Cable & Wireless Guernsey Accounting Documents

Transcription

1 Cable & Wireless Guernsey Accounting Documents

2 Introduction... i 1. Regulatory Accounting Principles Businesses Attribution Methods Introduction Attribution Methodologies Overview Revenue Costs Mean Capital Employed Non-Financial Data Current Cost Summary Revenue Overview Local Access Network Business Core Network Business Retail Business Mobile Other Activities Costs Apportionment to Activity Based Costing activities Mapping of Activity Based Costing activities to Businesses / Activities / Network Elements Mean Capital Employed Overview Tangible fixed assets Stock Debtors Cash at bank and in hand Loans and other borrowings falling due within one year Other creditors MAR adjustment Apportionment of Network costs Overview Exchange equipment Transmission Overhead plant Other costs Call Data Records (CDRs) Network transfer charges Overview Creation of the Network Business account Creation of the Retail Business account Transfer charges Background and overview Network charges Transfer charges from the Network Business... 19

3 4.3.1 Volumes and usage data requirements Calculation of the Network Business transfer charges to the Retail Business Other intra-c&wg transfer charges Reporting of transfer charges Current Cost Accounting (CCA) and General Accounting Policies Basis of Preparation of Regulatory Statements Basis of Accounting Basis of Preparation of the Current Cost (CCA) Financial Statements Principles of Valuation of Fixed Assets in the Current Cost Financial Statements Turnover Tangible fixed assets Asset Lives and Historic Cost Depreciation Stock Foreign exchange Pension and other post retirement benefits Leases Connection licence costs Current Cost Accounting Detailed Valuation Methodology Asset Class 100 Buildings (Leasehold Improvements) Asset Class Distribution Lines - Cables and Ducts Asset Class Submarine Cables Asset Class 555 MPLS Equipment Asset Class 565 MSAN Equipment Asset Class GSM Switch Asset Class GSM Base Stations & Radio Equipment Asset Class GPRS Asset Class 750 3G Radio Network Controllers Asset Class 815 Data Centres Current Cost Accounting Modelling Process General Current Cost Depreciation and the Roll-Forward Method Common Calculations Roll Forward Calculations Model Definition and Structure Overview Model Design & Methodology Resource Levels Activity Levels... 37

4 8.2.3 Cost Object (Product) Level Reporting Procedure Statement Production Improvements in Methodology Appendix A: Financial Statement Proformas Pro forma reporting formats for the Core Network Pro forma reporting formats for the Access Network Pro forma reporting formats for the Retail Businesses Pro forma reporting formats for the Mobile Business Pro forma reporting formats for Other Activities Business... 46

5 Introduction Introduction Cable & Wireless Guernsey Ltd ( C&WG ), also trading as Sure, has been found to be dominant 1 in the Guernsey wholesale fixed-line telecommunications market; the retail fixed-line telecommunications market and the retail mobile telecommunications market. Consequently it is required under Condition 27 of the Fixed Telecommunication Licence, dated 1 st October 2001 and Condition 25 of the Mobile Telecommunications Licence, dated 1 st September 2011, granted by the Guernsey Competition & Regulatory Authority (GCRA) [previously known as the Office of Utility Regulation (OUR)] to C&WG, to prepare and maintain accounting records in a form that enables the activities specified in any direction given by the Director General to be separately identifiable, and which the Director General considers to be sufficient to show and explain the transactions of each of those activities. The GCRA issued document 04/25 entitled Accounting Separation: Regulatory Accounting Guidelines to Cable & Wireless Guernsey Limited in December C&WG has used these Guidelines as the main basis for the production of its Separated Accounts. These Accounting Documents are provided to further set out the methodologies and procedures used, to highlight C&WG s interpretation of the guidelines where necessary and to assist users of the regulatory financial statements in understanding their preparation. More detailed descriptions of the processes and systems underlying the Statements of Separated Regulatory Accounts (Regulatory Statements) are contained within the Cost Attribution Methodology (CAM), which describes the processes and drivers used to derive the fully allocated costs of C&WG s Businesses and activities. A more detailed version of the CAM, the Detailed Attribution Methodology (DAM) is provided to the GCRA, but is not available for publication, due to the confidentiality of the data contained within it. Regulatory Statements are required for a range of business activities, the full definition of which are set out in Section 2. The Accounting Documents are made up of the following sections: 1. Regulatory Accounting Principles - which state the general rules by which the Regulatory Statements should be prepared, for example that all balances should be attributed with reference to cost causality. 2. Businesses which provides an overview of the businesses for which Regulatory Statements are prepared. 3. Attribution Methods - which explain how revenue, costs including transfer charges, assets and liabilities are attributed to the Businesses and Network Elements and Activities within those Businesses, following the Regulatory Accounting Principles, on a fully allocated basis. 4. Transfer Charges which explain how charges are raised from the Fixed Network and Fixed Access Businesses to the Retail Business for its use of the respective networks. 5. Current Cost Accounting and General Accounting Policies which detail the accounting policies adopted in preparing the underlying financial information. 6. Current Cost Accounting Detailed Valuation Methodology which details the mechanisms through which historic cost asset values have been brought to current cost equivalents. 1 GCRA 05/19 and 08/07 Price control for Cable & Wireless Guernsey, Decision Notice i

6 Introduction 7. Current Cost Accounting (CCA) Modelling Process which details the mechanics and logic of the CCA adjustments. 8. Model Definition and Structure which provides an overview of the model design and methodology. Pages i and ii of the introduction do not form part of the Accounting Documents. ii

7 C&WG Accounting records C&WG Accounting records C&WG is a unitary business, sharing a common network and support functions. It consists of a number of customer facing departments and departments responsible for providing customers with both fixed and mobile telephony services, maintaining the core switching and transmission networks, and providing and maintaining customer connections to this network. C&WG records its transactions in the accounting records in accordance with Guernsey legal requirements and generally accepted accounting principles. Within these records detailed data is maintained in respect of the manner in which the transactions have arisen. Assets, liabilities, income and costs are recorded by type. Basis of Preparation of Regulatory Statements The structure of the Businesses required under the GCRA Guidelines (i.e. Core Network, Local Access Network, Retail, Mobile and Other Activities) does not correspond to the way in which the statutory accounting records are structured. The Regulatory Statements are therefore produced by overlaying the requirements of the GCRA Guidelines on the statutory accounting record structure of C&WG. As required by the Guidelines, wherever possible, revenue, costs, assets and liabilities are directly associated with a Business, Activity or Network element using information recorded within C&WG's accounting records and are directly attributed to that item. Where no such direct attribution is possible the revenue, costs, assets and liabilities are apportioned between two or more Activities, Network Elements or Businesses on a basis that reflects the causality of the revenue, cost, asset or liability. Residual costs or business sustaining costs for which no direct or indirect method of apportionment can be identified are apportioned using an equal proportionate mark-up method. Details of this process are given in Section 3.2 in the Attribution Methods section within these Accounting Documents. iii

8 Regulatory Accounting Principles 1. Regulatory Accounting Principles The following Regulatory Accounting Principles ( the Principles ) are applied in the production of the Regulatory Current Cost Statements, Regulatory Historical Cost Statements, in the application of the Cost Attribution Methods, of the Transfer Charging system, and of the Accounting Policies. Sampling Where sampling is used to derive the attribution of costs, revenue, etc. it shall be based either on generally accepted statistical techniques or other methods which should result in the accurate attribution of revenue (including transfer charges), costs (including transfer charges), assets and liabilities. Priority and Proportionality Within the Regulatory Accounting Principles, insofar as there is conflict between the requirements of any or all of these Principles, the Principles are to be applied in the same order of priority in which they appear in this document. Definitions Any word or expression used in the Accounting Documents shall, unless the context otherwise requires, have the same meaning as it has in C&WG s licences. Cost Causality Revenue (including transfer charges), costs (including transfer charges), assets and liabilities shall be attributed to cost components, services and Businesses or disaggregated Businesses in accordance with the activities, which cause the revenues to be earned, or costs to be incurred or the assets to be acquired or liabilities to be incurred. Transparency The attribution methods used should be transparent. Costs and revenues, which are allocated to Businesses or Activities, shall be separately distinguished from those that are apportioned. Objectivity The attribution shall be objective and not intended to benefit C&WG or any other operator, product, service, component, Business or disaggregated Business. Consistency of treatment There shall be consistency of treatment from year to year. Where there are material changes to the Principles, the attribution methods, or the accounting policies that have a material effect on the information reported in the Regulatory Statements of the Businesses, the parts of the previous year s Regulatory Statements affected by the changes shall be restated. 1

9 Businesses 2. Businesses In accordance with the GCRA Guidelines, Regulatory Statements are produced for the following Businesses and, where applicable, Activities within those Businesses: Business Activities Local Access Network - Core Network - Mobile - Retail Exchange line rental and connection Local calls Local Internet calls Jersey calls National calls International calls Calls to Guernsey mobiles Non-geographic calls free to calling customer Non-geographic calls charged at local rate Non-geographic calls charged at national rate Non-geographic calls charged at premium rate Internet Directory enquiry Public payphones Leased lines (private circuits) Remaining activities Other Activities - Local Access Network The Local Access Network provides connections to and from the Core Network. The accounts for the Local Access Network Business will include the costs and capital employed associated with providing and maintaining these connections. For accounting separation, the Local Access Network Business will include all the customer-dedicated components of the network including, for example, the line cards and ports located at concentrators. The Core Network Business will include all other network components. Customer line connection and rental will be a service provided by the Retail Business. The revenue from line connection and rental provided to end-users will therefore be recorded against Retail. Thus, the cost of providing customer lines will initially be recorded against the Local Access Network Business and there will need to be a transfer of costs to Retail in order to match revenues with their associated costs. Core Network The Core Network Business provides a range of wholesale interconnection services internally to C&WG itself and externally to Other Licensed Operators in order to allow the customers of one operator to communicate with customers of the same or another operator, or to access services provided by another operator. These services include the switching and conveyance of calls. The accounts for the Core Network Business will include the costs, revenues and capital employed associated with the provision of these services. The revenues of the Core Network Business will derive principally from the sale of interconnection services to the Retail Business and to other operators. With respect to the wholesale provision of transmission circuits, the associated revenues are booked to the Core Network Business. 2

10 Businesses The Core Network Business also includes the costs and revenues associated with fixed network call termination from Jersey, UK and International destinations. Mobile The Mobile Business includes all those activities involving the provision of mobile telephony services. The accounts for the Mobile Business include the costs, revenues and capital employed associated with the provision of these services to end users as well as the costs of network provision. Costs relating to handset subsidies are included in this business, as these are provided in relation to Postpay mobile services. Retail The Retail Business includes all those activities involving the selling of telephony services to end users, including line rental, leased lines, calls, payphones and the provision of white page directory information. The accounts for the Retail Business include the costs, revenues and capital employed associated with the provision of these services to end users. The costs allocated to Retail include transfer charges related to the use of network resources or services provided by Local Access Network and the Core Network Businesses, and the marketing and billing costs associated with the provision of end user services. The Retail accounts are further disaggregated to distinguish between the costs and revenues of individual services, as shown below. The individual Activities are: Retail Exchange Line Rental and Connection Connection and recurring rental charges for fixed network exchange lines. Retail Local Calls Local dialled calls originating from ordinary and ISDN exchange lines. Retail Local Internet Calls Local Internet dialled calls originating from ordinary and ISDN exchange lines (e.g. calls to 0800 and 0845 number ranges allocated to local Internet Service Providers, originating from ordinary and ISDN exchange lines). Retail Jersey Calls Jersey dialled calls to fixed and mobile networks (excluding non-geographic numbers) originating from ordinary and ISDN exchange lines. Retail National Calls Calls originating from ordinary and ISDN exchange lines to National Geographic numbers and UK registered GSM handsets. Retail International Calls Calls to international fixed and mobile destinations, charged at international tariffs, originating from ordinary and ISDN exchange lines. Retail Calls To Guernsey Mobile Calls originating from ordinary and ISDN exchange lines to Guernsey registered GSM handsets. Retail Non-Geographic calls Free to Calling Customer Dialled calls originating from ordinary and ISDN exchange lines to non-geographic numbers for which the calling party does not pay a fee for the call. 3

11 Businesses Retail Non-Geographic calls charged at Local Call Rate Dialled calls to non-geographic numbers where the calling party is charged at the similar rate as a UK local dialled call. Also included here are calls to 0845 numbers allocated to UK Internet Service Providers, originating from ordinary and ISDN exchange lines. Retail Non-Geographic calls charged at National Call Rate Dialled calls to non-geographic numbers where the calling party is charged a similar rate to national dialled call. Retail Non-Geographic calls charged at Premium Rate Dialled calls to non-geographic numbers where the calling party pays a premium rate for value added services. Calls to local 120xx numbers are included here. Retail Internet Non-call related activities of C&WG s own Internet Service Provider. Retail Directory Enquiry Calls placed with Directory Enquiry service providers to obtain information about Guernsey and overseas telephone numbers, made from the local fixed network (including calls from public payphones). Retail Public Payphones Local, national, international and mobile dialled calls, originating from public payphones, using cash and phone cards. This does not include private payphones, situated at customers premises. Retail Leased Lines (private circuits) Connection and rental of local, national and international leased lines beyond customers premises and which have access to the public network, not including wiring of buildings or other wiring that does not have access to the public network. Retail Remaining Activities All other telecommunications services that are within the Retail Business. Other Activities Business Other Activities Business includes the sale, rental, repair and maintenance of customer equipment. It also includes yellow page directory listings and directory advertising, data centre services, IP feeds and consultancy services. In addition, C&WG has interests in non-telecommunications activities. For the purposes of accounting separation, the costs, revenues and capital employed associated with activities not included in the main business areas are shown here. 4

12 Attribution Methods 3. Attribution Methods 3.1 Introduction This document describes the attribution methodologies used to fully allocate C&WG's revenue, costs, assets and liabilities to its Businesses and, where applicable, their disaggregated Activities and Network Elements. It gives an explanation of the different methods used for attributing revenue, costs and capital employed. Cost types and the processes involved in their allocation, or apportionment, are described showing how costs are treated from their initial appearance in C&WG's accounting records to their ultimate attribution to Businesses. It explains both the system used to produce the Regulatory Statements and the methodologies employed in that system. The purpose of Accounting Separation is to provide an analysis of information derived from financial records to reflect as closely as possible the performance of parts of a business as if they were operating as separate businesses. It is necessary for competing operators to have confidence that C&WG is not unduly discriminating between its own Retail Activities and competing operators or between one competitor and another when providing similar services. Accounting Separation assists in ensuring that charges are cost-based, transparent and non-discriminatory. This in turn promotes a competitive environment in a number of ways, including: - a) the publication of accounts that are transparent and allow other operators to understand how C&WG s revenues relate to costs, b) the demonstration within C&WG s Regulatory Statements that interconnection arrangements are equitable. The fundamental feature of this approach to attribution is the principle of causality. Each item of income, cost and capital employed recorded in the C&WG group accounts is attributed to the Activities and Network Elements which make up the separate Businesses defined under Accounting Separation. Methodologies are regularly reviewed and enhancements introduced to reflect, for example, changing technologies, while the apportionment bases, which are the practical application of these methods to actual values, are reviewed at least annually. 5

13 Attribution Methods 3.2 Attribution Methodologies Overview C&WG's approach to attribution is firstly to identify the income and costs that can be directly attributed to Businesses, Activities or Network Elements. For all remaining balances C&WG identifies the appropriate driver for each item, and, as far as possible, uses objective operational and/or financial data relevant to that driver to generate apportionment bases. This approach to the attribution of financial information to Businesses, Activities and Network Elements can be summarised as follows: review each financial balance establish the cost/revenue driver, i.e. the process that caused the cost to be incurred or the revenue to be earned use the driver to apportion the balance to the relevant Business, Activity or Network Element apportion revenue to the relevant Activity or Business The general methods for revenue and cost attribution in Accounting Separation are set out below. The attribution of mean capital employed, which follows the same principles, is also described briefly below Revenue Revenue is recorded in the accounting records in such a manner that it is usually possible to allocate it directly to the relevant Activity or Business. Where this is not possible appropriate revenue drivers are used. The main revenue drivers deal with interconnect receipts from other operators, relating to call traffic Costs Costs are drawn from the accounting records. The methodologies applied to the costs, which vary according to the nature of the costs and the way in which they are recorded, are set out below Direct and directly attributable costs Certain costs can be allocated to specific Businesses, Activities or Network Elements and therefore do not require apportionment. These costs include most of the costs directly related to customer-facing activities, such as maintenance of customer premises equipment Indirectly attributable costs Other costs cannot be directly associated with particular Businesses, Activities or Network Elements and require indirect apportionment. These costs include general costs of C&WG s departments that service various Businesses, Activities and Network Elements, which are recorded on a cost centre basis using the Activity Based Costing process outlined in Section 3.4, where a specific apportionment base can be identified and measured. The above cost type will also include other costs, such as the costs of transmission equipment, which are used to provide a number of network services. These costs are grouped and then apportioned to Network Elements using network statistics, surveys or other methods of analyses (see Section 3.6) Unattributable Costs 6

14 Attribution Methods As stated above C&WG utilises, wherever possible, objective data relating to cost drivers. There is, however, some expenditure for which no specific apportionment bases can be readily derived. This cost is therefore apportioned to Businesses, Activities and Network Elements using the equal proportionate markups method, i.e. any individual Business will receive a proportionate apportionment of unattributable costs equal to its proportionate allocation/apportionment of attributable costs Mean Capital Employed Mean capital employed is defined by C&WG as mean total assets, less current liabilities, less finance lease liabilities and provisions (other than those for deferred taxation), less corporate taxes and dividends payable and less the short-term element of long term liabilities (other than those for finance leases). The mean is calculated from the start and end values for the period. The apportionment of capital employed follows a similar approach to that used for operating costs. Fixed assets are recorded by asset class and can be segmented into three categories: 1) those assets that can be directly allocated to Businesses, Activities or Network Elements; 2) assets relating to a group of Businesses, Activities and Network Elements which are apportioned on the basis of cost drivers, e.g. concentrator asset classes, which provide both line and traffic related functions and are thus apportioned both to the Local Access Network Business and various switching Network Elements; and 3) assets of a general nature supporting, for example, general mainframe computers or motor vehicles, where an appropriate apportionment base, derived from the attribution of the operating costs of that element, is applied. For current assets and liabilities, those elements that can be directly attributed to Businesses, Activities and Network Elements (specific debtors and creditors, stocks and provisions) are directly allocated; for the remainder appropriate apportionment bases are derived for each element. For instance, trade debtors are attributed on the basis of an analysis of the revenue those debtors relate to. Cash balances are attributed to Businesses, Activities and Network Elements on the basis of an analysis of operational requirements. Operating expenditure and capital employed are measured for each product and network component at Level A9 (final activity level) of the ABC Model and cash is then apportioned on a prorated basis. Provisions are either allocated specifically to Businesses, Activities and Network Elements or are apportioned using a base appropriate to the particular provision Non-Financial Data Wherever costs cannot be directly allocated to Businesses, Activities or Network Elements, an apportionment is required. Depending on the cost involved, the appropriate basis of apportionment may be of a non-financial nature. In these instances the relevant data may be extracted from non-financial data sources, such as operational systems recording core transmission and usage, or may be collected through activity analysis. By way of example, the apportionment to Businesses, Activities and Network Elements of the salary costs that relate to a department identified by the Accounting Separation process may be apportioned on the basis of a monthly survey of the time spent by the staff whose salaries are being apportioned. Such surveys 7

15 Attribution Methods will typically involve the analysis of the tasks undertaken by staff and the percentage of time spent on those tasks. These tasks will then be linked to Activities Current Cost C&WG is required by GCRA directive 04/25 to prepare its Regulatory Statements on a current cost basis. The methods of attribution used are compatible with the basis on which the current cost values have been derived, reflecting cost causalities in the same manner as the historic cost attributions. The current cost adjustments to the historical cost profit and loss account and mean capital employed are attributed to activities and components, which make up the separate Businesses defined under Accounting Separation, on the basis of causality. The attribution in the current cost Regulatory Statements is therefore consistent with that in the preparation of the underlying historical cost based information Summary Revenue, costs and capital employed are attributed, by allocation and apportionment, either directly to Businesses, Activities or Network Elements; or via a series of steps of indirect allocation through analysis of asset classes or the Activity Based Costing process; or through the apportionment of unattributable overheads. C&WG's approach to attribution is to identify the appropriate cost drivers for each type of revenue, cost or capital employed and, as far as possible, to use objective operational and/or financial data relevant to that cost driver to generate apportionment bases. Apportionment bases will be reviewed at least annually and methodologies regularly reviewed with enhancements introduced to reflect, for example, changing technologies. Details of specific apportionment methodologies can be found in associated separate documentation: CAM (Cost Attribution Methodology) A published list of cost/revenue drivers, which for each includes: o Driver name and system reference o Methodology Overview o Name and reference of cost/revenue being apportioned (shown as Source ) o List of items over which cost/revenue is being apportioned ( Destinations ) DAM (Detailed Attribution Methodology) A more thorough explanation, with values (available to C&WG and GCRA only), showing for each driver: o Data as per the CAM o More detailed instructions o Visio schematic map reference (where applicable) o Person/team who calculated driver o Person/team responsible for providing the data o Value of cost/revenue to be split o Value/percentage driven to each destination Within both the CAM and DAM documents it should be noted that there can be more than one Source name and reference. This is the case where the same driver values are being applied to different costs, e.g. driver R1-FNa is used to apportion the costs of: Insurance Charges Unrecoverable Insurance Excesses/Payments 8

16 Attribution Methods Using just one driver helps to ensure consistency of treatment, a key requirement of a good ABC system. Clarity on this example can be provided by viewing the R1-FNa page of the DAM/CAM document. The DAM document has one further note-worthy point. Many of the values shown in the To each column are percentages, therefore adding to 100%. However, for other data quantity types the total of the values are unimportant. C&WG s ABC model treats ALL values within each driver on a proportional basis. 9

17 Attribution Methods 3.3 Revenue Overview Turnover comprises the gross invoiced value of services provided and equipment sales. Typically turnover can be analysed by Activity directly from the accounting records. The turnover arises from calls, line rentals, connection charges, equipment sales and other activities Local Access Network Business The revenue arising from the provision of services to the Retail Business is calculated within the Transfer Charge element of the Accounting Separation system, rather than in C&WG's main accounting systems, on the basis of the recorded operating costs and return on capital employed of the Local Access Network Business Core Network Business Revenue arises from provision of network services to other operators and to the Retail Business. Receipts from other operators in respect of calls originating in their networks and terminating on, or in transit through, the C&WG Core Network are separately identified in the accounting records and directly allocated to the Business. The revenue arising from the provision of services to the Retail Business is calculated within the Transfer Charge element of the Accounting Separation system, rather than in C&WG's main accounting systems, on the basis of recorded volumes of usage Retail Business Retail exchange line rental and connection Local Access Network revenue, which is separately identifiable from the accounting records, is in respect of connection and rental income related to the provision of narrowband lines to retail customers Calls Call revenue relates to customers calls that are accounted for on an accruals basis. C&WG's billing system facilitates the identification of volumes and durations of all calls by type. This system is used to identify the revenue by call types including local, national, international, calls to internet, and calls to mobile in the accounting records. Therefore this revenue can be allocated directly to the relevant Retail Activities Public payphones Public payphone revenue arises from the collection of cash from payphones and the sale of phonecards. These can both be identified directly from the accounting records Leased lines Rental and connection charges for leased lines can be separately identified in the accounting records and the revenue can therefore be directly allocated to the relevant activity. 10

18 Attribution Methods Remaining Activities Remaining retail activities, which are not classified in any of the categories above includes separately identifiable revenue from areas such as Directory White Pages, Broadband Connect and Miscellaneous Fixed Network Services Mobile Revenue relating to rental, connection and call charges for both mobile voice and data services. Mobile revenue is separately identifiable from the billing system and accounting records Other Activities Revenue relating to products, such as Customer Premises Equipment, Mobile Handsets/Accessories, Data Centre Services and Directory Yellow Pages. The revenue can be identified directly from the accounting records and allocated directly to those activities. 11

19 Attribution Methods 3.4 Costs As noted earlier, all costs are apportioned using an Activity Based Costing methodology. This consists of a two-stage process comprising apportionment of costs to defined Activity Based Costing activities and a mapping of these activities to Businesses, Activities and Network Elements as defined by Accounting Separation Apportionment to Activity Based Costing activities Department costs C&WG has split its business into various Business departments, such as Customer Engineering, Switching and Business Sales, with a number of support departments such as Commercial Finance, Human Resources and IT Operations. Each of the departments holds all of the General Ledger costs that are department related, which mainly relates to staff costs. Where necessary, i.e. for most departments, each has then analysed its function into a number of specific activities that it performs. For instance, the Customer Engineering department has identified activities such as exchange/leased lines provision, business system installations and broadband provision. Each department performs an analysis of the time spent on the activities that it undertakes. Most of this work is analysed within C&WG s web-based Staff Activity Database, which is used to input and report the majority of activities undertaken within the company. Exceptions to this are where more detailed analysis is required, such as a full time and motion study, or where no data is needed, due to the existence of more appropriate data from elsewhere, like the number of staff in each department. This is the case for the Human Resources department, whose costs are apportioned across other departments based on the total staff numbers within each. The support departments costs are apportioned across the relevant departments that they support. In order to prevent a reiterative apportionment, the support departments have been exhausted in such a manner that once a department s costs have been exhausted, it cannot receive costs from another support department. The order of exhaustion of the support departments has been driven according to the breadth of the function that each performs, i.e. the Human Resource department provides greater support to the Commercial Finance department than vice versa, therefore Human Resources is exhausted before Commercial Finance. Non-departmental accounts A significant proportion of the costs in the General Ledger cannot be associated with a specific department. Examples of these costs are depreciation of assets including network plant and specific network related costs, such as external maintenance contracts. Within the model these costs have been grouped into activity specific accounts within C&WG s model Mapping of Activity Based Costing activities to Businesses / Activities / Network Elements A further apportionment process is required to produce allocations as the Activity Based Costing activities do not always directly map to the Businesses, Activities and Network Elements defined under Accounting Separation. This apportionment can take any of the following forms: an activity may be wholly attributable to a Business, Activity or Network Element, e.g. costs relating to phonecards will be pointed to Public Payphones; 12

20 Attribution Methods some activities may be attributed to different Businesses, Activities or Network Elements depending upon the area in which the cost falls, e.g. the buildings infrastructure management activity is attributed in different proportions to Businesses, Activities or Network Elements depending on the nature of the area in which the activity has been identified; or some activities may not be wholly attributable to a single Business, Activity or Network Element. In this case an appropriate apportionment base has been created to apportion the costs within the Activity Based Costing activity to Businesses, Activities and Network Elements. For example the activities under the billing process have been apportioned to Activities and Network Elements by identifying the cost driver relevant to each activity. 13

21 Attribution Methods 3.5 Mean Capital Employed Overview The definition of mean capital employed for Accounting Separation purposes is contained in section The apportionment of mean capital employed follows a similarly detailed and careful approach to that for operating costs. Where reference is made to processes described elsewhere, full details of these processes are not repeated here. For example, reference may be made to apportionment on the basis of "total salary". This is used wherever salary is the causal driver, e.g. for payroll creditors. Thus, the attribution of payroll creditors will follow the same procedure as the corresponding salary costs. The record of salary costs attributed to Businesses, Activities and Network Elements in the cost attribution process is used to attribute related creditors in such a way as to reflect fully the complexities of the analysis of those salary costs Tangible fixed assets Some network equipment assets can be allocated directly to Businesses, Activities or Network Elements on the basis of the asset class recorded in the general ledger, or apportioned to Businesses, Activities or Network Elements on the basis of network studies. These include the following categories of plant: Local Access lines cable Exchange equipment Transmission cable & duct Motor vehicles, computers, land and buildings are apportioned across Businesses, Activities and Network Elements on the same basis as their relevant operating costs, thereby ensuring consistency. The fixed assets of specialist operating units are directly allocated to the appropriate Business, Network Element or Activity by virtue of the operations undertaken by those specialist units. Where direct allocation is not possible the apportionment of the relevant assets between activities uses an appropriate cost driver specifically selected to reflect the operations concerned Stock Each line of stock has been individually reviewed to identify the relevant Network Element or product that it relates to and hence to which Business the stock should be allocated. Certain miscellaneous items were excluded from the calculation Debtors Debtors are analysed by type and sub-analysed where appropriate (e.g. by billing system) from information in the accounting records. At this stage, the appropriate apportionment bases (e.g., relevant turnover) are then applied. Debtors include the following categories: Trade debtors. These are directly allocated to Businesses, Activities and Network Elements on the basis of relevant turnover Accrued income. This is directly allocated to Businesses, Activities and Network Elements on the basis of relevant turnover Other debtors and prepayments are apportioned to Businesses, Activities and Network Elements using bases appropriate to the particular debtor type 14

22 Attribution Methods Cash at bank and in hand Cash balances are apportioned between Businesses on the basis of operational requirements, where operational expenditure and capital employed is used as a measure of the operational requirements of a Business. For regulatory accounting purposes C&WG calculates an allowable cash balance that reflects the cash it requires to hold for working capital purposes. C&WG deems allowable cash to be the average sum of: - adjusted trading balances held at the opening and closing dates for trade creditors, trade debtors & inter-company trading accounts - the balance due for Corporate Tax on the specified date - one month s company salary and associated costs The trading balances (trade debtors, trade creditors, inter-company trading balances) are adjusted to reflect the value of cash C&WG anticipates will be collected and paid in the following month. For operational purposes, a minimum cash balance of 1,000,000 is recognised Loans and other borrowings falling due within one year This category includes any bank overdrafts and short-term loans, apportioned on the basis of operating expenditure and capital employed in the period Other creditors Creditors are analysed by type from the general ledger codes and the appropriate apportionment bases are then applied to the following categories: Trade creditors are allocated to Businesses, Activities and Network Elements on the basis of analysis of each balance reported Capital creditors have been allocated directly to the Businesses, Activities and Network Elements to which they relate Payroll creditors are apportioned to Businesses, Activities and Network Elements on the same basis as pay or number of staff in each department, whichever is deemed more relevant to the particular balances Other creditors are apportioned to Businesses, Activities and Network Elements using bases appropriate to the particular creditor type MAR adjustment As required by the GCRA in its document 05/19 a Market to Asset Ratio (MAR) adjustment has been made to exchange line rental and the Public Payphones Business. Each fixed asset is classified as to whether it was purchased by Guernsey Telecoms (prior to May 2002) or C&WG. The Net Book Values of the assets are totalled, with percentages showing how much of each asset group is relevant to pre/post May These percentages are then applied to the Fixed Asset balances relevant to exchange line rental and the Public Payphone Business. 15

23 Attribution Methods 3.6 Apportionment of Network costs Overview The process to apportion network costs to Network Elements, where the costs relate to the Core Network Business and to the Local Access Business, is based upon a series of network studies, which make use of relevant engineering data, operational systems and/or sample data. Taken together, Network Elements make up all the costs and capital employed of the separated Core Network and Local Access Businesses Exchange equipment The main cost drivers for exchange equipment are the number of connections and call durations. Exchange equipment costs are allocated to the appropriate drivers on the basis of an engineering study undertaken, together with the equipment suppliers, to analyse equipment functionality and the required level of maintenance support. The apportionment approach identifies the allocation of total exchange costs between the Local Access Network Business and Core Network Business. The specific equipment affected by this study is exchange line terminations, trunk terminations, Core Network hardware, operating software and application software. Exchange expenditure is assigned to the main cost drivers, as follows: Connections costs that are associated with equipment that has the function of providing access to the network Calls costs that are associated with equipment that has the function of holding the network path open for the duration that a link is made across the network (call duration) Transmission The transmission network provides the following paths; links between leased line customer connections and Remote Subscriber Units (RSUs) links between RSUs and exchanges links between exchanges These paths are recorded in the Fixed Asset Register as part of Distribution Lines Cables and Ducts and Distribution Lines Equipment. The network is used both to carry calls on paths dedicated to the PSTN, and to route activities, such as leased lines, that also require dedicated paths. The transmission equipment is allocated between PSTN and leased lines based on analysis of the type and capacity of circuits. Cable and duct is allocated between PSTN and leased lines based on the annual average working number of lines, factored by whether, in general, the services are provided by one or two copper pairs (or equivalent). Factoring is also applied to recognise whether one or two ends of the service have an access network requirement. 16

24 Attribution Methods Overhead plant Overhead plant is solely used by the C&WG Local Access Network Other costs Most other network costs can be directly linked to Network Elements with no further analysis. In cases where the apportionment of these network costs is required appropriate bases are derived through reviewing the causal links of the network costs. For example the apportionment of maintenance activities to Network Elements is based upon an analysis of time spent Call Data Records (CDRs) CDRs are used as a basis of apportioning network component costs, e.g. the switch, and non-network costs e.g. interconnect costs, to relevant call products. CDR reports detail the volume of particular traffic types, that is, there are CDRs maintained for each distinct call type where the source and respective destination can be identified. This detailed call information allows numerous call related costs to be apportioned accurately. The base data used to consolidate specific CDR cost drivers has been sourced from the billing mediation platform and has been reconciled to C&WG s billed revenue analysis, and for relevant call types, its interconnect payments and receipts. The CDR data used within C&WG s Separated Accounts are based on analysis of every CDR within the accounting period, i.e. no sampling is undertaken. Previous analysis undertaken by C&WG indicated that sampling would produce inaccurate results, primarily because of seasonality and the inability to identify comparable data for reconciliation purposes. Route factors are calculated to recognise that similar call types may utilise the same network components, but in different volumes. Hence, the different types of CDRs are weighted by their respective route factor. These are calculated by applying a defined rule-set of network traffic routing to the base CDR information. The logic is best illustrated with a simple example. In the following scenario: a 20xx number is connected to Switch A a 72xx number is connected to Switch B a 70xx number is connected to Switch B a) A fixed line local number 20xx makes 100 minutes of local calls to another local fixed 72xx number. This call routing utilises 2 x Switch component (Switch A and Switch B at the same time). b) A fixed line local number 70xx also makes 100 minutes of local calls to another local fixed 72xx number. This call routing utilises 1 x Switch component (Switch B only). The average Switch Route Factor for these two local calls would therefore be ((2 x 100 minutes) + (1 x 100 minutes)) / 200 total minutes = 1.5. This logic is also applied to calculate route factors for other network components, such as concentrators, local transmission, mobile base stations, mobile switch, etc. 17

25 Attribution Methods 3.7 Network transfer charges Overview The transfer charges of Network Elements from the Fixed Network Business to Retail Activities and charges to Other Licensed Operators are based on the unit costs of Network Elements including the applicable rate of return and the volume of segments used by the Retail Business and other operators respectively Creation of the Network Business account The Network Business account consists of interconnect revenues from other operators and the transfer charge income from the Retail Business and the cost and capital employed of all Network Elements Creation of the Retail Business account The Retail Activities are attributed together with all their income, costs and capital employed including transfer charges for their use of the fixed network to the Retail Business account. 18

26 Transfer Charges 4. Transfer charges 4.1 Background and overview Under Accounting Separation, C&WG prepares separate Regulatory Statements for twenty one separated businesses, that have been defined by the GCRA. C&WG is required to prepare Regulatory Statements on a current cost basis using Transfer Charges calculated in accordance with the principles outlined below. Results are calculated based on C&WG s Reference Offer rates for call conveyance. More details can be found on pages ii, iii and 51 of C&WG s Published Separated Regulatory Accounts. Non-conveyance costs are actioned using the methodology described in this Transfer Charges section. 4.2 Network charges The Fixed Network Business sells a range of network and wholesale services to meet the differing needs of other operators and the Retail Business respectively. The price of each network service is based on the fully allocated cost of the Network Elements or parts thereof and wholesale services are charged at the relevant wholesale price as would be charged to Other Licensed Operators. A Network Element is a unit of network plant or activity, which can be separately costed but, in most cases, cannot be separately supplied, e.g. core portion of a concentrator. All services sold by the Fixed Network Business, either to other operators or the Retail Business, are built up from combinations of one or more Network Elements. In accordance with the C&WG s licence conditions, the price of network services includes a return on capital. The determinants of the level of this return are the cost of capital and the capital used to provide the service. In February 2008 the GCRA issued a Decision Notice to C&WG relating to Price Control (document GCRA 08/07). The GCRA s Director General used a pre tax nominal weighted average cost of capital (WACC) of 11.6% for Price Control purposes. This rate has been used in both of the accounting periods relevant to this submission. 4.3 Transfer charges from the Network Business Volumes and usage data requirements The system used to calculate the transfer charges and produce the Regulatory Statements contains nonfinancial data, including detailed analyses of service volumes and network usage data. The main classes of information are summarised below. Call conveyance and Network element usage Call traffic by product/service (in minutes) Route factors by Network Element by product/service Network Element usage (in minutes) Ancillary services Various volume and usage information by product/service 19

27 Transfer Charges Calculation of the Network Business transfer charges to the Retail Business Calculated Network Element charges form the basis of both Network Businesses transfer charges to the Retail Business. C&WG Retail Business route factors and volumes are applied to the calculated Network Element charges to derive its transfer charge. Transfer charges are calculated in two stages: aggregation of unit Network Element charges into unit network service charges multiplication of unit network service charges and network service volumes The following is an example of the various cost categories for conveyance charging. Unit network service charge Network Network Network Service specific Overall cost element 1 element 2 element 3 Unit cost X X X Route factor X X X Service charge X X X X X 4.4 Other intra-c&wg transfer charges C&WG s Businesses sell services to each other. The basis on which charges are made from the Fixed Network Business to the Retail Business is set out above. For other inter-business sales, the transfer charges are, as required by the GCRA (to ensure no preferential treatment is given to Businesses within C&WG), set at a rate equivalent to the charge that would be levied if the product/service were sold externally rather than internally. Where the transfer charge cost would be immaterial to the businesses concerned no acknowledgement has been made. This ensures that the statements are concise, whilst still being materially correct. The costs of a Business will not ordinarily arise wholly within one operating division of C&WG. Transfers of cost may therefore take place. These costs are attributed to Businesses using the methodologies described in the Attribution Methods section of the Accounting Documents and do not constitute Transfer Charges as referred to in this section of the Accounting Documents. 4.5 Reporting of transfer charges The Regulatory Statements record transfer charges as specified above as: revenue accruing in one distinct separated business operating cost recognised in another separated business The Retail Business purchases from the Fixed Network Business are analysed in the general form described within the pro forma Regulatory Statements as set out in the Guidelines. 20

28 Transfer Charges To aid transparency details of the transfer charging processes are described below: These additions have been made to the calculated data contained within the ABC model, to recognise the adjustments required to place C&WG s businesses in line with Other Licensed Operators: Local Leased Lines C&WG s own Retail Business provides local leased lines to retail customers. This charge deals with the relevant associated costs, by transfer charging the difference between cost (as automatically calculated within the model) and the published wholesale rates for the services used. The calculation is undertaken as the quantity of circuits rented multiplied by the annual wholesale price for each circuit in place. The total is charged as a cost to the Retail Leased Lines Business and revenue to C&WG s Core Network. Outside Bailiwick Leased Lines C&WG s own Retail Business provides outside Bailiwick leased lines to retail customers. This charge deals with the associated costs that should be incurred, by transfer charging the difference between cost (as automatically calculated within the model) and the published wholesale rates for the services used. The calculation is undertaken as the quantity of circuits rented multiplied by the annual wholesale price for each circuit used. The total is charged as a cost to the Retail Leased Lines Business and revenue to C&WG s Core Network. GSM Leased Lines C&WG s Mobile Business makes use of a variety of leased lines for the operation of its mobile network. This charge deals with the associated costs that should be incurred, by transfer charging the difference between cost (as automatically calculated within the model) and the published wholesale rates for the services used. The calculation is undertaken as the quantity of circuits rented multiplied by the annual wholesale price for each circuit used. The total is charged as a cost to the Mobile Business, with revenue to C&WG s Core Network. Guernsey Grid for Learning (GGfL) - C&WG provides a variety of services to the States of Guernsey, some of which are to enable it to provide a high speed Internet and data system for local educational establishments. The majority of this service is in the provision of data centre services and hence the costs and revenues associated with the GGfL are recognised within the Other Activities Business. There are however some costs that relate to leased lines, for which a transfer charge is required. The charge deals with the difference between cost (as automatically calculated within the model) and the published wholesale rates for the services used. The calculation is undertaken as the quantity of circuits rented multiplied by the annual wholesale price for each circuit used. The total is charged as a cost to the Other Activities Business, with revenue to C&WG s Core Network. Fixed to Mobile CSI Links For regulatory purposes C&WG s mobile network interacts with C&WG s fixed network on the same basis as Other Licensed Operators in Guernsey, using C&WG s Reference Offer service of Customer Sited Interconnect. This transfer charge reflects the appropriate cost levied on the Mobile Business by the Core Network Business, along with the recognition of the associated traffic related parameters. Payphone Exchange Lines The Public Payphones Business makes use of exchange lines in the provision of its services. The transfer charge cost of these lines is calculated in line with the full published retail rates for the period. The total is charged as a cost to the Retail Public Payphones Business and revenue to C&WG s Exchange Line Rental & Connection Business. Retail Broadband Services (Connect, Select & Select Pro) Both the Retail Remaining and Internet Businesses make use of wholesale broadband services. To ensure that these areas are dealt with on an equal basis to OLOs, all relevant network charges have been set to remain in the Core Network. Therefore, the full wholesale charge for all services used by these retail areas is transfer charged. 21

29 Transfer Charges Retail Broadband SP Charges C&WG s Internet Business has dedicated Service Provider (SP) links to the Core Network, to enable cwgsy.net to provide content to its broadband subscribers. This calculation transfer charges the appropriate wholesale costs (in full). This is a revenue to the Core Network and a cost to the Internet Business. Mobile Termination C&WG s Retail Fixed Line Calls to Guernsey Mobiles Business and its Retail Public Payphones Business receive no cost within the ABC model for call termination on C&WG s mobile network, so that charges can be based entirely on the mobile termination rates in place during the period. These two transfer charges calculate the full appropriate charge that should be incurred, based on time of day analysis multiplied by the calculated call minutes. Therefore the charge is a cost to these businesses and a revenue in the Mobile Business. o Note: In addition to this call termination revenue, C&WG s Mobile Business automatically receives recognition for mobile termination revenues (via the ABC model) for calls originated elsewhere. Mobile Mast Sharing C&WG s Mobile Business has equipment sited on some of C&WG s Core Network masts. This transfer charge recognises the relevant cost to the Mobile Business and the associated revenue for the Core Network Business. 22

30 CCA and General Accounting Policies 5. Current Cost Accounting (CCA) and General Accounting Policies 5.1 Basis of Preparation of Regulatory Statements The structure of the Businesses required under the GCRA Guidelines (i.e. Core Network, Local Access Network, Retail, Mobile and Other Activities) does not correspond to the way in which the statutory accounting records are structured. The Regulatory Statements are produced by overlaying the requirements of the GCRA Guidelines on the statutory accounting record structure of C&WG by disaggregating balances recorded in the general ledgers and other accounting records of the company maintained in accordance with the Companies (Guernsey) Law, 2008 and used, in accordance with that Law, for the preparation of the C&WG's statutory financial statements for the 12 month period ended 31 March For the purpose of preparing the Regulatory Statements it has been necessary for C&WG to extract the relevant revenues and costs, with reference to the actual general ledger balances pertaining to that period, from those shown in the C&WG's Statutory Financial Statements which reported on the 12 month period ended 31 March The results of that extraction have been reconciled to the Statutory (historic cost) Financial Statements. 5.2 Basis of Accounting The Regulatory Statements are prepared in accordance with the Accounting Separation: Regulatory Accounting Guidelines to Cable & Wireless Limited (GCRA document 04/25) and other relevant correspondence between C&WG and the GCRA. These set out the framework under which the Regulatory Statements are to be prepared, within which it identifies and details: The Regulatory Accounting Principles The Cost Allocation Principles The Transfer Charges The Accounting Policies The Regulatory Statements use the Statutory Financial Statements for the financial period April to 31 March 2012 as the basis for the calculations. The Regulatory Statements are prepared in accordance with the particular accounting policies described below. 5.3 Basis of Preparation of the Current Cost (CCA) Financial Statements Further to a Direction issued by the GCRA (04/25), C&WG is required to prepare its Regulatory Statements under the Current Cost Accounting (CCA) convention. Current cost valuations are prepared under the Financial Capital Maintenance (FCM) convention. Under this convention the current cost profit is normally adjusted by the erosion of purchasing power that shareholders equity has experienced during the year due to general inflation. However, as per best practice when applying CCA within the telecom sector this complex inflationary adjustment is not made within C&WG s current cost calculations. The effect of current cost asset revaluations is to increase the historical cost profit by any unrealised holding gains arising in the year and to decrease it by unrealised holding losses. Unrealised holding gains for the various categories of fixed asset are treated in the same way as depreciation, so that losses increase costs and gains reduce them. 5.4 Principles of Valuation of Fixed Assets in the Current Cost Financial Statements Assets are restated in the CCA Model at their value to the business, usually equivalent to the Net Replacement Cost (NRC). NRC is generally derived from the assets Gross Replacement Cost and for each 23

31 CCA and General Accounting Policies asset is the current purchase price of an identical new asset. Various current cost valuation methods were considered, including indexation and absolute valuation. The methods used to value each asset class are not detailed here but can be found in Section 6. Indexation In line with GCRA direction 04/25, which states that CCA should be implemented in a least cost manner using indexation, various types of indices have been used: In some cases C&WG has been able to develop and apply an in-house index based on the change in purchase price that it has experienced for a particular asset e.g. Leasehold Improvements. Where a transaction history as above is not available for a particular asset class and the use of RPI or inhouse indices is inappropriate, CWG uses the C.A. Turner Telephone Plant Index. Background information on the C.A. Turner Telephone Plant Index The C.A. Turner Telephone Plant Index (TPI) is compiled bi-annually by an independent U.S. consultancy firm. The TPI is based on U.S. data and the definitions of the Federal Communications Commission (FCC) Uniform System of Accounts (USOA) Part 32 and the information and estimates within the index are widely recognised as objective and unbiased. Index series are prepared for each of the primary telecom plant accounts as defined by the FCC. The plant accounts measured by the Index include: C.A. Turner Telephone Plant Index Plant in Service Description FCC Account Plant in Service Description FCC Account Motor Vehicles 2112 Public Telephone Term Eq Special Purpose Vehicles 2114 Garage Work Equipment 2115 Poles 2411 Other Work Equipment 2116 Aerial Cable Metallic Aerial Cable Fibre Buildings 2121 Underground Cable Metallic Furniture 2122 Underground Cable Fibre Office Equipment 2123 Buried Cable Metallic General Purpose Computers 2124 Buried Cable Fibre Submarine Cable Metallic Analogue Electronic Switching 2211 Submarine Cable Fibre Digital Electronic Switching 2212 Intra Building Cable Metallic Electro-Mechanical Switching 2215 Intra Building Cable Fibre Aerial Wire 2431 Operator Systems 2220 Conduit Systems 2441 Radio Systems - Analogue Radio Systems - Digital Circuit Equipment - Analogue Circuit Equipment - Digital Adjustments are required from the standard TPI: Each of the index series comprises underlying material, labour and overhead component indices. It is generally accepted that material cost trends experienced in the U.S. are mirrored globally. However U.S. labour cost fluctuations will not accurately reflect the 24

32 CCA and General Accounting Policies experience within the Guernsey market. The Index has therefore been modified to strip out the U.S. labour and overhead information and instead incorporate C&WG labour and overhead rates. This was achieved by supplying the authors of the Index with current and historical C&WG labour and overhead rates. These costs have been independently applied to the Index, weighted on the industry standard basis. Low value / low life Where assets have a relatively low value and appropriate indices are not readily available, C&WG has accounted for the asset class at its historical cost. Similarly where the life of an asset is relatively short, such that there is unlikely to be significant difference between the cost of the asset at the date of acquisition and its gross replacement cost, C&WG has not re-valued the asset, but has retained at its historical cost value. The asset life for a category to meet the criteria is five years or less. Absolute Valuation This method of valuation involved using physical quantities of assets and their current unit prices as per supplier pricelists. This method is employed where it is difficult or inappropriate to apply an index as above, e.g. MSANs. 5.5 Turnover Turnover comprises the gross invoiced value of all services provided and equipment sold in the period. It includes the value of unbilled calls as at the end of the period calculated by reference to the amount at which calls will be billed. This total of unbilled calls is included in debtors. 5.6 Tangible fixed assets Expenditure on tangible fixed assets is capitalised at cost. Fixed asset costs include assets under construction, for which no depreciation has been charged. For all other assets, additions are recorded and maintained by reference to category and year of acquisition. Depreciation is charged against the cost of the asset category as shown below. Assets are written out of the accounting records at the end of their expected useful life as determined from the year of acquisition and the asset categories expected useful life. Assets transferred from the States Telecommunications Board as at 1 October 2001 are being depreciated over their residual estimated useful lives from the date of transfer, applying the periods noted below. Information Technology expenditure is capitalised and amortised over its useful economic life when it relates to significant projects and will benefit the company for more than one year. Information Technology expenditure that takes place annually, such as software upgrades, is expensed as incurred. 5.7 Asset Lives and Historic Cost Depreciation Historic cost depreciation of tangible fixed assets is provided on a straight-line basis by reference to historical cost and the estimated working lives of the assets. Depreciation commences in the month following on from the acquisition date. The lives assigned to major categories of fixed assets are: Asset category: Life in years: Leasehold improvements Cables up to 20 25

33 CCA and General Accounting Policies Network equipment up to 20 Mobile equipment up to 15 Motor Vehicles up to 10 Software up to Stock Stock is valued at the lower of cost and net realisable value. 5.9 Foreign exchange Transactions denominated in foreign currencies are translated into sterling at the rates ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates ruling at that date. These translation differences are dealt with in the Profit and Loss Account Pension and other post retirement benefits The expected costs of providing pensions and other post retirement benefits as calculated periodically by professionally qualified actuaries, is charged to the Profit and Loss Account so as to spread the cost over the service lives of employees in the schemes operated by the C&WG in such a way that the pension cost is a substantially level percentage of current and expected future pensionable payroll Leases Rentals are charged to the Profit and Loss Account in equal amounts over the lease term Connection licence costs Licence costs relating to the connection of software and hardware to the company s network are one-off costs, which allow the company to use the software and hardware on its network. As such, these are capitalised and amortised over their useful economic lives when they relate to software and hardware that will be in use for more than one year. 26

34 CCA - Detailed Valuation Methodology 6. Current Cost Accounting Detailed Valuation Methodology This section provides an outline of the methodologies adopted for deriving gross replacement costs (GRCs). The asset classes not detailed below have met the low value / low life criteria and have been valued at historic cost. 6.1 Asset Class 100 Buildings (Leasehold Improvements) Description This asset category consists of Leasehold Improvements made to various C&WG properties. Valuation Methodology An in-house index was created using statistical information from the States of Guernsey. The more material assets within this category were re-valued using this approach. 6.2 Asset Class Distribution Lines - Cables and Ducts Description This asset category consists of the buried duct and cable (both copper and fibre), that form part of the Local Access Network. The category also includes the cost of trenching. Work is ongoing to reconcile fixed asset data with costing values provided by DISCUS. Enhancements and additional reporting fields have been added to DISCUS during the period however C&WG will continue to use the TPI until this work has been successfully completed. Current Valuation Methodology Until such time as DISCUS is used to provide CCA valuations C&WG believes that its existing indexation methodology provides the most reasonable valuation, given the information available and its resource and time constraints. This asset class has been valued through the use of the Turner Index. Two index series were used - FCC account: Buried Cable Metallic, and FCC account: Buried Cable Fibre The indices were applied on a weighted basis according to the results of access network analysis. The proportions show the percentage of the network that is copper cable or fibre cable. The definitions for FCC account: Buried Cable Metallic, and FCC account: Buried Cable Fibre, are as follows: Buried cable. (a) This account shall include the original cost of buried cable as well as the cost of other material used in the construction of such plant. This account shall also include the cost of trenching for and burying cable run in conduit not classifiable to Account 2441, Conduit Systems. Subsidiary record categories, as defined below, are to be maintained for non-metallic buried cable and metallic buried cable. (1) Non-metallic cable. This subsidiary record category shall include the original cost of optical fibre cable and other associated material used in constructing a physical path for the transmission of telecommunications signals. 27

35 CCA - Detailed Valuation Methodology (2) Metallic cable. This subsidiary record category shall include the original cost of single or paired conductor cable, wire and other associated material used in constructing a physical path for the transmission of telecommunications signals. These definitions are closely aligned with the assets that make up category 305. The primary factors influencing the cost of buried duct and cabling are: Labour costs - trenching and cable laying are particularly labour intensive activities, and Cable prices - the global market price of copper in particular, as well as the price trends of fibre cabling. Both factors are recognised and measured within the index. When reviewing data with it should be borne in mind that during 2010/11 the price of copper reached record highs. The following graph illustrates the general increase in copper prices during the 2010/11 accounting period. Source: The worldwide copper price exerts influence on the Turner Plant Index and this resulted in a large holding gain within this asset class for 2010/11. This was reflected with a significant impact in the 2010/11 Regulatory Accounts. Whilst this impact was felt within a number of businesses, the two main businesses affected were Local Access Network Business and Retail - Exchange Line Rental & Connection. The former charges the latter for the provision of PSTN and ISDN services, with the reported charge being dramatically reduced in 2010/11 by the calculated holding gain (treated as a reduction of cost) generated through the revaluation of Cables and Ducts. The reported profitability of the Local Access - Network Business and the Retail Exchange Line Rental & Connection Business represent current costs and revenues in accordance with the CCA methodology as described in Section 5 of the Accounting Documents. As such they do not reflect the actual costs incurred or revenues that would have been received during that period. The results should be used with caution for any purposes other than regulatory. 6.3 Asset Class Submarine Cables Description This asset category consists of all submarine cables linking C&WG s Bailiwick network to other operators outside of the Bailiwick. Valuation Methodology This asset class has been valued through the use of the Turner Index. The index series used was FCC account: Submarine Cable Fibre. 28

36 CCA - Detailed Valuation Methodology The definitions for FCC account: Submarine Cable Fibre, is as follows: Submarine & deep-sea cable (a) This account shall include the original cost of submarine cable and deep-sea cable and other material used in the construction of such plant. Subsidiary record categories, as defined below, are to be maintained for non-metallic submarine and deep- sea cable and metallic submarine and deepsea cable. (1) Non-metallic cable. This subsidiary record category shall include the original cost of optical fibre cable and other associated material used in constructing a physical path for the transmission of telecommunications signals. This definition is closely aligned with the assets that make up category Asset Class 555 MPLS Equipment Description This asset category consists of equipment making up C&WG s MPLS network. Valuation Methodology The MPLS assets are broken down by component and re-valued using recent supplier quotations. RPI figures are applied to the labour elements, such as installation and commissioning. 6.5 Asset Class 565 MSAN Equipment Description This asset category consists of Multi-Service Access Nodes (MSANs). Valuation Methodology The more material assets within this category have been valued on an absolute basis. Recent supplier quotes were used to determine the value with a number of assets deemed to be current cost as they were purchased during the period. 6.6 Asset Class GSM Switch Description The category consists of mobile switching and related assets. Valuation Methodology Material assets within this class have been re-valued using budgetary quotes from Nokia Siemens Networks. 6.7 Asset Class GSM Base Stations & Radio Equipment Description The category consists of mobile base stations and related assets. Valuation Methodology C&WG carried out an in depth study to classify each base station site as one of six types ranging from small to extra large making allowances for 2 and 3G sites. Recent supplier quotes were used to determine a cost per site classification. RPI figures are applied to the labour elements, such as installation and commissioning, as these form a significant part of the capital costs incurred in this category. 29

37 CCA - Detailed Valuation Methodology 6.8 Asset Class GPRS Description The category consists of GPRS Core Network assets. Valuation Methodology Material assets within this class have been re-valued using budgetary quotes from Nokia Siemens Networks. 6.9 Asset Class 750 3G Radio Network Controllers Description The category consists of mobile base stations and related assets. Valuation Methodology Material assets within this class have been re-valued using budgetary quotes from Nokia Siemens Networks Asset Class 815 Data Centres Description The category consists of Data Centre and associated equipment. Valuation Methodology Material assets within this class are broken down to a component level where each component is re-valued using supplier quotes. RPI has been used to re-value labour components of the individual assets. 30

38 CCA Modelling Process 7. Current Cost Accounting Modelling Process 7.1 General The model employed to calculate the Current Cost (CCA) Net Book Value, Supplementary Depreciation and Holding Gain / (Loss) for each asset class is populated by: 1) Historic financial information reconciled to the HCA fixed asset register used in the preparation of the statutory accounts. 2) The opening gross replacement costs (GRC) have been taken from the closing 2010/11 CCA analysis. Notably some of these GRC values have been restated so to be consistent with the logic and valuation methodologies adopted in 2011/12. The 2011/12 closing GRCs are inserted into the model directly from the respective valuations to enable the necessary CCA calculations to be carried out. Explanations of the methods used to derive the gross valuations are not included here, but can be viewed in Section 6 of this document. 7.2 Current Cost Depreciation and the Roll-Forward Method Under the Financial Capital Maintenance convention C&WG has calculated four types of CCA depreciation: 1. Current cost depreciation 2. Holding gains / losses 3. Supplementary depreciation 4. Backlog depreciation As for Historic Cost Accounting (HCA), depreciation is charged under CCA so as to reflect consumption of the assets. The Roll-Forward Method has been chosen as the method for these calculations. Roll-Forward is the most accurate means of calculating CCA outputs because it is not affected by ranging asset lives or any significant volume movement year on year within an asset class. 7.3 Common Calculations a) Gross Holding Gain / (Loss) Calculation (GHG) Gross Holding Gains or Losses reflect the movement in the Gross Replacement Cost (GRC) from the beginning of the period to the end of period after discounting the effects of any retirements, transfers and additions. GHG = Closing GRC - (CCA Retirements + Transfers + Additions + Opening GRC) b) CCA Retirement Calculation Where indexation has been used to value a class of asset, retirements have been valued directly through the relevant index. Where an index has not been applied the formula below has been used: CCA Retirements = (Opening GRC / Opening Gross Book Value) * Historic Cost Retirements c) Additions and Work in Progress (WIP) Both of these elements are valued at Historic Cost (HCA). The WIP movement figure is the difference between the current year-end and opening (i.e. previous year s closing) HCA WIP figure. 31

39 CCA Modelling Process 7.4 Roll Forward Calculations a) Opening Current Cost Depreciation Under this method the opening current cost depreciation charge is calculated based on the historical depreciation charge and the relationship between Gross Replacement Cost (GRC) and Gross Book Value (GBV). Opening CCA depreciation = (Opening GRC / Opening GBV) x Opening Accumulated Depreciation b) Current Cost Depreciation Charge for the year The current cost depreciation charge for the year is given by the following formula: CCA depreciation charge = (Opening GRC + Closing GRC) / (Opening GBV + Closing GBV) x Historical depreciation c) Supplementary Depreciation Supplementary Depreciation = Current Cost Depreciation charge (as above) Historic Cost depreciation d) Backlog Depreciation The total depreciation charged to the Profit and Loss Account in the year is the sum of the historic depreciation and the supplementary depreciation. This total depreciation, if summed over the life of the asset, will not equal the replacement cost of the asset at the end of its life. The difference between the two is the backlog depreciation. Backlog Depreciation = [ - (1 - ( Opening NBV / Opening GBV )) * Holding Gains / Losses ] e) Net Holding Gain / (Loss) The Net Holding Gain or Loss is the Gross Holding Gain / (Loss) for the year, as calculated above, less backlog depreciation. Net Holding Gain / (Loss) = Gross Holding Gain / (Loss) - Backlog Depreciation 32

40 Model Definition and Structure 8. Model Definition and Structure 8.1 Overview The following documentation illustrates the key design elements of C&WG s activity based costing model, the methodologies employed, the reporting procedures used and the regulatory statement production process employed. 8.2 Model Design & Methodology The model structure was created using proprietary Activity Based Costing (ABC) software. A new system was implemented in April 2012 and this has been used to create both the 2011/12 and restated 2010/11 regulatory statements. As a matter of course C&WG restates its prior year regulatory statements to ensure that all enhancements in methodology are consistently reported. The new costing software provides the functionality for as many levels as a user may require and C&WG has chosen to establish the following structure for its costing requirements: Resource Levels (R1, R2, R3, through to R9) Activity Levels (A1, A2, A3, through to A9) Cost Object Level (C1) The overview on the next page provides a summary of events at each level. 33

41 Model Definition and Structure Regulatory Accounting Model Structure for Cable & Wireless Guernsey Cost Object Level Activity Levels Resource Levels C1 A9 A8 A7 A6 A5 A4 A3 A2 A1 R2 to R9 R1 All FINANCIAL INPUTS are entered in the level, with reconcilions to the Statutory Financial Statements. Adjustments are made to recognise regulatory accounting requirements. The first stage of overhead apportionments is carried out from this level to other Resource levels. In these eight levels the exhaustion of support department related costs occurs. Each group of associated costs is apportioned over the remaining departments so that by Resource Level 9 only business related activites remain. The sum of these activites (and associated transfer charges) will equal the total costs that entered the model at Level R1. This level is used specifically to deal with switching activities. They are dealt with here as they need to be fed into A2 before that level is actioned. A2 is used to split the total underground network cost to further activity destinations. A2 also deals with Switching costs. This level is used for further treatment of Access Network costs along with Transmission General and SDH Network specific costs A4 deals with MPLS equipment as well as outside Bailiwick Transmission costs. Data Centre costs are also dealt with at this level. Additional treatment of transmission costs both within and outside the Bailiwick are actioned at level A5 along with CWGSY broadband costs. Broadband equipment costs are dealt with at this level along with and network apportionments for leased lines Mobile network, works orders & billing along with additional leased line and broadband analysis take place at this level A8 actions Guernsey Corporate Costs and remaining overhead costs such that A9 level products and services have received all their relevent costs. At this level NETWORK COMPONENT costs are provided, along with product specific costs. This is the final level within the RAC model and is used to provide PRODUCT PROFITABILITY and REGULATORY STATEMENTS data. All costs have arrived here from level A9, with all revenues flowing directly from level R1. 34

42 Model Definition and Structure Taking each in turn: Resource Levels R1 is the first level within the model and is used to hold the annual financial balance for each general ledger code, as exported from C&WG s financial reporting system. Before any ABC analysis is undertaken certain adjustments are made to comply with the requirements of standard regulatory accounting principles and to differently recognise C&WG s treatment of specific items. These adjustments are for: C&WG s own fixed network calls, postpay mobile rentals and mobile calls (all retail rated) For statutory purposes these values are shown as a reduction of income. For regulatory reporting they are treated as direct costs of C&WG s departments or activities. Equipment subsidies C&WG subsidises customer equipment on the commencement of certain term contracts. In its statutory accounts these costs are recognised as a reduction of revenue, but for regulatory accounting purposes they are treated as a cost. Submarine cable interconnect receipts Revenue is received from an outside Bailiwick operator for use of a proportion of submarine cable lengths owned by C&WG. This value is dealt with as a reduction of cost for regulatory purposes, having originally been shown in the statutory accounts as revenue. Current Cost Accounting (CCA) adjustments The Current Cost Regulatory Statements are prepared under the Financial Capital Maintenance convention and are in accordance with the GCRA s stated requirements. The adjustments relate to: o o Holding gains or losses Changes in fixed asset values arising during the period. Supplementary depreciation Depreciation adjustments on fixed assets, arising from the differences between HCA and CCA valuations. Profit/loss on disposal of assets (Non-trading adjustment) The value is included within the statutory accounts, but excluded for regulatory accounting purposes, as it does not relate to trading activities undertaken by C&WG. The balance on this code in the model is driven to an excluded area, which is used solely for reconciliation purposes. Interest received/tax charges (Non-trading adjustments) These values are not used in the model, so as to be consistent with the calculation of cost of capital (WACC), which is based on pre-interest and pre-tax values. The balance on these codes in the model are driven to an excluded area, which is used solely for reconciliation purposes. Once these adjustments have been recognised the R1 total Profit & Loss line should reconcile to the Reconciliation Statement for the Profit and Loss Account within the document Statements of Separated Regulatory Accounts (Regulatory Statements). The R1 total Balance Sheet figure provides both the full value of the relevant items and the associated WACC value (which is used to determine the returns on the various Balance Sheet items). The final set of values shown at R1 relate to transfer charges. There are a variety of additional costs and revenues borne by specific businesses, activities, products and services, beyond those recognised for statutory accounting purposes. Each transfer charge has a debit and credit, balancing to zero and as such has no impact on the overall profit and loss shown. Within the model the references TCC (Transfer charge 35

43 Model Definition and Structure cost) and TCR (Transfer Charge Revenue) are used to distinguish these values from other financial inputs. Transfer charging is discussed in more detail in Section 4. Once all data at R1 has been reconciled, the costs are then analysed in levels R2 through to R9. Support department costs are exhausted across relevant other support departments and business departments. The total cost at R9 will be the same as at R1, as all costs end up there prior to entering the Activity levels, but at levels R2 to R8 only the costs associated with the particular processes being analysed are shown. The costs analysed and apportioned at each of those levels can be summarised as: R2 Infrastructure costs (including buildings, electricity, office equipment, insurance, transport and the company s senior management overheads) R3 Facilities & HR R4 Specific Information Technology (including strategic planning, IP/IT engineering and the billing function) R5 Corporate IT network R6 Senior management costs (including the overheads received from level R2) R7 Residual support costs (relating to Legal & Regulatory, Finance & Logistics) R8 Level used for business departments receiving costs from any of the previous levels within the model The final resource stage, R9, is referred to as the Aligned Resources level and this presents the values in an activity based costing view, as the starting point for the individual Activity levels that follow. For those familiar with C&WG s cost model structure level R9 can be thought of as the replacement for the old R3 (when only levels R1 to R3 existed). At every point where costs are apportioned in the model a specific cost driver methodology and reference number is used. Driver references are defined in such a way as to indicate three variables. For example, R1-FNa shows : R1 FN The level within the model that the driver is used. A two letter code indicating the type of cost/revenue being driven (in this instance Insurance Charges and Unrecoverable Insurance Excesses/Payments). a A lower case letter is used with each two letter code above to differentiate the various drivers of each type, e.g. FNa, FNb, etc. As an output from this level costs are passed through to their next relevant activity. The actual activity level (A1 to A9) that a cost next appears in is determined by the activity stage at which the cost pool is required, but the objective is to pass the cost as far through the model as possible (towards or at A9), to minimise the number of paths (and therefore size) for the model. 36

44 Model Definition and Structure Activity Levels Page 34 of this document provides an overview of the processes undertaken by each of the activity levels. All costs must exist at level A9 and the total should reconcile to that of levels R1 and R9. A9 is the key level for activity based costing purposes in C&WG s model. Costs here are grouped into Network Components or Products. For the avoidance of doubt, Products does not solely mean retail costs. It includes the non-network specific costs for interconnect, wholesale and retail products and services Cost Object (Product) Level In line with the logic of interconnect, wholesale and retail, this product profitability level allows for analysis formed under these headings. Additional headings are provided to separately report on the services provided to C&WG s related companies, including C&W Isle of Man and C&W Jersey. For each product a view of profitability is available, with underlying details showing the WACC value relevant to each Balance Sheet item and the CCA adjustment (where relevant). Products are grouped into the following categories: C - Core Network specific costs J - C&W Jersey M - C&W Isle of Man R - Retail S - Services to other C&W Businesses T - Interconnect W - Wholesale An accompanying number is used, but is not unique to the letter, so for example, there are R11, T11 and W11 references in use within the C1 activity level, but these products are not associated. 8.3 Reporting Procedure To aid the transparency and functionality of the Regulatory Statement production process (see Section 8.4) each R1, A9 and C1 account within the model is flagged with a reporting attribute. This is shown in the Properties view of each account. These attributes provide three functions: 1. A view as to which separated regulatory business each product or service forms part of; 2. Based on this view, an indication as to whether transfer charges are applicable between businesses; and 3. Separate financial analysis of operating costs, Balance Sheet items (including individual WACC values) and CCA adjustments. Having this style of report flagging embedded within the model provides a clearly defined link between the model, its output processes and the Regulatory Statements. The following example illustrates the point: A9-SN4 is the reference number for Fixed Network Switch. This activity has an attribute of NETWORK- SWITCH, indicating that this component belongs to the Core NETWORK. Associated with this A9 activity is a cost driver, A9-CDr, which is used to drive the activity cost across all C1 products that make use of the Fixed Network Switch. Each of the C1 products is flagged with its own attribute. For this example Fixed Line Local Geographic Calls is used, which has an attribute of LOCAL CALLS. Whatever the apportioned value from A9 to this 37

45 Model Definition and Structure individual C1 product, the transfer charge to be applied is to automatically credit the Core Network and debit the Retail Local Calls business. The output process is repeated across all network components and products, by the running of four reports: A9-C1 Transfer Charges (providing details of the costs to be billed between regulatory businesses) C1-R1 Revenues (showing for each product the relevant R1 revenues) A9-R1 Balance Sheet (showing for each A9 activity which R1 Balance Sheet costs are relevant) A9-R1 Operating Costs (showing for each A9 activity which R1 P&L costs are relevant) The results populate linked Excel tables, with the process of model calculation and data extraction through to refreshing of the Regulatory Statements being completed in less than a minute. 8.4 Statement Production The detailed output of the above four reports is referenced to the individual Profit and Loss Accounts and Balance Sheets as indicated by the attribute that has been associated with each revenue, cost, asset or liability item during the modelling process. The resulting Profit and Loss Accounts and Balance Sheets for each separated business are then consolidated and reconciled to the statutory accounts of C&WG. 8.5 Improvements in Methodology As indicated in Section 8.2 C&WG upgraded its activity based costing software in April This not only saved on annual licensing costs, but also brought graphical functionality for users, which had not previously been available. This has led to a better user experience and provides the incentive for further enhancements over the coming months to make the best of the available functionality. The change-out of the software has been undertaken as an in-house project (with background vendor support), thereby maximising user knowledge and minimising costs. Over the years C&WG has chosen to introduce various enhancements to its ABC model and for the purposes of consistency routinely re-states its prior year results. The main enhancements in relation to the 2011/12 accounting period related to: The increased visibility of the apportionment of support department costs, through the expansion of the Resource levels within the costing model from three to nine. A review of C&WG s CCA model, which resulted in two changes in methodology being applied to the 2011/12 data, along with the restatement of the associated 2010/11 data. The changes were: o o The recalculation of the Net Replacement Cost (NRC) for asset classes 305 and 320 (namely Distribution Lines Cables and Ducts and Submarine Cables) in relation to the 2010/11 accounting period. This was required to fully align with the requirement specified in the GCRA 04/25 document. More specifically, the NRC of the revalued asset classes was adjusted to reflect current NRC values by taking into consideration fully depreciated assets. For non-revalued asset classes, the NRC remains equal to the historical NBV. The recalculation of Net Book Values for the period 2010/11, as a result of a change in the calculation process during 2009/10. It should be noted however that no regulatory decisions were taken based on the original NBVs. 38

46 Model Definition and Structure The change in treatment of interconnect payments and receipts. Up until 2011 C&WG s statutory accounts recognised such receipts and payments in relation to its associated companies use as increases in revenue and cost of sales. From 2012 these interconnect services are accounted for through the journaling of revenues and costs directly to the relevant businesses on a monthly basis, thereby requiring no retrospective apportionment within C&WG s Separated Regulatory Accounts. The reported profitability of C&WG s Core Network and Mobile Business should not be affected as a result of this change. A change in the application of the Reference Offer rates in the adjustment of transfer charges from the Core Network to the Mobile Business and various retail businesses. Until recently no other local operator interconnected with C&WG s Core Network at both fixed network switching locations within the Bailiwick. Now that this occurs C&WG s Mobile Business and the various call-related retail businesses are able to be transfer-charged on that equivalent basis (having always interconnected at both switching locations). Apart from the Public Payphones Business, which continues to require the use of an unlisted Reference Offer service (for which the network component usage is not relevant to Other Licensed Operators), all call conveyance charges have been transfer charged solely at the prevailing Reference Offer rates. This avoids the previous need for more detailed analysis of the specific differences in the route factors between C&WG s and OLOs use of standard Reference Offer services, which required variances in the application of those rates. For reporting consistency all relevant areas of C&WG s 2010/11 Reference Offer based statements have been restated. 39

47 Model Definition and Structure Appendix A: Financial Statement Proformas The following proformas are provided to assist with the general understanding of the accounting separation process, but do not represent the actual wording used by C&WG in its own regulatory accounts. Pro forma reporting formats for the Core Network a) Core Network - Profit and Loss 40

48 Model Definition and Structure b) Core Network - Balance Sheet 41

49 Model Definition and Structure c) Core Network - Return on Capital Employed 42

50 Model Definition and Structure Pro forma reporting formats for the Access Network a) Access Network - Profit and Loss b) Access Network Balance Sheet, as for Core Network c) Access Network Return on Capital Employed, as for Core Network 43

51 Model Definition and Structure Pro forma reporting formats for the Retail Businesses a) Retail Businesses - Profit and Loss b) Retail Businesses Balance Sheet, as for Core Network c) Retail Businesses Return on Capital Employed, as for Core Network 44

52 Model Definition and Structure Pro forma reporting formats for the Mobile Business a) Mobile Business - Profit and Loss b) Mobile Business Balance Sheet, as for Core Network c) Mobile Business Return on Capital Employed, as for Core Network 45

53 Model Definition and Structure Pro forma reporting formats for Other Activities Business a) Other Activities - Profit and Loss b) Other Activities Balance Sheet, as for Core Network c) Other Activities Return on Capital Employed, as for Core Network 46