Telecom Cost Accounting Conference

Dubai 26 Oct. 2009

Accounting Separation Global Best Practices and Oman ModelGlobal Best Practices and Oman Model

Safdar ImamSafda aSenior Costing Specialist

Omantel SAOG

Talking Points !Talking Points !

h i i S i ?What is Accounting Separation?

Why to have it as a Regulatory Mechanism in y g yTelecoms?

What do IFRS say about AS and Why do we needWhat do IFRS say about AS and Why do we need other Standards?

Wh AS P i i l d B P i ?What are AS Principles, and Best Practices?

What are International Experiences?p

How is Oman AS Framework emerging?

What is Accounting Separation?What is Accounting Separation?

Depends on whom you ask!!!

“De‐consolidation of a holding company's accounts so g p ythat the costs and revenues associated with each subsidiary or unit can be individually identified and y yallocated.” (www.businessdictionary.com)

“Accounting Separation is a system of preparation ofAccounting Separation is a system of preparation of separate accounts of economic results, on some pre‐defined basis for some specific functions or services ”defined basis, for some specific functions or services.  (OECD)

What is Accounting Separation?l ’ iRegulator’s Perspective

“The preparation of separate accounts for different p p pbusinesses and parts of the businesses run by the same company or group of companies, so that the costs and p y g p p ,revenues associated with each (and the transfers between them) can be separately identified and ) p yproperly allocated.” (OFCOM UK)

“Accounting Separation is a system of comprehensiveAccounting Separation is a system of comprehensive set of accounting policies, procedures and techniques for preparation of financial information to demonstratefor preparation of financial information to demonstrate compliance with ‘non‐discrimination’ obligations and absence of anti competitive cross subsidies” (ITU/EU NATPabsence of anti‐competitive cross‐subsidies  (ITU/EU‐NATP Project Team) 

What is Accounting Separation?Operator’s Perspective

AS refers to the preparation of separate “sets ofAS refers to the preparation of separate “sets of financial statements” for identified business lines of a notified dominant operator under ex ante regulatorynotified dominant operator under ex‐ante regulatory framework with the object to provide transparent disclosures about internal transactions (Transferdisclosures about internal transactions (Transfer Pricing) between various business lines. 

Real Life Perspective !!Real Life Perspective !!

It is “Unscrambling of the Omelet”?It is  Unscrambling of the Omelet ? 

(www findlaw com au )(www.findlaw.com.au )

Scramble Challenge

Why is AS used as Regulatory Tool in Telecoms?Why is AS used as Regulatory Tool in Telecoms?

T id hi h l l f ti l dTo provide higher level of operational and financial details than what is derived from statutory financial statementsstatutory financial statementsTo reflect performance of the part of the business as if they had operated as separate businessesas if they had operated as separate businessesIn case of vertically integrated undertakings providing ICT Networks and Servicesproviding ICT Networks and Services– To prevent discrimination in favor of their own activitiesactivities

– To prevent unfair cross‐subsidy

Why Separation?Why Separation?Competition Problem – Vertically Connected Industry

Vertically integrated Anti‐

New Entrants /integrated 

operatorStrategic WMD

AntiCompetitive Behavior

Possible Effects

Entrants / Competitors

Core Network Supply of Wholesale Products

Price Discrimination

Margin Squeeze

Fore‐closures

Access Network

Cross‐subsidization

Raising Rivals’ Costs

M & A

Retail Services

Supply of Retail Products

Predatory Pricing

Restriction of Competitors’ 

l

Bankruptcies

Pricing Sales

Solution to Competition Problem?Solution to Competition Problem?

SEPARATION

Structural S

• Achieve ownership unbundling or Divestiture• Separate network infrastructure from units offering 

i i hi i f

SEPARATION

Separation

F ti l

Separate Ownership

services using this infrastructure

•Separate part of the operation with a bottleneck resourceP id i l i h I b ilFunctional 

SeparationIndependent Governance & Operations

•Provide access to competitors along with Incumbent retail divisions on non‐discriminatory basis

•Separate “set of accounts” for part of the operation with 

Accounting SeparationAccounting Rules for Regulatory 

Controls

p p pbottleneck resource and business units of retail services •Provide transparency of transactions between internal units to ensure equal treatment for external operators

But how much Separation?pAccounting Separation is a less intrusive and much less costly REMEDY to implement

Accounting Separationl bRegulatory Objectives

International Experiences highlight following safeguards against VIDOs*

• Monitoring cross subsidisation

International Experiences highlight following safeguards against VIDOs  

• Comparison between internal transfer prices and externalwholesale service charges for vertically integrated operators

• Analysing potential anti‐competitive pricing behaviour, suchas margin squeeze or predatory pricing

• Determination and monitoring of interconnect charges

• Monitoring industry and service trends• Monitoring industry and service trends

• Tariff regulation

*Vertically Integrated Dominant Operator

Isn't IFRS sufficient for AS?Isn t IFRS sufficient for AS?

• On 30 Nov 2006, IASB issued IFRS 8 – Operating Segments to replaceIAS 14 Segment Reporting

International Financial Reporting Standard # 8 – Operating Segments

IAS 14‐ Segment Reporting.

• IFRS 8 is mandatory for annual financial statements of Listed Companiesfor the period beginning on or after 01 Jan 2009p g g

• Segmented financial information is required to be disclosed about an“Operating Segment” defined as follows;

Engaged in business activities earning revenues and incurring expenses(including transactions with other ROS’* of the same entity)

Whose operating results are reviewed regularly by the entity’s chiefWhose operating results are reviewed regularly by the entity s chiefoperating decision makers to make decisions about resource allocation andperformance assessment.

For which discrete financial information is available

* Reportable Operating Segments

What do IFRS say?What do IFRS say?

Exceptions/ Thresholds;

International Financial Reporting Standard # 8 – Operating Segments

p

Corporate HQ or Functional Units with no revenuestream from operational activities of the entityp y

Post retirement benefit plans

S t ith R i < 10% f bi dSegment with Revenue size < 10% of combined revenueof all ROS’*

S t ith P fit L f 10% f ll bi dSegment with Profit or Loss of < 10% of all combinedProfit or Loss of all ROS’

i h l % f ll bi dSegment with Assets value < 10% of all combined assets.* Reportable Operating Segments

Why do we need AS Framework on top of IFRS?Why do we need AS Framework on top of IFRS?

IFRS d d fi ROS dIFRS does not define ROS revenue, expense, assets and liabilities nor any allocation rules/ methodology

Only requires an explanation as to how these are measured for each ROS

Limited only by their internal reporting practices, entities have discretion in determining the number of ROS d h t i i l d d i th ROS P&L A tROS and what is included in the ROS P&L Account.

Scope is limited to Public Listed companies whose debt i i d d i bli kor equity instruments are traded in a public market.

Postulates of AS Regulatory Framework

D fi i th k t d iDefining the markets and services

Analyzing the market structure– Synthesizing the Market Study Results and available Remedies– Synthesizing the  Market Study Results and available Remedies

– Determining the Dominant Position (SMP)

Defining objectives of Regulatory AccountingDefining objectives of Regulatory Accounting

Specifying key parameters of Cost Accounting Model

Using Regulatory Cost Accounting resultsg g y g– Margin Squeeze/ Imputation Tests

– Predatory Pricing Tests

– Anti‐competitive Bundling Tests

– Cross‐subsidization Tests

Postulate 4: Specifying Key Parameters of i d lCosting Model

– Accounting principlesAccounting principles 

– Disaggregation level – Products and Services

– Accounting period & production timeline

– Criteria of Assets Valuation– Criteria of Assets Valuation

– Cost Standards & Categorization (SAC, FDC, LRAIC, )MC)

– Types of Models (Top Down vs. Bottom Up, HCA, yp ( p p, ,CCA, BCA) 

Postulate 4: Specifying Key Parameters of i d lCosting Model

– Internal Transfer PricingInternal Transfer Pricing

– Life Span of Assets

– Weighted Average Cost of Capital

– Activity costs attributable to network directly to– Activity costs attributable to network, directly to services, indirectly to services

– Unattributable costs’ allocation principles

– Recommended CCA concepts (Excess Capacity, p ( p y,FCM, OCM)

Accounting Separation

OMAN MODEL

Sultanate of OmanMarket Overview

• Located south‐east of Arabian Peninsula next to Saudi Arabia and the UAEand the UAE. 

• Divided into three main Governorates and five RegionsGovernorates and five Regions  

• 309,500 square kilometers 

• GDP US $ 60 bGDP  US $ 60 b

• Population 2.743 million *

• Teledensity• Teledensity 

– Mobile: 130 %

Fixed: 10%– Fixed:       10%

*Excluding Expats ; 0.6 M  ( Oman TRA Market Statistics – June 2009)

Oman Telecom LiberalizationOman Telecom Liberalization

O j i d th WTO i N 2000Oman joined the WTO in Nov 2000Committed to liberalize the market by Jan ‘05TRA was established in Mar 2002Second Mobile License issued in Mar 2005Second Mobile License issued in Mar 2005– Nawras; Jointly owned by Q Tel with localO M bil S b idi f G t d O t l– Oman Mobile; Subsidiary of Govt. owned Omantel

Second Fixed License issued in Nov 2008– Nawras Plans to install IGE / MAN (www.nawras.om )

– Omantel  270 K Subs (10%) / NG Upgrade( ) / pg

Regulatory Framework *Regulatory Framework Licensing RegimeLicensing Regime– Class I License – Public Fixed and Public Mobile Networks

– Class II License – Public Value‐Added ServiceClass II License  Public Value Added Service

– Class III License – Private Telecommunications Service

I t tiInterconnection

– LRIC based charges

• Omantel & Oman Mobile FDC / LRIC model

• Fixed and Mobile Termination determined annuallyFixed and Mobile Termination determined annually

– RIO and RAO

* www.tra.gov.om

Regulatory FrameworkRegulatory FrameworkUniversal Service ObligationUniversal Service Obligation 

– USF established to subsidize service for un‐served areas 

f l d b b d d d f– Part of royalties paid by operators to be dedicated for USF

– Underserved  Areas selected by TRA; to be offered for  bidding

SMP Remedies

– Accounting Separationg p

– Transparency

– Access to NetworkAccess to Network

Current Oman Telecom Market TRA Report 30 JUN 2009

Market Share Market Share

Total Fixed Market:  0.265 M Total Mobile Market:  3.562 M 

Oman Mobile     50%Nawras 47%Resellers 3%

Omantel        100%Nawras Preparing to Launch

Source: www.tra.gov.om

AS Framework Roll out in Oman UpdateAS Framework Roll‐out in Oman ‐ Update

Consultation Paper on Accounting Separation AUG 2008

Responses on AS Consultation Paper OCT 2008

Stakeholders’ Meeting FEB 2009Stakeholders  Meeting FEB 2009

Consultation Paper on Market Dominance Criteria MAR 2009

TRA Position Statement JUL 2009

TRA Guideline / Determination NOV 2009TRA Guideline / Determination NOV 2009

Oman TRA Consultation PaperSMP Remedies

All current Class I license holders are classified as Notified OperatorsAll current Class I license holders are classified as Notified Operators– Omantel;

– Oman Mobile

– Nawras

Remedies– Accounting Separation, 

– Cost Accounting /Price Control– Cost Accounting /Price Control

– Transparency

– Non‐discrimination 

– Access to Network 

– Unbundling of Products 

Oman TRA Consultation PaperObjectives

/• Remedies/ obligations of the Notified and other Licensees 

• Market‐based level of Accounting Separation 

• Overall reporting requirements, format of the SRAs* and related issues 

A i di d d di i i• Appropriate audit procedures and audit opinion 

• Cost allocation process of costing models for SRAs 

d d / h d l d• Mandated Accounting/ Costing Methodologies and principles for SRAs 

S t d T f Ch i d CCA th d l i• Suggested Transfer Charging and CCA methodologies 

• Long‐Run Incremental Costing (LRIC) modeling approach 

M k t D t R ti R i t d d• Market Data Reporting Requirements and procedures 

Market based Accounting Separation

Retail Fixed Market definition Level of development•Access

Voice •Local and/or national voice telephone services

•International voice telephone services

Market not OpenedIndividual SMPCompetitive market

Retail Data •Retail leased lines•Dial Up Internet•Broadband Internet

Wholesale Fixed Voice

•Call origination 

Wholesale •Wholesale unbundled access

•Call termination 

Wholesale “infrastructure”

Wholesale unbundled access •Wholesale Line Rental (WLR)

•Wholesale broadband access (Bit stream Market)

•Wholesale terminating segments of leased lines

Mobile Market •Access and voice call origination

•Wholesale terminating segments of leased lines

•Wholesale trunk segments of leased lines

•Voice call termination on individual mobile networks•Wholesale international roaming 

OMAN TRA PRICE CONTROL REGIMEOMAN TRA PRICE CONTROL REGIME

SEPARATED REGULATORYSEPARATED REGULATORY ACCOUNTS

INVESTIGATIVE COSTING

Annual

INVESTIGATIVE COSTING STUDIES

FDC / LRIC MODELING 

Rare Case

/INTERCONNECT TARIFF 

APPROVALAnnual

TARIFF REBALANCING/ ADC APPROVALSAnnual

PRODUCTS PRICING APPROVALSEach Product

DIRECTIVE Occasional

AS Obligation for SMPTRA Position Statement Jul 2009

What to Submit? When to Submit?

Methodology document 3 months after TRA Decision Issuance

TD FDC/HCA FY 2009 One Year after the Decision

TD FDC/CCA FY 2010 6 th ft Y dTD FDC/CCA FY 2010TD LRIC Results FY 2010

6 month after Year-end

TD FDC/CCA FY 2011 6 month after Year-endTD FDC/CCA FY 2011TD LRIC Results FY 2011

6 month after Year-end

Timeline TRA Position Statement Jul 2009Timeline – TRA Position Statement Jul 2009

TRA DECISION

FY 2009 FDC/HCA

FY 2011 FDC/CCA, 

LRICDECISION FDC/HCA LRIC

FEB NOV  NOV  JUL  JUL 2012

METHODOLOGY DOCUMENT

FY 2010 FDC/CCA

20102009 2010 2011 2012

DOCUMENT  FDC/CCA, LRIC

Omantel Response to AS ChallengeOmantel Response to AS Challenge 

Omantel is one of the first Telcos of the Region to have implemented ABC in the Region

Omantel Group is already providing fully segmented costing analysis for Fixed Line (Omantel) and Cellular (Oman Mobile) businesses to the TRA annually based on;businesses to the TRA, annually, based on;

– Top‐down FDC

– LRIC Model 

The Group is gearing up to meet AS obligations p g g p g

Arguing with TRA to reduce arduousness of the obligations   

OMANTEL – The Challenge is to Turn Challenge into Opportunity

Cost Management/ Efficiency  

Improvement 

“Effective” fulfillment of

Leveraging Business

Accounting Separation

fulfillment of Regulatory 

Requirements

Business Information for Value Creation

Separation Model

Budgeting and  Strategic Fi i l

Performance Management 

d D i i Financial  Model

and Decision Making

Important References*Important References

Identification of Competition Problems and Remedies by Mark Scanlan & Ulrich Stumpf

ITU Regulatory Accounting Guide – March 2009

ITU Costing Experts’ Training Documents – Nov 2008

Oman TRA Accounting Separation Consultation PaperPaper

Oman TRA Market Statistics – June 2009

You can download, these documents from IIR Telecom Costing website

Q & A

For any further query please contactFor any further query, please contact 

Safdar Imam

Sr. Costing Specialist, Omantelg p ,

safdar.syed@omantel.com or ssimam@gmail.com

ALQURAN ALHAKIMVerse 284 Chapter 2Verse 284, Chapter 2, 

وإن تبدوا ما في أنفسكم أو تخفوه يحاسبكم لله ما في السماوات وما في الأرض والله على آل شيء قدير فيغفر لمن يشاء ويعذب من يشاءبه الله يب ن ب وي ي ن ر يري ي ى و

To Allah belongs all that is in the heavens andTo Allah belongs all that is in the heavens and all that is on the earth, and whether you

disclose what is inside you or conceal it Allahdisclose what is inside you or conceal it, Allah will call you to ACCOUNT for it. Then He

forgives whom He wills and punishes whomforgives whom He wills and punishes whom He wills. And Allah commands everything.

ABC Design at OmanTelActivity Based Costing

ActivitiesActivities Cost ObjectsCost Objects1st Level11stst LevelLevel

ResourcesResources

EquipmentEquipmentEquipment

ABC Design at OmanTel1st Level

Network Blocks by Region

11 LevelLevel

Network Blocks by Region

EquipmentGroupsSwitchingBTS’s

Fiber Optic CableCross‐connects

Etc.

EquipmentEquipmentGroupsGroupsSwitching

Transmission EqmtFiber Optic CableCross‐connects

Etc.

Client FacingActivities byBusiness Unit /Global

Client FacingClient FacingActivitiesActivities bybyBusiness Unit /Business Unit /GlobalGlobal

GeneralCarrier’sProducts & Services

GeneralCarrier’sProducts & Services

2nd Level

International Routes by Carrier

22ndnd LevelLevel

International Routes by CarrierDepartmentsDirectorate HEMDirectorate HEPCorp. PlanningFinancial Serv

DepartmentsDepartmentsOmanTel

OrganizationalCost Centers

Resource Pools‐ Personnel‐ Fleet‐ Buildings‐ Communications‐Hardware/ Software

Resource PoolsResource Pools‐ Personnel‐ Fleet‐ Buildings‐ Communications‐Hardware/ Software

Network Activitiesby Business Unit /Network Block

Support Activitiesb B i U it /

Network ActivitiesNetwork Activitiesby Business Unit /by Business Unit /Network BlockNetwork Block

Support ActivitiesSupport Activitiesby Business Units/by Business Units/

Customer GroupsRegionsOther Cost Objects

Network Blocks

Hardware & Software

Regions

Other Cost Objects

Network Blocks

Hardware & Software

3rd Level

Basic Services b y Region

Customer Groups

33rdrd LevelLevel

Basic Services b y Region

Regions

Financial Serv.Customer Serv.Support Serv.Mobile C.U.Fixed C.U.

InternationalAdministration

Etc

/

Other Costs‐ Depreciation‐ Cost of Capital

Other Costs‐ Depreciation‐ Cost of Capital by Business Units/

Globalby Business Units/by Business Units/GlobalGlobal

Hardware GroupsHardware GroupsHardware Groups4th Level44thth LevelLevel

Regions

Etc.

Hardware &SoftwareGroupsTIMS

Hardware &Hardware &SoftwareSoftwareGroupsGroups

Billing SystemsPayroll System

Etc.

‐ Cost of Capital‐Maintenance‐ External Supplies‐ Etc.

Cost of Capital‐Maintenance‐ External Supplies‐ Etc.

Software GroupsSoftware GroupsSoftware GroupsProducts / Services by Region

and Customer Group

Other Cost Objects

Products / Services by Region

Other Cost Objects

C C t d RCommon Costs and Revenues

TABSPayrollEtc.

RevenuesRevenuesRevenues

Common Costs and RevenuesCommon Costs and Revenues

Segment Definitions for DominantFBO Domestic/InternationalFBO - Domestic/International

NetworkLocal

h

Tandemexchange/

interconnect gateway

Tandemexchange/

interconnect gateway

Internationalgateway

h exchangegateway switch

gateway switch

exchange

Linecards/ports

Local-tandemtransmission

Tandem-tandem

transmission

Internationaltransmission

Customer AccessDomestic networkInternational servicesnetwork