must also recognize a deferred inflow of resources
equal to the lease receivable plus any up-front payments received from lessee that relate to future periods in acct 4300
• Lessee treatment is the same • 1410 for ROU asset • 4300 for lease liability
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• Dark fiber leases • Becoming more & more common • Non-Regulated & Non-Tariffed
• Flat rate pricing from large mobile providers seeking state-wide or area-wide pricing
• Competition • NECA tariff pricing concerns/issues
• Switch sharing TS Freeze
option, but does not specifically impact your company’s revenues
More of a case-by-case basis Evaluate overall financial & non-financial costs & benefits
• Cost Companies – operating leases may still be viable even after rule changes
• Need to work directly with your cost consultant as each company can be different
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• Third Party Software Options • simpLease • Visual Lease • Lease Query • uGAAP
• BKD Solution – LeaseVision • Webinar on August 19, 2019 to launch the service &
demo the solution. Sign up on our Thoughtware page
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Continuing Professional Education (CPE) Credit
• Webinars, seminars & articles • Many are CPE-eligible • August 19 – From Cloudy to Clear: Introducing BKD
LeaseVision (FASB) • More Time Proposed for the New Lease Accounting
Standard for Private Companies • Internal Control Checklist for Leases • New Lease Relief Finalized
BKD Thoughtware®
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The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
Thank You!
Recognize the history & evolving regulatory environment of the telecom industry
Categorize major revenue & support streams of telecommunications companies
Identify telecommunications specific acronyms & terminology
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• 1876 – Telephone patented • 1879 – Bell Telephone Company established • 1885 – American Telephone & Telegraph
(AT&T) established • 1899 – AT&T acquired American Bell • 1913 – AT&T agrees to become regulated
monopoly
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telephone, telegraph & radio communications • Established the Federal Communications
Commission (FCC) • Interstate & international jurisdiction • State Public Utility Commissions (PUCs) have jurisdiction
over most intrastate telecommunications services
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Telecom History Lesson
• 1984 - Divestiture • AT&T forced to give up its 22 local Bell companies • 7 Regional Bell Operating Companies (RBOCs)
established, AKA Baby Bells • Ameritech, Bell South, Pacific Telesis, Southwestern Bell
• AT&T • Bell Atlantic, NYNEX
• Verizon Communications • US West
• Telecommunications Act of 1996 • Opened local markets to encourage competition • Reduced long-distance rates & increased the
amount of long-distance usage • Introduced choice • Sought to maintain a significant distinction between
telecommunications & information services • Codified universal service
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• Landline initially regulated utility-like carriers • Defined franchise areas
• Competitive Local Telephone Company (CLEC) • Gained legitimacy in the Telecom Act • Initially limited to urban areas
• Internet Service Providers (ISP) • Initially a dial-up modem information service • Regulation resulted from ISP-bound calling • FCC’s “Public Interest Obligations” much later
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• Telecommunications Act of 1996 • Set obligations for interconnection
• Wireline ILECs must agree to interconnect with CLECs • Agreements for the exchange of local traffic • Initially, a Rural Exemption protected rural ILECs • Requirements to negotiate in good faith according to timelines • Early rules in particular on ISP-bound traffic to neighboring
areas • Different rules for wireline CLECs & wireless providers
• Interconnection agreements must be approved by state PUCs
• PUCs would also hear & rule on complaints about process, delays, connection methods, meet points, etc.
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Telecom History Lesson
• Telecommunications Act of 1996 • Began to change how state legislatures & PUCs
viewed telecommunications services & providers • Would internet access be classified as a long-distance
service? • Would RBOCs be permitted to provide “other information
services”?
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wiring for broadband internet service, including Voice over Internet Protocol (VoIP)
• Computer-to-computer VoIP not subject to same regulation as telephone companies
• Questions were raised: will VoIP lead to the erosion of local telephone companies or will it strengthen them?
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• 50 state PUCs with different requirements • Deregulation created monopolies rather than
competition • 2010: National Broadband Plan • 2011: Connect America Fund
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• Goal is to reform & modernize universal service & intercarrier compensation (ICC) systems
• Ensure robust & affordable voice & broadband services are available to Americans throughout the nation
• Provided total budget of $4.5 Billion for Universal Service Support over 6 years
• Support due to companies is uncertain due to constraints on the FCC’s budget
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• Level of state regulation varies
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• Nonregulated • Video • Sales/lease of equipment • Internet • Cellular voice
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• Revenues Billed on CABS • Carrier: Access customer who ordered a switched or special
access service • Access: Ability to enter/exit the ECs (Exchange Carrier’s)
local exchange network • Billing: Process of charging for access to/from ECs’ end users • System: Hardware & software used to record & translate
access usage &/or demand into a bill
IXC Billing
• Billed in advance
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• USF/ICC Order Impact on Access Rates • Beginning in 2011, terminating interstate switched
access rates are being reduced over a nine-year period • By July 2020, IXCs will no longer be billed for their
terminating MOU • Revenues will need to be recovered primarily from end
user customer • Most state commissions require terminating intrastate
switched access rates mirror interstate tariffed rates • FCC said it would next address originating rates, but so
far, has not done so
Support Mechanisms
neca.org
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• NECA • Established in 1983 • Administers FCC’s Access Charge Plan (cost
pooling) • Association of companies participating in interstate
pools • Cost studies submitted by member companies
support rates filed with the FCC by NECA
Support Mechanisms
• Cost recovery • Cash flow • Reporting obligations
• Provides tariffs to keep pace with emerging market needs
Support Mechanisms
• Average schedule • Receive settlements based on a series of statistical
formulas • Cost
• Receive settlements based on a company’s actual interstate investment & expenses (revenue requirement)
• Companies elect pooling option • Once cost is elected, there’s no going back to average
schedule
• Rates charged to • IXCs • End users
• Support received from received from regulatory agencies • Due July 31 each year
Support Mechanisms
• Analysis of an ILEC’s expenses & plant investment (Part 32)
• Allocation of expenses & investment between regulated & nonregulated (Part 64)
• Jurisdictional separation of regulated expenses & investment between local, intrastate & interstate (Part 36)
• Assignment of regulated expenses & investment to particular rate elements such as switching, transport, non- access (Part 69)
• Universal Service Funding (Parts 36 & 54)
Support Mechanisms
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• Universal Service • The FCC recognized decades ago that rural areas had
lower population density & higher costs • USF support to rural high cost companies was informal
at first through cost settlements with the Bell System companies
• As the AT&T Divestiture approached, several USF programs we know today evolved to meet specific needs
• Eligible Telecommunications Companies (ETCs) were designated by the FCC, or by state commissions, as worthy of receiving USF support
Support Mechanisms
• Universal Service • ETC obligations, in general
• Carrier of last resort • Have, & advertise, the availability of low income offerings • Ability to function in emergency situations • Meet service quality standards • Comply with all reporting requirements • More lately, to meet voice & broadband pricing & Public Interest Obligations
to offer broadband speed & latency goals • States usually designate ETCs
• States are actually encouraged to add local requirements • State USF programs often reach beyond federal Lifeline program • Requirements to show USF is spent for appointed purposes • Outage, safety & marketing requirements under state rules
Support Mechanisms
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• Universal Service Fund • System of subsidies & fees managed by FCC to provide
universal access to telecommunications services in the United States
• FCC established USAC to administer the collection & disbursement of universal service funds
usac.org
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• Universal Service Goals • Promote the availability of quality services at just,
reasonable & affordable rates • Increase access to advanced telecommunications services
throughout the United States • Advance availability of such services to all consumers,
including those in low-income, rural, insular & high-cost areas at rates comparable to urban areas
• Increase access to telecommunications & advanced services in schools, libraries & rural health care facilities
• Provide equitable & non-discriminatory contributions from all providers of telecommunications services to the fund supporting universal service programs
Support Mechanisms
• Universal Service Fund Programs • High Cost
• Targeted to providers in high cost & rural areas • A major source of funding for most ETCs
• Lifeline • Subsidizes low-income subscribers who must meet annual
eligibility requirements & be recertified each year • Subsidies possible for voice or broadband
• Schools & Libraries • Subsidizes phone, broadband & some construction
• Rural Health Care • Subsidizes rural health care providers & businesses serving
them
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• USF/ICC Order Effects on High Cost • The 2011 USF/ICC Order outlined the phased end of older
High Cost Program support, to be replaced with the Connect America Fund (CAF)
• In 2016, High Cost recipients were first offered a path to choose a new model-based universal service support mechanism called the Alternative Connect America Model (A- CAM)
Support Mechanisms
159
• A-CAM Funding Timeline • By November 1, 2016, 216 rate-of-return companies elected 274
separate offers • The amount of support for electing carriers would exceed the overall 10-
year budget set by the FCC by more than $160 million • On December 20, 2016, a revised offer was released
• Reduced funding for the majority of companies that selected A-CAM, but reduced buildout requirements as well
• On January 24, 2017, final Order was released • 182 companies elected 217 revised offers with promised payments to be
coming annually for the next 10 years in support • June 29, 2018, non “glide path” A-CAM recipients had a chance
to accept more support & additional buildout obligations • December 2018, revised A-CAM I offers & later A-CAM II offers
Support Mechanisms
Support Mechanisms
• Model-based (A-CAM) vs. Legacy USF • Legacy
• Just like it sounds, mostly our USF, average schedule or cost, with a few changes
• Model-based support • Complex model that simulates building a whole new
network • Excludes low-cost census blocks & census blocks where
a non-subsidized competitor can provide service • Support tied to building broadband service to new
locations
• Filings • FCC – www.fcc.gov
• Too many to list • 499-A annual filing due April 1 • 499-Q quarterly filing due 2/1, 5/1, 8/1 & 11/1 • 481 annual filing due July 1
• NECA – www.neca.org • Some monthly reporting – line counts, etc.
• USAC – www.usac.org • Reporting for CAF & Legacy High Cost
Regulatory Compliance
• Operating Report (Formerly Form 479) • Financial & statistical reports for telecommunications borrowers • Annual report
• Broadband Collection & Analysis System (BCAS) • Quarterly reporting for those with broadband loans
• Annual property tax reporting
• Filings • Annual ETC reporting
• High Cost ETC – FCC Form 481 • Lifeline ETC – FCC Form 555
• Revenue reporting – FCC Form 499 • Broadband & voice reporting – FCC Form 477 • Ongoing reporting
• NECA – monthly, annual, data Collections • USAC – …if you’re not in the NECA TS Pool
Regulatory Compliance
Part 32
• Account Structure • 1xxx
Represents accounts which are assets, but not regulated fixed assets • 2xxx
Represents accounts which are regulated fixed assets • 3xxx
Represents accounts which are depreciation & amortization reserves • 4xxx
Represents accounts which are liabilities, long-term debt or a portion of stockholders equity • 5xxx
Represents revenue accounts • 6xxx
Represents expense accounts • 7xxx
Represents other income/expense accounts
• Cash (1130) • Temporary cash investments (1160) • Accounts receivable (1180, 1190) • Materials and supplies (1220) • Prepayments (1310)
Part 32
• Long-term note receivables (1200) • Marketable securities (1402) • Cash value life insurance (1410) • Deferred charges (1439)
Part 32
• Account Grouping • Property, plant & equipment
• Telephone plant in service (2111-2441) • Internet plant in service (1410) • Video plant in service (1410) • Accumulated depreciation (3100) • Plant under construction (2003)
Part 32
• Account Grouping • Current liabilities
• Current portion of long-term debt (4050) • Accounts payable (4010) • Accrued taxes (income 4070, property 4080) • Other accrued liabilities (4120)
Part 32
• Other long-term liabilities (4310) • Deferred income taxes (4340) • Other deferred credits (4360) • Deferred tax regulatory liability (4361) • Other jurisdictional liabilities & deferred credits – net
(4370)
• Equity - Corporation • Common stock (4510) • Preferred stock (4510) • Additional paid-in
capital (4520) • Accumulated other
• Equity - Cooperative • Patronage capital
assignable (4550) • Patronage capital
assigned (4550) • Unallocated non-
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Part 32
Part 32
• Income taxes • Federal (7220, 7420) • State (7230, 7430)
Part 32
• Clearing Accounts • Motor vehicle expenses – Plant – 6112.1
• Expenses related to the maintenance of plant vehicles • Salaries & wages – change oil, washing • Fuel, repairs, insurance
• Cleared to construction & other plant specific expense accounts • Other work equipment expenses – 6116
• Expenses related to the maintenance of other work equipment • Salaries & wages – change oil, washing • Fuel, repairs, insurance
• Cleared to outside plant construction & outside plant specific expense accounts based on labor hours
Part 32
• Clearing Accounts • Provisioning expense - 6512
• Expenses relating to the provisioning of materials & supplies • Salaries & wages for loading & unloading supplies • Taking physical inventory
• Cleared to construction & plant specific expense accounts based on material used, does not always clear to zero
• Engineering expense - 6535 • Includes cost relating to general engineering not related to a
specific project • Cleared to construction accounts based on direct labor hours,
may not clear to zero
Part 32
Acronyms & Terminology
• Acronyms • ARC – Access Recovery Charge • CABS – Carrier Access Billing System • CAF – Connect America Fund • CL – Common Line • COE – Central Office Equipment • DSL – Digital Subscriber Line • EC – Exchange Carrier • ETS – Ethernet Transport Service • EU – End User
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• Acronyms • FCC – Federal Communications Commission • HCL – High Cost Loop • ICC – Intercarrier Compensation • ICLS – Interstate Common Line Support • ILEC – Incumbent Local Exchange Carrier • ISP – Internet Service Provider • IXC – Interexchange Carrier • MOU – Minutes of Use
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• Acronyms • NECA – National Exchange Carrier Association • PUC – Public Utility Commission • SLC – Subscriber Line Charge • TS – Traffic Sensitive • USAC – Universal Service Administrative Company • USF – Universal Service Fund • VOIP – Voice Over Internet Protocol
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• Terminology • Access Charges – The fees long-distance companies & other
network users pay to local telephone companies to originate & terminate calls on their networks
• Access Line – A communications facility extending from a customer’s premises to a serving central office switch, sometimes referred to as a subscriber loop, local loop or the ‘last mile’
• Common Line (CL) Pool – The pool NECA administers for its local exchange carrier members’ non-traffic sensitive costs of providing interstate access associated with subscriber loop plant
• Digital Subscriber Line (DSL) – A technology that brings high- bandwidth information services to the home or small business over telephone loop plant; DSL technology enables a loop to simultaneously carry voice, which takes little bandwidth & high speed data
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• Terminology • Ethernet – A local area network technology that connects computers,
printers, servers, etc., in a physical location – carrier ethernet equipment provides reliable ethernet connectivity beyond the LAN through the telecommunications network; Ethernet uses twisted pair (copper), fiber optic & coaxial cable & may also use wireless connectivity or transport
• High Cost Loop (HCL) Support – This Federal USF fund provides support to offset high unseparated local loop costs for rural study areas
• Interstate Common Line Support (ICLS) – This USF fund supports the interstate common line costs of rate-of-return ILECs by funding the residual between the ILECs interstate common line costs or revenue requirement & the revenue collected from the common line rate elements charged pursuant to NECA’s FCC Tariff No. 5
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• Terminology • Incumbent Local Exchange Carrier (ILEC) – The telephone
company that, on the date of enactment of the Telecommunications Act of 1996, provided telephone exchange service in a specific area & was deemed to be a member of NECA pursuant to Section 69.601(b) of the Commission’s regulations (47 C.F.R. 69.601(b))
• Intercarrier Compensation (ICC) – Flows of payments among telecommunications carriers that result from the interconnection of telecommunications networks under current systems of regulation
• Internet Protocol (IP) – The method by which packet data is sent from one area computer to another; every server, router & switch in an IP network is uniquely identified by at least one IP address
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• Terminology • Internet Service Provider (ISP) – Business entity that provides
internet service to the end user customer • Local Number Portability (LNP) – The ability to transfer an existing
telephone number assigned by a local exchange carrier (LEC) & reassign it to another carrier
• Local Switching Support (LSS) – This USF fund supports high local switching costs of small ILECs
• Minutes of Use (MOU) – A total of all premium & non-premium originating & terminating interstate traffic sensitive switched access minutes that are switched in a Class 5 (local) end office
• Phantom Traffic – Traffic that is terminated but is not billable because the originating source is not identified
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• Terminology • Settlement – A settlement is calculated for each pooling company
based on their individual expense & tax amounts, including a share of the pool’s calculated rate of return; each company then receives its settlement minus the access revenue it has already collected
• Traffic Sensitive (TS) Pool – The pool NECA administers for the portion of the network where costs vary according to usage; pool members apply the TS tariff rate elements: Traffic Sensitive – Switched, including charges to interexchange carriers (IXCs) for long distance traffic & Traffic Sensitive – Special Access, including DSL & other broadband services
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Acronyms & Terminology
• Terminology • Tariff 4 – NECA FCC Tariff No. 4 describes the location & technical
capabilities of wire centers providing interstate access telecommunications service; it also provides information to support the ordering & billing of jointly provided (meet point or billing percent) interstate access service
• Tariff 5 – NECA FCC Tariff No. 5 contains the rates, regulations, service terms & conditions that apply to interstate access services offered by local member telephone companies participating in the tariff
• Telecommunications Relay Services (TRS) – The interstate Telecommunications Relay Service Fund, established by the FCC on July 26, 1993, helps speech & hearing impaired individuals use telecom services
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Acronyms & Terminology
• Terminology • Universal Service Fund (USF) – A group of federal funding programs that
promote universal service goals created by the FCC to provide support for high cost telco’s, low-income consumers, rural health care initiatives & schools & libraries
• Voice over Internet Protocol (VoIP) – A technology that allows users to make telephone calls using a broadband internet connection instead of a regular (or analog) phone line
Interconnected VoIP – starts/stops on the Public Switched Network Non-Interconnected VoIP – computer-to-computer calls via the Internet
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• Webinars, seminars & articles • Many are CPE-eligible
• FCC Removes Local Rate Floor Requirement • CAF Report & Order • Budget Control Mechanism • Revenue Recognition
BKD Thoughtware®
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Mike C. Spratt, CPA, CIA Director | BKD 1401 50th Street, Suite 350 West Des Moines, IA 50266 515.223.0159 Ext. 42246 515.440.9164 Direct 515.223.5429 Fax mspratt@bkd.com
192
bkd.com | @bkdllp
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
Thank You!
Our goals for today
Contribution Margin Analysis
• BDS order (Cost-based A-CAM I or II adopting carriers)
• Pros o Cost savings by eliminating annual cost study o Pricing flexibility (hopefully) o Lower special access pricing to be more competitive
• Cons o Essentially nothing ROR o Forever election o ACAM year 11 uncertainty o First year(s) implementation “growing pains/learning curve”
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increase) • Pros
o Generally higher USF than voice-based USF o Customer demand, in most areas o More options for customers to choose what works for
them • Cons
o Loss of local residential/business access service revenues
o Once offered, hard to go back to requiring voice service o Strain on budget, assuming many companies roll out
CBOL
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• Legacy or A-CAM – Switch Consolidations • Pros
o Lower costs, including maintenance contracts o For Cost companies switching recovery frozen o Create a revenue stream if you host for neighboring
companies • Cons
o Watch out for double recovery o Switchless concerns & issues o Loss of control if you purchase host switching from
neighbor
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• Legacy or A-CAM – Dark Fiber Leases (ROR based)
• Pros o Pricing flexibility/market-based rates o More likely to win ETS circuits o Can offer & still remain in NECA or other tariff
• Cons o Cost Study impact o Dot the I’s & cross the T’s (do everything right)
• Especially if in NECA’s tariff o Consider implications of new lease rules on accounting
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• VOIP Phone Systems • Replacing traditional key systems with Voice Over
Internet Protocol system • Many businesses switching to VOIP systems to
save money
• VOIP Phone Systems • Pros
o Similar to legacy key system environment o Equipment is widely used & available
• Cons o Additional training for technicians o Sales staff needed for demos & sales calls o Truck rolls to install equipment which can be expensive
depending on service territory o Less access revenue
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• Edging off Existing Fiber Routes to provide Broadband
• Manufacturing, large farming operations on the edge of communities where you have fiber route going right by
• Expansion of the network in small increments in a focused manner
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• Edging off Existing Fiber Routes to provide Broadband
• Pros o Pick up new customers – broadband, circuits, dark fiber o Often not significant CapEx costs since main route already
there o Can lead to additional customers once you get 1 or 2 o Often can get customers to pay for part of build
• Cons o Requires some marketing to potential customers o Need to determine pricing, look at payback analysis o Can be pretty competitive
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Non-Regulated Environment • Video Replacements
• Over the top platforms & related devices o Netflix o Hulu o Sling o Amazon Prime o YoutubeTV o Sony Playstation Vue o HBO Now o Roku, etc. o Disney – coming soon! o Plus many others
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• Video Replacements – OTT platforms & related devices
• Pros o No longer negotiating programming contracts o Get customers off existing video platform which loses
money o Keep the customer by selling additional broadband which
has much better contribution margin o No set-top boxes or middleware to manage & maintain
• Cons o Need to train staff on OTT options so they can educate
customers o Need to try several & then pick 1 or 2
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Non-Regulated Environment • Managed Wi-Fi
• Initial installation of Wi-Fi routers to ensure best signal where the customer needs it most
• Apps available to test Wi-Fi signal throughout the home
• Work with customer to understand where they want & need the best signal
• Place router in best spot or advise use of extenders or multiple routers
• Educate client so they know where devices will work best to optimize their broadband usage experience
• Ongoing maintenance to help customers as needs arise
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• Managed Wi-Fi • Pros
o Help customers maximize the broadband experience o Could encourage them to purchase higher speeds since
they are better educated on how to get the most out of their network
o Customer looks to your company for complete service • Cons
o Spending more time in the customer premise o Training needed for technicians o Some additional testing equipment, though generally pretty
inexpensive
207
• Internet of Things (IoT)/Smart Home Installation & Management
• So many devices out there to create a “Smart Home” o Garage door openers o Thermostats o BBQ Grills & Smokers o Refrigerator & other home appliances o Gaming systems o Doorbells o Home security o Audio systems o Lights o The list goes on & on…
• Help the customer manage their devices & get the best performance
208
• Internet of Things (IoT)/Smart Home Installation & Management
• Pros o Increases need for broadband services o Providing more complete solution to customers
• Cons o Training needed for technicians so they can help
customers o Spending more time in the customer premise o Likely to drive increased backhaul needs for company
209
• Home Security Installation & Monitoring • Installation of security systems for homes &/or
businesses o Sell the equipment & get paid a fee for the installation
• Provide monitoring service (usually in partnering with a third party)
210
• Home Security Installation & Monitoring • Pros
o Another touchpoint with customers o Similar to other products & services o Opportunities to upgrade broadband
• Cons o More time in the customer premise o Additional training for technicians o Some additional equipment needed o Technology changes frequently
211
computer setup, etc. for both residential & small- medium sized businesses
• Sell the hardware & software as well as fee for the service provided to install, configure & maintain
212
• Computer Services – network management, firewalls, anti-virus, computer setup, etc.
• Pros o Often doing all of this for your own companies o Provides a way to leverage internal function to generate
revenue o Generally good margins
• Cons o Skilled staff needed o More time in the customer premise o Managing work hours for staff to meet customer needs
213
Non-Regulated Environment
• Web Hosting & Design • Storing &/or designing website files for customers • Fixed cost for the storage of the site for them • Variable cost for the design of the site • Recurring costs for maintenance of the site • For hosting need to consider redundancy needs to
ensure no gaps in service
214
• Web Hosting & Design • Pros
o Already providing the broadband so another touchpoint o Another reason for customers to look to your company
for solutions o Can lead to other services
• Cons o Requires skilled staff o Constant maintenance to meet consumer needs o Marketing
215
the equipment • Managed Services – providing device management
including firewalls, anti-virus, software provisioning, backups, logical access controls, cloud computing, etc.
216
o Ability to sell additional broadband/circuits so customers & providers can access the facility
o Use existing fiber networks to provide connectivity o Marketplace need continues to grow o Opportunities to market backup solutions to existing
customers • Cons
o Very large cap-ex investment o Skilled staff needed for operation o Significant marketing needs to enter the market
217
• Edge Data Centers – Supplement 5G Networks
• Data center facilities away from the centralized core network to offer additional computing power
• Generally smaller facilities • 5G while powerful is very distance sensitive &
requires a very dense network to support it
218
• Edge Data Centers – Supplement 5G Networks
• Pros o Colocation option for equipment for 5G providers o Ability to sell additional circuits using existing fiber
networks to provide connectivity • Cons
o Providing network for a competitor (cellular) o Possible large CapEx investment o Possible upgrades needed to existing network
219
• Critical (key) indicators of progress toward an intended result
• Provide a focus for strategic & operational improvement
• Help create an analytical basis for decision making • Focus attention on what matters most
220
• Provide objective evidence of progress towards achieving a desired result
• Measure what is intended to be measured to help inform better decision making
• Offer a comparison that gauges the degree of performance change over time
• Can track efficiency, effectiveness, quality, timeliness, governance, compliance, behaviors, economics, project performance, personnel performance or resource utilization
• Are balanced between leading & lagging indicators
221
Key Performance Indicators (KPIs) • KPIs can be very different from company to
company • Need to determine specific outcomes trying to be
achieved in order to understand what measurements will be useful to determine success
• Decide what matters most to you & what do you feel indicates success or progress towards your goal
222
Key Performance Indicators (KPIs) • Strategic Measures
• Track progress toward strategic goals, focusing on intended/desired results of the End Outcome or Intermediate Outcome. When using a balanced scorecard, these strategic measures are used to evaluate the organization’s progress in achieving its Strategic Objectives depicted in each of the following four balanced scorecard perspectives o Customer/Stakeholder o Financial o Internal Processes o Organizational Capacity
• Operational Measures • Focus on operations & tactics, & designed to inform
better decisions around day-to-day product/service delivery or other operational functions
223
• Focus on project progress & effectiveness • Risk Measures
• Focus on the risk factors that can threaten our success • Employee Measures
• Focus on the human behavior, skills or performance needed to execute strategy
• Likely need some of each to achieve an overall goal
224
Key Performance Indicators (KPIs) • KPI Examples
• Desired Outcome – Increase broadband customers from 1,500 to 2,500 in the next 18 months o How many potential customers are there & who are
they? o What is the timeline for number of new customer
increases within the 18 months, e.g. 60 customers per month
o What is the backhaul requirement if we bring that many customers on the network?
o What specific network upgrades are needed to accommodate? • Set a timeline for network upgrades that falls in line with
your strategic goals set above
225
Key Performance Indicators (KPIs) • KPI Example
• How many competitors do we have in our market? • How many customers are we losing to competitors?
o If we lose a customer, are we asking & tracking why they leave?
• How many ads per month are we running & in what media? o Are we tracking how customers heard of us when they
sign up? • How many CSR sales of new broadband services
have we made each month?
226
Contribution Margin
• How much of a specific customer rate/plan price (e.g. broadband) falls to the bottom line after expenses
• Consider o Revenue o Fixed direct costs o Variable direct costs o Overhead costs
227
• Benefits • Focus marketing efforts on plans/rates with highest
contribution margin to achieve best profit • Better design pricing in the future
• Hurdles • Fairly complicated process to dig out all the specific
costs for each rate or plan • Time consuming
228
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EXAMPLE #1 10/1 MBPS 25/1.5 MBPS 75/2 MBPS 150/5 MBPS Package Price 54.95$ 64.95$ 74.95$ 84.95$
Direct Costs Per user charges 7.50$ 7.50$ 7.50$ 7.50$
Indirect Costs Backhaul 5.00$ 10.00$ 15.00$ 30.00$
Overhead Network 15.00$ 15.00$ 15.00$ 15.00$ Customer Service 3.00$ 3.00$ 3.00$ 3.00$ Corporate Operations 5.00$ 5.00$ 5.00$ 5.00$
Total Cost per customer 35.50$ 40.50$ 45.50$ 60.50$
Net margin per customer 19.45$ 24.45$ 29.45$ 24.45$
Users (850 total) 100 250 325 175
Profit 1,945.00$ 6,112.50$ 9,571.25$ 4,278.75$
Total Margins 21,907.50$
230
EXAMPLE #2 10/1 MBPS 25/1.5 MBPS 75/2 MBPS 150/5 MBPS Package Price 54.95$ 64.95$ 74.95$ 84.95$
Direct Costs Per user charges 7.50$ 7.50$ 7.50$ 7.50$
Indirect Costs Backhaul 5.00$ 10.00$ 15.00$ 30.00$
Overhead Network 15.00$ 15.00$ 15.00$ 15.00$ Customer Service 3.00$ 3.00$ 3.00$ 3.00$ Corporate Operations 5.00$ 5.00$ 5.00$ 5.00$
Total Cost per customer 35.50$ 40.50$ 45.50$ 60.50$
Net margin per customer 19.45$ 24.45$ 29.45$ 24.45$
Users (850 total) 50 250 375 175
Profit 972.50$ 6,112.50$ 11,043.75$ 4,278.75$
Total Margins 22,407.50$
Summary
• Many ways to diversify without letting go of the roots of the company
• Many options help bolster core service revenue • Flexibility will be important with constantly
changing technology
233
Continuing Professional Education (CPE) Credit
• Webinars, seminars & articles • Many are CPE-eligible • FCC Removes Local Rate Floor Requirement
Placed on Rural Independent Telephone Companies
BKD Thoughtware®
bkd.com | @bkdllp
The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.
Thank You!
Why A-CAM in the First Place
General Overview of A-CAM
Revised A-CAM I Deployment Obligations
Offer Overview for A-CAM II
Offer Extension for A-CAM II
Location Clarification for A-CAMA-CAM II Public Notice DA 19-650
Example with an A-CAM II Offer
A-CAM Support Pros
A-CAM Support Cons
Legacy Support Pros
Legacy Support Cons
Legacy Support Unknowns
Business Data Services (BDS)
Business Data Services (BDS)
Consumer Broadband -Only Loop (CBOL)
CBOL Pros & Cons
CBOL Pros & Cons
LECs Now Provide Better Service Despite Heightened Regulation
Slide Number 31
Slide Number 32
Five-Step Model
Performance Obligations - Identification
Performance Obligations - Identification
Performance Obligations - Identification
Performance Obligations - Identification
Commission Expenses
Commission Expenses
Implementation & Documentation Considerations
Slide Number 61
Implementation & Documentation Considerations
Example Contracts that Could be Leases
Contracts not Under ASC 842
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?