Service Level Accounting Separation We make ICT strategies work

Transcription

1 Service Level Accounting Separation We make ICT strategies work

2 Regulating anti-competitive pricing behaviors How? Accounting Separation is a regulatory instrument that helps the NRA to regulate anticompetitive pricing behaviors. Anti-competitive Pricing Behaviors Regulatory Control Example 1: Cross subsidy A vertically integrated operator subsidizes its fixed broad services with the mobile services in a bundled packaged offer. With this, a sole broadband provider can hardly compete with Profit and Loss Statement of Mobile Termination Service Retail Revenues - From initial connection services - From line maintenance services - From leased line services - From voice services - Local - National - Fixed to mobile - Others - From data services - Other revenues Total Retail Revenues External Wholesale Revenues - From fixed operators 1,000,000,00 - From mobile operators 1,000,000,00 - From international operators 1,000,000,00 - From others Total External Wholesale Revenues 3,000,000,00 Example 2: Predatory / margin squeeze pricing A vertically integrated operator decreases the retail prices and on the other hand increases the prices of wholesale inputs. It s doubtful that a small operator will have sufficient margin to survive its business Internal Wholesale Revenues From internal retail: Domestic Fixed Line Service From internal retail: Domestic Mobile Service From internal retail: International Telephone Service 0 From internal retail: Narrowband Internet Access Servic From internal retail: Broadband Internet Access Service Total Internal Wholesale Revenues Separate the Financial Statements Total Revenues 3,000,000,00 Direct Costs - External direct cost 30,000,00 - Internal transfer charge from service 1 transfer charge from service transfer of charge the from service XOperator 0 - Internal N/A N/A - Internal N/A Total Direct Costs 30,000,00 Operating Costs - Staff cost 57,206,101 N/A - Other operating cost 106,669,653 N/A Total Operating Costs 163,875,755 N/A - Depreciation & Amortization 157,248,615 N/A Total 157,248,615 N/A Total Costs 351,124,369 N/A Example 3: Discriminatory pricing The wholesale prices offered to external parties are different from the prices offered to internal ones / subsidiaries. 2 Total Profit (EBIT) 2,648,875,631 N/A Key Benefits Proof based on trustful costing and pricing information.

3 Accounting Separation implementation Many NRAs worldwide have adopted Accounting Separation (AS). The NRAs such as in New Zealand, Ireland, Saudi & Thailand have recently introduced a modern AS system. Implementation of Accounting Separation Worldwide (Examples) Detailed AS obligation (service level) established for over a decade AS for specific purpose i.e. assisting the calculation of spectrum utilization fees New AS framework in 2010 replacing the old one in operation for 10 years Recently implemented service based AS in 2012 Entered into force in the beginning of 2006 based on traditional AS Comprehensive AS (service level) introduced since 2001 AS framework introduced in 2010 taking into account modern telecoms world Detailed and simplified AS applied to different licensees 3 AS firstly introduced in 2009

4 Modern Accounting Separation will be based on Service / Market The modern AS distinguishes an incumbent's financial statement by market or service. This help the NRA address the pricing problem directly at the service in concern. Traditional Accounting Separation MODERN Accounting Separation Financial Statement of A Company Financial Statement of A Company Access Profit and Loss Statement of Mobile Termination Service Core Retail Revenues - From initial connection services - From line maintenance services - From leased line services - From voice services - Local Profit 0 and Loss Statement N/A of Mobile Termination Service - National - Fixed to mobile - Others Retail Revenues - From data services - From initial connection 0 services N/A - Other revenues - From line maintenance 0 services N/A Total Retail Revenues - From leased line 0 services N/A - From voice services External Wholesale Revenues - Local - From fixed operators 1,000,000,000 - National N/A - From mobile operators 1,000,000,000 - Fixed to mobile N/A - From international operators 1,000,000,000 - Others N/A - From others - From data services Total External Wholesale Revenues - Other 3,000,000,000 revenues N/A Total Retail Revenues Internal Wholesale Revenues From internal retail: Domestic Fixed Line Service External Wholesale Revenues From internal retail: Domestic Mobile Service - From fixed operators 1,000,000,00 From internal retail: International Telephone Service - From mobile operators 0 1,000,000,00 From internal retail: Narrowband Internet Access Servic - From international 0 operators N/A 1,000,000,00 From internal retail: Broadband Internet Access Service - From others Total Internal Wholesale Revenues Total External Wholesale 0 Revenues N/A 3,000,000,00 Total Revenues Internal Wholesale 3,000,000,000 Revenues N/A From internal retail: Domestic Fixed Line Service Direct Costs From internal retail: Domestic Mobile Service - External direct cost From 30,000,000 internal retail: International N/A Telephone Service 0 - Internal transfer charge from service 1 From internal retail: 0 Narrowband N/A Internet Access Servic - Internal transfer charge from service 2 From internal retail: 0 Broadband Internet N/A Access Service Total Internal Wholesale 0 Revenues N/A - Internal transfer charge from service X Total Direct Costs Total Revenues 30,000,00 3,000,000,00 Operating Costs Direct Costs - Staff cost - External 57,206,101 direct cost N/A 30,000,00 - Other operating cost - Internal 106,669,653 transfer charge from service N/A 1 Total Operating Costs - Internal 163,875,755 transfer charge from service N/A 2 - Internal transfer charge from service X - Depreciation & Amortization Total Direct 157,248,615 Costs N/A 30,000,00 Total 157,248,615 N/A Operating Costs Total Costs - Staff 351,124,369 cost N/A 57,206,101 N/A - Other operating cost 106,669,653 N/A Total Profit (EBIT) Total Operating 2,648,875,631 Costs N/A 163,875,755 N/A - Depreciation & Amortization 157,248,615 N/A Total 157,248,615 N/A Total Costs 351,124,369 N/A Total Profit (EBIT) 2,648,875,631 N/A Retail Profit and Loss Statement of Mobile Termination Service Retail Revenues - From initial connection services - From line maintenance services - From leased line services - From voice services - Local Profit and Loss Statement of Mobile Termination Service - National - Fixed to mobile - Others - From data services Retail Revenues - Other revenues - From initial connection services Total Retail Revenues - From line maintenance services - From leased line services External Wholesale Revenues - From voice services - From fixed operators - Local 1,000,000,00 - From mobile operators - National 1,000,000,00 - From international operators - Fixed 1,000,000,000 to mobile N/A - From others - Others Total External Wholesale Revenues - From data services 3,000,000,00 - Other revenues Internal Wholesale Revenues Total Retail Revenues From internal retail: Domestic Fixed Line Service From internal retail: Domestic Mobile External Service Wholesale Revenues From internal retail: International Telephone Service - From fixed operators 0 1,000,000,00 From internal retail: Narrowband Internet Access - From Servic mobile operators 1,000,000,00 From internal retail: Broadband Internet Access - From Service international operators 1,000,000,00 Total Internal Wholesale Revenues - From others Total External Wholesale Revenues 3,000,000,00 Total Revenues 3,000,000,00 Internal Wholesale Revenues Direct Costs From internal retail: Domestic Fixed Line Service - External direct cost From internal retail: 30,000,000 Domestic Mobile Service N/A - Internal transfer charge from service 1 From internal retail: International 0 Telephone Service N/A 0 - Internal transfer charge from service 2 From internal retail: Narrowband 0 Internet Access N/A Servic From internal retail: Broadband 0 Internet Access N/A Service - Internal transfer charge from service Total X Internal Wholesale Revenues Total Direct Costs 30,000,00 Total Revenues 3,000,000,00 Operating Costs - Staff cost Direct Costs 57,206,101 N/A - Other operating cost - External direct cost 106,669,653 N/A 30,000,00 Total Operating Costs - Internal transfer 163,875,755 charge from service 1 N/A - Internal transfer charge from service 2 - Depreciation & Amortization - Internal transfer 157,248,615 charge from service X N/A Total Total Direct Costs 157,248,615 N/A 30,000,00 Total Costs Operating Costs 351,124,369 N/A - Staff cost 57,206,101 N/A Total Profit (EBIT) - Other operating 2,648,875,631 cost N/A 106,669,653 N/A Total Operating Costs 163,875,755 N/A - Depreciation & Amortization 157,248,615 N/A Total 157,248,615 N/A Total Costs 351,124,369 N/A Total Profit (EBIT) 2,648,875,631 N/A Other Transformation Domestic Fixed Line DSL Retail Broadband internet BSA ULL Wholesale Market Level Service Level The traditional accounting separation divide the whole financial statement into 4 main categories ; Access, Core, Retail and Other As telecoms networks and services have been changed significantly in the last decade, This type of separation is not applicable anymore. 4 In a new telecoms world, the separated accounts of a vertically integrated operators are rather divided by market / service. This help the NRA to address the pricing problem at the specific services which are subject to regulation or in a particular concern.

5 To implement Accounting Separation, what are the challenges for NRAs and Operators? Several challenges are foreseen when implementing service level Accounting Separation; starting from strategic directions to detailed implementation issues. Challenge Key Questions Why it is important Define Regulatory Strategy Why AS is needed? What regulatory objectives will be met by imposing AS? Accounting Separation gives additional burden to the operators therefore solid argumentations and justifications from the NRA are utmost important. Design Accounting Separation Framework Who should be obliged to AS? What services should be separated? How the AS report should look like? The proportional obligation makes Accounting Separation more effective while achieving regulatory goals. Detail Accounting Separation Methodology What cost basis should be applied? HCA or CCA? What costing principle should be used? FDC or LRIC? The Accounting Separation reports provide basis for the NRA to analyze detailed costing data and its implications. Implement Accounting Separation How the cost data of an operator will be allocated to different services? What are the results or AS statements and their implications? 5 Implementation could become a very complicated task taking a lot of resources. The results shown in AS reports could jeopardize the company s businesses.

6 Accounting Separation framework design In the framework design, NRAs have to consider several strategic options when determining designated operators, AS services, reporting formats & audit requirements. Key Considerations of Accounting Separation Framework Design Possible options: SMP only Facility-based license only Vertically integrated operator only Arbitrary designation Main points: Regulated vs. nonregulated services Retail vs. wholesale Level of disaggregation: market / service / product level Accounting Separation Services Designated Operator Accounting Separation Framework Audit Requirements 6 Reporting Format Reporting scope: Single or multiple level of report Only P&L and Capital Employed With additional costing data Key consideration: Auditor proposed by itself or by the regulator Detailed audit or high level review Auditing timeframe

7 Determining services subject to Accounting Separation (AS Services) The imposed AS Services need to be justified. Service definitions are very crucial since they usually become controversial issues and delay the whole process. Design of AS Services and Definitions (Illustrative) Wholesale market Wholesale services Illustrative Domestic Fixed Line Access Domestic Mobile Intl. Telephone Gateway Intl. Internet Gateway Others Origination Voice IC Termination Transit ULL Access Bitstream Access Leased Lines Other WS Fixed Line Data Voice Origination Termination National Roaming Intl. Roaming SMS Termination Mobile Data Inf rastructure MVNO Other WS Mobile Intl. telephone gateway service Intl. internet gateway service Concession Business Fixed Origination Fixed Origination Fixed Origination Fixed Transit Reporting Other Fixed Origination Parties Fixed Transit operators Reporting network Other Parties operators Reporting network Other Switch Parties operators POI Reporting network Other Switch Parties operators POI network Calling Party Switch Point of Interconnect Receiving Party POI Calling Party Switch Point of Interconnect Receiving Party POI Calling Party Point of Interconnect Receiving Party Calling Party Point of Interconnect Receiving Party Characteristics: 7 Fixed Transit Fixed Transit Proposed AS Services are based on the existing market definition laws & regulations. 2 stages approach on the proposed AS Services Detailed description with illustration and example of realworld services on each type of AS Service

8 Service Costing Model as a cost allocation tool Cost allocation is the most complicated task in AS. Service Costing Model has to be developed and used as a tool to help distribute different cost types to AS Services. Cost Allocation Process Cost Groups Elements Routing Table Services AS Services Directly allocatable Cost # Category NWE 1 Leased Lines BTS-BSC Link 2 Chipcards IN Platform 3 Land Plots BTS 4 Radio Frequencies BTS 5 GPRS/WAP Accounts GPRS Link Depreciation Asset Register NW Assets Shared Assets Technical Activities (Staff + Staff Cost) Direct Allocation related non-technical* Other OPEX via suitable cost driver Activity Driver T1 Activity Driver T2 Element 1 Element 2 Element 3 Element 4 Element 5 Element n Call Scenari o 1 Call Scenari o 2 Call Scenari o 3 Call Scenari o 4 Call Scenari o 5 Call Scenari o n Networ k Elemen t 1 Call Scenarios Networ k Elemen t 2 Networ k Elemen t 3 Networ k Elemen t 4 Networ k Elemen t n 0 1,3 2,4 0, ,3 2,9 0,4 1,3 2,7 7,4 5,3 5, ,7 0,7 0 0,2 0,2 0,4 0,2 1 2,5 6,8 6,8 1,4 Usage (minutes) Routing Factors Service 1 Service 2 Service 3 Service 4 Service 5 Service 6 Service n AS Service 1 AS Service 2. AS Service x Key characteristics All cost groups are analyzed and remodeled in order to allocate cost to network elements. The network elements represent the operators logical infrastructure. The Routing Table shows how different services are consuming the existing infrastructure. The calculation bases on call scenarios and weighted minutes. 8 Cost are allocated to services All cost originators can be traced back Cost are aggregated on market level

9 Consultancy support on Accounting Separation from end to end With our proven methodology and extensive experience, Detecon can support both NRAs and Operators along the value chain of the whole Accounting Separation process. Accounting Separation Process Overview I. II. III. Framework & Methodology Development of service level AS Implementation of service level AS IV. Other related issues Project & Program Management Office Analysis of Laws and Regulations Drafting of AS Methodology & Framework AS Service Definitions Drafting of AS Notification Input Data Analysis Analysis of Separated Accounts Database Preparation Preparation for Other Related Issues e.g. NGN Telecoms Market Analysis Allocation of Revenues Public Consultation Development of Service Costing Models Impact of Cost Base (HCA/CCA) Analysis of Accounting Standards Review of International Best Practices Allocation of Costs Development of Accounting Manual Implementation Progress Preparation Internal Preparation and Capacity Building 9 Analysis of CVR Implementation of Internal Transfer Charges CCA Adjustment

10 Our credentials Detecon will leverage NRAs and Operators benefits with our experts in all disciplines and the use of ready to go models and tools. Detecon Leverage Client Benefits Why Detecon Holistic Expertise in all disciplines We have dedicated specialists that cover all relevant accounting separation topics from strategy to implementation. Detecon is one of the few consultancies in the world that is able to support in the area of telco costing and accounting separation. Proof based on trustful costing and pricing model and methodology. Proof based on telco costing and accounting separation project experience worldwide. Ready to Go Set of AS and Service costing tool box Detecon has a set of service costing models and accounting separation tool box to support implementation. They just need to be customized to suit the client s requirements. Proof based on set of service costing and accounting separation tool box and templates. Extensive Research partners in Telecoms market and regulation Detecon has extensive research partners in telecoms market and regulation in all relevant accounting separation topics that is able to support project from strategy to implementation. 10 Proof based on trustful research partners and award-winning database management.

11 Accounting Separation tool box Detecon provides an unmatched set of tools for service costing and accounting separation analysis. This includes for example modeling and reporting templates. Tool-based Service Costing Model Accounting Separation Reporting Template Profit and Loss Statement of Mobile Termination Service 1. Basic Model Configuration Model Approach: Top-down Price Setting: Current prices Historical prices Modelled Depreciation Method: OPEX Allocation: OPEX Setup: Costs of Capital: Bandwidth (Mbps) Min. bandwidth Unit prices Multiples E1 DS3 STM1 STM4 STM16 STM64 by Operator +300% +300% +300% Straight Line +244% % Economic Annuity 45 Tilted Annuity 2 Actual figures +160% +140% +150% Reasonable +317% +100% 15,6 6,0 2,5 0,5 1,0 0,1 Included -81% -97% -42% -38% -40% -35% % 63% 60% 65% 19% MS excel based Service Costing tool providing opportunities to perform a deep dive costing analysis Retail Revenues - From initial connection services - From line maintenance services Profit and Loss Statement 0 of Mobile N/A Termination Service - From leased line services - From voice services - Local Retail Revenues - National - From initial connection services - Fixed to mobile - From line maintenance services Profit and Loss 0Statement of Mobile N/A Termination Service - Others - From leased line services - From data services - From voice services - Other revenues - Local 0 Retail Revenues N/A Total Retail Revenues - National - From initial connection services - Fixed to mobile - From line maintenance services External Wholesale Revenues - Others - From leased line services - From fixed operators - From data services 1,000,000,000 - From N/A voice services - From mobile operators 1,000,000,00 - Other revenues - Local - From international operators Total Retail Revenues 1,000,000,00 - National - From others - Fixed to mobile Total External Wholesale Revenues External Wholesale Revenues 3,000,000,00 - Others - From fixed operators - From data services 1,000,000,00 Internal Wholesale Revenues - From mobile operators - Other revenues 1,000,000,00 From internal retail: Domestic Fixed Line Service - From international operators Total Retail Revenues1,000,000,00 From internal retail: Domestic Mobile Service - From others From internal retail: International Telephone Service 0 Total External Wholesale Revenues External Wholesale Revenues 3,000,000,00 From internal retail: Narrowband Internet Access Servic 0 - From N/A fixed operators 1,000,000,00 From internal retail: Broadband Internet Internal Access Wholesale Service Revenues 0 - From N/A mobile operators 1,000,000,00 Total Internal Wholesale Revenues From internal retail: Domestic 0 Fixed Line Service - From N/A international operators 1,000,000,00 From internal retail: Domestic Mobile Service- From others Total Revenues From internal retail: 3,000,000,000 International Telephone Total External Service N/A Wholesale Revenues0 3,000,000,00 From internal retail: Narrowband Internet Access Servic Direct Costs From internal retail: Broadband Internet Internal Access Wholesale Service Revenues - External direct cost Total Internal Wholesale Revenues 30,000,000 From N/A internal retail: Domestic 0 Fixed Line Service N/A - Internal transfer charge from service 1 0 From N/A internal retail: Domestic Mobile Service - Internal transfer charge from service Total 2 Revenues 0 From N/A internal retail: 3,000,000,000 International Telephone Service N/A 0 0 From N/Ainternal retail: Narrowband Internet Access Servic - Internal transfer charge from service Direct X Costs 0 From N/A internal retail: Broadband Internet Access Service Total Direct Costs 30,000,00 - External direct cost Total Internal Wholesale Revenues 30,000,00 - Internal transfer charge from service 1 Operating Costs - Internal transfer charge from service Total 2 Revenues 3,000,000,00 - Staff cost 57,206,101 N/A - Other operating cost 106,669,653 N/A - Internal transfer charge from service Direct X Costs Total Operating Costs Total Direct Costs 163,875,755 - External N/A direct cost 30,000,00 30,000,00 - Internal transfer charge from service 1 Operating Costs - Internal transfer charge from service 2 - Depreciation & Amortization 157,248,615 N/A - Staff cost 57,206,101 N/A Total - Other operating cost 157,248,615 - Internal N/A transfer 106,669,653 charge from service X N/A Total Operating Costs Total Direct Costs 163,875,755 N/A 30,000,00 Total Costs 351,124,369 N/A Operating Costs Total Profit (EBIT) - Depreciation & 2,648,875,631 Amortization - Staff N/A cost 157,248,615 N/A 57,206,101 N/A Total - Other operating 157,248,615 cost N/A 106,669,653 N/A Total Operating Costs 163,875,755 N/A Total Costs 351,124,369 N/A Total Profit (EBIT) - Depreciation 2,648,875,631 & Amortization N/A 157,248,615 N/A Total 157,248,615 N/A - Reporting templates designed & based on international best practice - Costing input parameters can be linked with the Service Costing Model providing greater chance for detailed result analysis Total Costs 351,124,369 N/A Total Profit (EBIT) 2,648,875,631 N/A Research Partners Extensive research partners in telecoms market and regulation. MERLIN Detecon s award-winning knowledge management 11

12 Our team of experts We have experts specialized in regulatory accounting, costing, pricing, engineering & finance. Our consultants have excellent records with the NRAs & Operators worldwide. Consulting Team (Example) Dr. Markus Steingroever Wholesale & Regulatory Strategy Expert 15+ years of experience in regulatory consulting for C level, design and management of strategic issues on regulations and policies Dr. Werner Knoblen Regulatory Accounting Strategy Expert 12+ years in international telco, 7+ years in advising operators and regulators worldwide to design and implement regulatory accounting Jackkit Sangkittiwan Service Costing & Pricing Expert 11+ years in international telco, 6+ years in developing and implementing service costing model, pricing tool and accounting separation model in 10+ countries Andre Wilbert Accounting Separation Expert 7+ years in international telco, 5+ years in advising regulators and operators in various service costing, pricing and accounting separation in 10+ countries Sivinee Nontasut Cost Accounting & Pricing Expert 6+ years in international telco, in-depth understanding on cost accounting and accounting separation for telco, topic leader on telco pricing analysis 12 Sebastian Schade Financial Accounting Expert 4+ years in international telco. In-depth understanding on telco costing, cost benchmark and KPIs, topic leaders on cost optimization and profitability and many more

13 Selected project references Our project references in the area of telco service costing and accounting separation are substantial. Here are some selected examples. Client Reference Case Regulator, SEA Design of the modern Accounting Separation framework for Thailand consisting of internal analysis on telecoms markets and regulations, analysis on Thai accounting standard (Thai GAAP) and review of international best practice. Implementation of Accounting Separation framework including public consultation and implementation support to obligated operators. Regulator, Middle East Benchmarking and cost study of regulated telecommunications services e.g. fixed and mobile termination, wholesale leased line, SMS termination and dark fibre / duct access. Roadmap study for introducing accounting separation & cost modeling for IC tariff regulation. Operator, Russia & EE Development of ABC and service costing methodology across MTS group (eg. Russia, Belarus and Uzbekistan) Development of Service Costing Model and reporting system. Comparison of the regional and international cost, profit, capacity performance. Operator, Europe Operator, West Africa Analysis of the Accounting Separation requirements and development of Top-down LRIC-based Service Costing Model and Accounting Separation Reporting Model. Analysis of Accounting Separation results and development of strategic recommendations and regulatory strategies. Analysis and assessment of the current financial status. Development of Top-down FDC service costing model including result and sensitivity analysis. Development of profitability analysis tool and profitability statement by product and product group. Recommendations on the regulatory strategies regarding mobile termination service. 13

14 Contact Persons in APAC For further discussion how Detecon can assist you, here is your contact in Asia Pacific Dr. Arnulf Heuermann Managing Partner Detecon International GmbH Sternengasse Cologne (Germany) Phone: Mobile: Dr. Markus Steingröver Managing Partner Detecon International GmbH Sternengasse Cologne (Germany) Phone: Mobile: