IDA Presentation

1
ENHANCEMENTS TO ACCOUNTING SEPARATION IN
SINGAPORE Overview of Revisions to
the Accounting Separation Guidelines 25 May 2001
2
Agenda

• Introduction and Forum Objectives
• Background
• Proposed Revisions to the Accounting Separation
  Framework

3
Background

• Change drivers
• Objectives and role of accounting separation
• Approach to developing an enhanced accounting
  separation framework

4
Change Drivers
The following factors impact on the information
IDA needs to undertake its regulatory functions

• Market liberalisation
• New Code of Practice for Competition
• Digital convergence and rapid technological change

5
Objectives of Accounting Separation -
International Experience
Objectives of accounting separation vary between
different countries and include the following

• Monitoring cross subsidisation
• Comparison between internal transfer prices and
  external wholesale service charges for vertically
  integrated operators
• Analysing potential anti-competitive pricing
  behaviour, such as predatory pricing
• Determination and monitoring of interconnect
  charges
• Monitoring industry and service trends
• Tariff regulation

6
Objectives of Accounting Separation in Singapore
To provide a structured reporting framework which
will enable iDA to

• Ensure that Dominant FBOs do not favour their
  downstream operations and affiliates in providing
  inter-operator services
• Monitor compliance with the cross-subsidisation
  provisions applying to Dominant Licensees under
  the COP
• Establish and maintain objective reference points
  for evaluating information provided by Licensees
  in relation to ad hoc studies
• Monitor the provision of IRS by Dominant
  Licensees
• Monitor ICT market performance and trends

7
The Role of Accounting Separation
ICT Sector Objectives
Efficiency, fair market conduct competition,
industry self-regulation
Regulatory Competitive Safeguards

• Classification of FBOs
• IRS regulation
• Prohibition of cross-subsidies unfair
  competition

• Accounting Separation

Accounting Separation Information to enable iDA
to administer regulatory safeguards
Information
iDA general information gathering powers
Accounting Separation
8
The Role of Accounting Separation (cont)

• Accounting separation provides a complementary
  tool rather than a substitute for the various
  competitive safeguards in place under the COP.
• It is intended to provide iDA with the
  information it requires to effectively administer
  the regulatory framework.
• However, accounting separation itself also acts
  as a primary safeguard against potential
  anti-competitive cross subsidisation by ensuring
  transparency of Licensees financial costs and
  revenues.
• It also provides the industry with a general
  level of comfort that the regulator is able to
  monitor the conduct of Dominant Licensees

9
Approach to Development ofEnhanced AS Framework

• Review of effectiveness of existing accounting
  separation framework in Singapore
• Review of experience in other jurisdictions
• Hong Kong, UK, Australia, USA, EU
• Identification of iDAs information needs
• Aim to optimise information objectives while
  considering the administrative burden

10
The Proposed AS FrameworkTwo-level approach

• Detailed Segment Reporting (DSR)
• As a general rule, DSR will apply to Dominant
  FBOs and the entities over which they have
  control
• In addition, IDA may direct any other FBO or SBO
  that is related to a Dominant FBO to report on
  DSR basis (reserve power)
• Definitions of control and related entity are
  contained in the ASG
• Control is defined by 50 rule
• Related entity is defined by 20 rule

11
The Proposed AS FrameworkTwo-level approach

• Objectives of DSR
• To enable IDA to monitor pricing, potential
  anti-competitive conduct and IRS (O/T/T) charges
• Separate reporting of major service segments,
  including wholesale/retail separation
• At the present time, DSR will apply to
• SingTel, SingNet, SingTel Mobile, SingTel Paging
• SCV

12
The Proposed AS FrameworkTwo-level approach

• Simplified Segment Reporting (SSR)
• Apply to all FBOs except Dominant FBOs or any
  Licensees that are required to report on DSR
  basis
• Applies only to the licensed FBO entity (i.e.
  does not apply to controlled or related entities)
• Objectives of SSR
• Main purpose is to enable IDA to monitor market
  trends
• Higher level of aggregation to minimise
  regulatory burden

13
The Proposed AS FrameworkExemptions

• A Licensee may apply for an exemption from
  accounting separation or from complying with
  certain provisions of the Guidelines
• IDA may grant an exemption if it concludes that
• the amount of revenues or costs generated by the
  Licensee are insignificant or
• the information about the Licensees business is
  likely to be of limited value to IDA in meeting
  the objectives of accounting separation
• An exemption may be reviewed revoked by IDA
• Onus on Licensee to notify IDA if circumstances
  on which the exemption was granted change (eg
  substantial increase in revenues)

14
Level of Disaggregationof Services
Dominant FBOs Access Domestic
Network International Network Retail
Services Customer access Domestic
calls Domestic leased circuit svcs Internationa
l calls International leased circuit
svcs Mobile domestic access calls Narrowband
Internet Access Broadband Internet Access Other
Activities
All Other FBOs Fixed Domestic Services Internati
onal Fixed Mobile Services Mobile Domestic
Services Narrowband Internet Access Broadband
Internet Access Other Activities
Wholesale
Wholesale Retail
Retail
15
Accounting SeparationSegment Definitions

• The division of the organisations operations for
  accounting separation must reflect the objectives
  for the use of the information produced
• Separation of activities that are subject to
  different competitive intensities
• Separation of the upstream and downstream
  activities of vertically integrated or related
  Licensees
• Separate reporting of high growth/important
  services

16
Segment Definitions forDominant FBO Reporting

• Access
• Domestic Network
• International Network
• Retail Services
• Customer access
• Domestic calls
• Domestic leased circuit services
• International calls
• International leased circuit services
• Mobile domestic access calls
• Narrowband Internet Access
• Broadband Internet Access
• Other Activities

17
Segment Definitions for DominantFBO -
Access/Domestic Network
18
Segment Definitions for DominantFBO -
Domestic/International Network
19
Segment Definitions forNon-Dominant FBO Reporting

• Fixed Domestic Services
• International Fixed Mobile Services
• Mobile Domestic Services
• Narrowband Internet Access
• Broadband Internet Access
• Other Activities

20
Cost Basis - Overview

• Initially accounting separation will be based on
  Historic Cost Accounting
• Within a further 2-3 year timeframe, accounting
  separation will be migrated to Current Cost
  Accounting (CCA), consistent with global
  telecommunications regulatory trends
• To move directly from the current accounting
  separation framework to a new reporting
  architecture and CCA would be very complex and
  require a substantial implementation period
• A two-phased approach will produce immediate
  improvements in the information provided, but
  also allow a manageable implementation process

The timeframe will depend on the preparations
required by Licensees. Propose to
consider Licensees feedback during the
consultation process in determining an
appropriate timeframe.
21
Cost Basis - HCA Reporting Basis

• In general, reporting Licensees should prepare
  their accounting separation statements
• in accordance with Singapore GAAP and
• in accordance with the accounting policies that
  the Licensee uses for statutory financial
  reporting,
• iDA may direct Licensees to use particular
  accounting policies for specific items from time
  to time, in order to ensure that the accounting
  separation reports provide meaningful information
  necessary for iDA to perform its regulatory
  functions, or to allow comparability between
  Licensees
• iDA may approve alternative methodologies which
  may be requested by a Licensee

22
Cost Allocation Methodology -Overview
Dominant FBOs Based on causation Structured
tiered cost driver approach with simplified
allocation of indirect overhead
costs Prescribed allocation methodologies for
key cost and revenue items Detailed
methodologies to be documented in PCAM and
approved by iDA
All Other FBOs Based on causation Licensees may
determine their own allocation methods consistent
with principle of causation Detailed
methodologies to be documented in PCAM and
approved by iDA
23
Cost and RevenueAttribution Principles

• Costs/revenues may be attributed to services
  according to the following categories
• Direct cost/revenue Solely caused/generated by
  a particular service/product/asset/function
  recorded in the accounts against the relevant
  service/product/asset
• Directly attributable cost/revenue Solely
  caused/generated by a particular S/P/A/F but not
  recorded in the accounts against the relevant
  S/P/A/F

24
Cost and Revenue Attribution Principles (cont)

• Indirectly attributable cost/revenue Part of a
  pool of common costs/revenues but which can be
  attributed to a particular S/P/A/F though a
  non-arbitrary and verifiable cause and effect
  relationship
• Unattributable cost/revenue Part of a pool of
  common costs/revenues which cannot be identified
  to a particular S/P/A/F through a non-arbitrary
  and verifiable cause and effect relationship

25
Cost and RevenueAttribution Principles (cont)

• Dominant FBOs are required to separately identify
  the attribution categories of costs in their
  accounting separation statements as follows
• Direct directly attributable
• Indirectly attributable
• Unattributable (allocated in proportion to
  contribution margin)
• Non-dominant FBOs are required to separately
  identify
• Direct, directly attributable indirectly
  attributable costs
• Allocated unattributable costs
• All FBOs are not required to separately identify
  the attribution categories of revenues in their
  accounting separation statements.

26
Cost Allocation Methodologyfor Dominant FBOs
The preferred approach is a simplified cost
driver attribution methodology. The key features
of this approach are

• Attribution of costs/revenues is based on
  causation using identified cost drivers (e.g.
  activity based costing)
• A heirachical attribution and allocation
  methodology
• Prescribed allocation methods for certain
  cost/revenue items
• Indirect costs which are difficult or complex to
  apportion are allocated in proportion to each
  segment contribution margin
• Unattributable costs (e.g. overheads) are
  allocated in proportion to each segment
  contribution margin

27
Cost Allocation Methodology forDominant FBOs
Simplified Cost Driver Methodology
See page 16 of ASG
28
Cost Allocation Methodologyfor Non-Dominant FBOs
A more flexible approach will be used for
Non-Dominant FBO cost and revenue allocation

• Attribution of costs/revenues is based on
  causation using identified cost drivers (e.g.
  activity based costing) as determined by the
  Licensee
• Indirect costs which are difficult or complex to
  apportion are allocated in proportion to each
  segment contribution margin
• Unattributable costs (e.g. overheads) are
  allocated in proportion to each segment
  contribution margin

But subject to approval by iDA
29
Overview ofReporting Requirements
Dominant FBOs Income Statement for each
Detailed Segment Income Statement for
each Simplified Segment Stment of Mean Capital
Employed for each Detailed Segment Reconciliation
s to Audited Financial Statements Non-financial
information Audit Report
All Other FBOs Income Statement for
each Simplified Segment Reconciliation
to Audited Financial Statements Non-financial
information Audit Report
Income
Income
Capital
30
Detailed Segment Reporting Income Statements
Income statements prepared for each segment will
identify

• Revenues for each segment, with separate
  identification of revenue from external sources,
  the Licensees internal businesses and from
  related entities
• Costs for each segment, with separate
  identification of direct and directly
  attributable costs, indirectly attributable costs
  and allocated unattributable costs, charges from
  internal businesses, charges from related
  entities and charges from other Licensees. Fixed
  and variable cost should also be separately
  reported and
• The calculated return for each segment.

31
Detailed Segment Reporting Income Statements
(cont)
Detailed segment income statements will be
required for

• Each of the Detailed Reporting Segments that are
  provided by the Dominant Licensee and/or its
  controlled entities and
• In addition, entities that are subject to
  Detailed Segment Reporting must provide income
  statements for each of the Simplified Reporting
  Segments, in order to enable IDA to monitor the
  completed markets for these services.

32
Simplified SegmentIncome Statements
Income statements prepared for each segment will
identify

• Total revenues for each segment
• Costs for each segment, with separate
  identification of
• fixed and variable costs
• direct, directly attributable and indirectly
  attributable costs
• allocated unattributable costs and
• The calculated return for each segment.

33
Simplified SegmentIncome Statements (cont)
Simplified segment income statements will be
required for

• Each of the Simplified Reporting Segments that
  are provided by the a non-dominant Licensee

34
Reconciliation of Consolidated Income Statements

• A Reconciliation of Consolidated Income Statement
  will be required under both Detailed Segment
  Reporting and Simplified Segment Reporting
• A Reconciliation of Consolidated Income Statement
  provides a reconciliation of the consolidated
  Income Statements for all segments with the
  Licensees audited Income Statement, or
  Consolidated Income Statement where a Licensees
  business is structurally separated

35
Detailed Segment Statements of Mean Capital
Employed

• Statements of Mean Capital Employed should be
  submitted for each segment
• The mean capital employed is defined as total
  assets less current liabilities, excluding
  corporate taxes, dividends payable and long term
  liabilities. That is, it is the total written
  down value of non-current assets and working
  capital.
• The mean is computed as the average of the start
  and end values for the relevant period.

36
Detailed Segment Statements of Mean Capital
Employed
The Statement of Mean Capital Employed has two
main purposes

• it allows for a calculation of return on capital
  employed for each separated segment and activity
  and
• it allows for the more accurate allocation of
  capital charges to the Income Statement, e.g.
  depreciation.

37
Detailed Segment Reconciliation of Mean Capital
Employed Statement
The Reconciliation of Mean Capital Employed
Statement provides

• a reconciliation of the individual segment
  Statements of Mean Capital Employed to the
  Licensees audited Balance Sheet or consolidated
  Balance Sheet where a Licensees business is
  structurally separated.

38
Non-financial Information Report

• iDA proposes that all reporting Licensees should
  provide information on key operational and
  service usage parameters as part of the standard
  reporting requirements for accounting separation.
• Network usage parameters will be used by iDA to
• estimate the unit costs and revenues of each
  reported service
• monitor market trends in the services subject to
  accounting separation

39
Reporting Timeframes for Detailed Segment
Reporting
Report
Period Frequency
Timeframe
To be submitted within 4 months of the end of the
reporting period
Income Statements
6 monthly
To be submitted within 4 months of the end of the
reporting period
Reconciliation of Consolidated Income Statements
Annually
To be submitted within 4 months of the end of the
reporting period
Statements of MCE
6 monthly
40
Reporting Timeframes forDetailed Segment
Reporting (cont)
Report
Period Frequency
Timeframe
To be submitted within 4 months of the end of the
reporting period
Reconciliation of Consolidated MCE Statement
Annually
Non-financial Information Report
To be submitted within 4 months of the end of the
reporting period
6 monthly
To be submitted within 2 weeks of the
audit completion
Audit Report
Annually
41
Reporting Timeframes forSimplified Segment
Reporting
Report
Period Frequency
Timeframe
To be submitted within 4 months of the end of the
reporting period
Income Statements
6 monthly
To be submitted within 4 months of the end of the
reporting period
Reconciliation of Consolidated Income Statements
Annually
To be submitted within 4 months of the end of the
reporting period
Non-financial Information Report
6 monthly
42
Reporting Timeframes forSimplified Segment
Reporting (cont)
Report
Period Frequency
Timeframe
To be submitted within 2 weeks of the
audit completion
Audit Report
Annually
43
Administrative Requirements

• Procedure and Cost Allocation Manual (PCAM) must
  be developed by each Reporting Licensee
• Licensee must file its proposed PCAM with iDA 90
  days after the date of effect of the ASG
• iDA approval period for the PCAM will be 90 days
• Detailed specifications for the content of the
  Licensees PCAM are set out in the ASG
• PCAM (including detailed cost allocation methods)
  must be approved by iDA
• Any changes to PCAM must be filed with, and
  approved by, iDA
• There will be no public disclosure of Licensees
  PCAMs or accounting separation reports

Subject to extension if required
44
Audit Requirements

• Reporting Licensees will be required to obtain an
  annual independent audit of their accounting
  separation reports
• The auditor is appointed by the Licensee and
  responsibility for completion of the audit lies
  with the Licensee. However, iDA may request
  meetings with the auditor to discuss the
  auditors work
• iDA may undertake a re-audit if it is not
  satisfied with the audit undertaken by a
  Licensees auditor
• The costs of all audits and re-audits must be
  borne by the Licensee

45
Audit Requirements (cont)

• The auditor shall, in his Auditors Report,
  express an opinion on
• whether the Accounting Separation Statements for
  the year ended have been properly drawn up in
  accordance with the Licensees PCAM that has been
  approved by iDA under the Accounting Separation
  Guidelines and so as to present fairly, in all
  material respects the information reported in
  each of the accounting separation statements
  submitted to iDA.

46
Industry Consultation Proposed Timeframe For
Completion
Activity / Milestone
Date
21 June Q3, 2000
Deadline for submission of industry
responses iDA review of industry feedback and
finalisation of framework