Telecom Cost Accounting Conference
            Dubai 26 Oct. 2009

        Accounting Separation 
Global Best Practices an...
Talking Points !
            Talking Points !
What is Accounting Separation?
 h i           i S        i ?
Why to have it ...
What is Accounting Separation?
 What is Accounting Separation?
Depends on whom you ask!!!
“De‐consolidation of a holding c...
What is Accounting Separation?
           Regulator’s Perspective
                 l   ’         i
“The preparation of sep...
What is Accounting Separation?
       Operator’s Perspective
AS refers to the preparation of separate “sets of 
AS refers ...
Real Life Perspective !!
  Real Life Perspective !!

It is “Unscrambling of the Omelet”?
It is               of the Omelet...
Why is AS used as Regulatory Tool in Telecoms?
Why is AS used as Regulatory Tool in Telecoms?

 To provide higher level of...
Why Separation?
                     Why Separation?
Competition Problem – Vertically Connected Industry

   Vertically   ...
Solution to Competition Problem?
   Solution to Competition Problem?
                             SEPARATION
             ...
Accounting Separation
                 Regulatory Objectives
                     l       b
International Experiences high...
Isn t IFRS sufficient for AS?
          Isn't IFRS sufficient for AS?
International Financial Reporting Standard # 8 – Ope...
What do IFRS say?
                   What do IFRS say?
International Financial Reporting Standard # 8 – Operating Segments...
Why do we need AS Framework on top of IFRS?
Why do we need AS Framework on top of IFRS?

 IFRS does not define ROS revenue...
Postulates of AS Regulatory 
               Framework
Defining the markets and services
D fi i th       k t     d    i
Ana...
Postulate 4: Specifying Key Parameters of 
              Costing Model
                  i      d l
– Accounting principle...
Postulate 4: Specifying Key Parameters of 
              Costing Model
                  i      d l
– Internal Transfer Pr...
Accounting Separation
  OMAN MODEL
Sultanate of Oman
                     Market Overview
• Located south‐east of Arabian 
  Peninsula next to Saudi Arabia 
...
Oman Telecom Liberalization
  Oman Telecom Liberalization
Oman joined the WTO in Nov 2000
O     j i d th WTO i N 2000
Comm...
Regulatory Framework *
      Regulatory Framework 
Licensing Regime
Licensing Regime
– Class I License – Public Fixed and ...
Regulatory Framework
        Regulatory Framework
Universal Service Obligation 
Universal Service Obligation
– USF establi...
Current Oman Telecom Market 
            TRA Report 30 JUN 2009




      Total Mobile Market:  3.562 M      Total Fixed M...
AS Framework Roll‐out in Oman ‐
AS Framework Roll out in Oman Update

Consultation Paper on Accounting Separation       AU...
Oman TRA Consultation Paper
           SMP Remedies
All current Class I license holders are classified as Notified Operato...
Oman TRA Consultation Paper
              Objectives
• Remedies/ obligations of the Notified and other Licensees 
        ...
Market based Accounting Separation
                Market definition                                       Level of develo...
OMAN TRA PRICE CONTROL REGIME
     OMAN TRA PRICE CONTROL REGIME
                                SEPARATED REGULATORY 
   ...
AS Obligation for SMP
  TRA Position Statement Jul 2009
     What to Submit?                 When to Submit?

Methodology ...
Timeline – TRA Position Statement Jul 2009
Timeline TRA Position Statement Jul 2009

                                     ...
Omantel Response to AS Challenge
Omantel Response to AS Challenge 
 Omantel is one of the first Telcos of the Region to ha...
OMANTEL – The Challenge is to Turn 
   Challenge into Opportunity
                                   Cost 
               ...
Important References
         Important References*
Identification of Competition Problems and 
Remedies by Mark Scanlan &...
Q & A




       For any further query, please contact 
       For any further query please contact
                    Sa...
ALQURAN ALHAKIM
                              Verse 284, Chapter 2, 
                              Verse 284 Chapter 2
‫ﻟﻠ...
Activity Based Costing


                 ABC Design at OmanTel
             Resources                                    ...
Segment Definitions for Dominant
  FBO - Domestic/International
          Network
                                    Tand...
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Telecoms' Regulatory Accounting Separation and Oman Case Study

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Telecoms' Regulatory Accounting Separation and Oman Case Study

  1. 1. Telecom Cost Accounting Conference Dubai 26 Oct. 2009 Accounting Separation  Global Best Practices and Oman Model Global Best Practices and Oman Model Safda Safdar Imam a Senior Costing Specialist Omantel SAOG
  2. 2. Talking Points ! Talking Points ! What is Accounting Separation? h i i S i ? Why to have it as a Regulatory Mechanism in  y g y Telecoms? What do IFRS say about AS and Why do we need  What do IFRS say about AS and Why do we need other Standards? Wh AS P i i l dB P i ? What are AS Principles, and Best Practices? What are International Experiences? p How is Oman AS Framework emerging?
  3. 3. What is Accounting Separation? What is Accounting Separation? Depends on whom you ask!!! “De‐consolidation of a holding company's accounts so  g p y that the costs and revenues associated with each  subsidiary or unit can be individually identified and  y y allocated.” (www.businessdictionary.com) “Accounting Separation is a system of preparation of Accounting Separation is a system of preparation of  separate accounts of economic results, on some pre‐ defined basis, for some specific functions or services. defined basis for some specific functions or services ”  (OECD)
  4. 4. What is Accounting Separation? Regulator’s Perspective l ’ i “The preparation of separate accounts for different  p p p businesses and parts of the businesses run by the same  company or group of companies, so that the costs and  p y g p p , revenues associated with each (and the transfers  between them) can be separately identified and  ) p y properly allocated.” (OFCOM UK) “Accounting Separation is a system of comprehensive Accounting Separation is a system of comprehensive  set of accounting policies, procedures and techniques  for preparation of financial information to demonstrate  for preparation of financial information to demonstrate compliance with ‘non‐discrimination’ obligations and  absence of anti‐competitive cross‐subsidies (ITU/EU‐NATP  absence of anti competitive cross subsidies” (ITU/EU NATP Project Team) 
  5. 5. What is Accounting Separation? Operator’s Perspective AS refers to the preparation of separate “sets of  AS refers to the preparation of separate “sets of financial statements” for identified business lines of a  notified dominant operator under ex‐ante regulatory  notified dominant operator under ex ante regulatory framework with the object to provide transparent  disclosures about internal transactions (Transfer  disclosures about internal transactions (Transfer Pricing) between various business lines. 
  6. 6. Real Life Perspective !! Real Life Perspective !! It is “Unscrambling of the Omelet”? It is  of the Omelet ?  (www.findlaw.com.au (www findlaw com au ) Scramble Challenge
  7. 7. Why is AS used as Regulatory Tool in Telecoms? Why is AS used as Regulatory Tool in Telecoms? To provide higher level of operational and  T id hi h l l f ti l d financial details than what is derived from  statutory financial statements statutory financial statements To reflect performance of the part of the business  as if they had operated as separate businesses as if they had operated as separate businesses In case of vertically integrated undertakings  providing ICT Networks and Services providing ICT Networks and Services – To prevent discrimination in favor of their own  activities – To prevent unfair cross‐subsidy
  8. 8. Why Separation? Why Separation? Competition Problem – Vertically Connected Industry Vertically  New  integrated  integrated Anti Anti‐ Entrants /  Entrants / Strategic  Possible  operator Competitive  Competitors WMD Effects Behavior Price  Margin  Core Network Supply of  Discrimination Squeeze Wholesale  Fore‐closures Products Cross‐ Raising Rivals’  M & A Access  Network subsidization Costs Supply of  Bankruptcies Retail Products Restriction of  Predatory  Retail Services Competitors’  Pricing Sales l
  9. 9. Solution to Competition Problem? Solution to Competition Problem? SEPARATION • Achieve ownership unbundling or Divestiture Structural  • Separate network infrastructure from units offering  Separate  S services using this infrastructure i i hi i f Separation Ownership •Separate part of the operation with a bottleneck resource Functional  F ti l Independent  •Provide access to competitors along with Incumbent retail  P id i l divisions on non‐discriminatory basis i hI b il Governance &  Separation Operations •Separate “set of accounts” for part of the operation with  p p p bottleneck resource and business units of retail services  Accounting Rules  •Provide transparency of transactions between internal  Accounting Separation for Regulatory  Controls units to ensure equal treatment for external operators But how much Separation? p Accounting Separation is a less intrusive and much less costly REMEDY to implement
  10. 10. Accounting Separation Regulatory Objectives l b International Experiences highlight following safeguards against VIDOs International Experiences highlight following safeguards against VIDOs*  • Monitoring cross subsidisation • Comparison between internal transfer prices and external wholesale service charges for vertically integrated operators • Analysing potential anti‐competitive pricing behaviour, such as margin squeeze or predatory pricing • Determination and monitoring of interconnect charges • Monitoring industry and service trends Monitoring industry and service trends • Tariff regulation *Vertically Integrated Dominant Operator
  11. 11. Isn t IFRS sufficient for AS? Isn't IFRS sufficient for AS? International Financial Reporting Standard # 8 – Operating Segments • On 30 Nov 2006, IASB issued IFRS 8 – Operating Segments to replace IAS 14 Segment Reporting 14‐ Reporting. • IFRS 8 is mandatory for annual financial statements of Listed Companies for the period beginning on or after 01 Jan 2009 p g g • Segmented financial information is required to be disclosed about an “Operating Segment” defined as follows; Engaged in business activities earning revenues and incurring expenses (including transactions with other ROS’* of the same entity) Whose operating results are reviewed regularly by the entity’s chief entity s operating decision makers to make decisions about resource allocation and performance assessment. For which discrete financial information is available * Reportable Operating Segments
  12. 12. What do IFRS say? What do IFRS say? International Financial Reporting Standard # 8 – Operating Segments Exceptions/ Thresholds; p Corporate HQ or Functional Units with no revenue stream from operational activities of the entity p y Post retirement benefit plans Segment with R S t ith Revenue size < 10% of combined revenue i f bi d of all ROS’* Segment with P fit or L S t ith Profit Loss of < 10% of all combined f f ll bi d Profit or Loss of all ROS’ Segment with Assets value < 10% of all combined assets. ih l % f ll bi d * Reportable Operating Segments
  13. 13. Why do we need AS Framework on top of IFRS? Why do we need AS Framework on top of IFRS? IFRS does not define ROS revenue, expense, assets and  IFRS d d fi ROS d liabilities nor any allocation rules/ methodology Only requires an explanation as to how these are  measured for each ROS Limited only by their internal reporting practices,  entities have discretion in determining the number of  ROS d h t i i l d d i th ROS P&L A ROS and what is included in the ROS P&L Account. t Scope is limited to Public Listed companies whose debt  or equity instruments are traded in a public market. i i d di bli k
  14. 14. Postulates of AS Regulatory  Framework Defining the markets and services D fi i th k t d i Analyzing the market structure – Synthesizing the Market Study Results and available Remedies Synthesizing the  Market Study Results and available Remedies – Determining the Dominant Position (SMP) Defining objectives of Regulatory Accounting Defining objectives of Regulatory Accounting Specifying key parameters of Cost Accounting Model Using Regulatory Cost Accounting results g g y g – Margin Squeeze/ Imputation Tests – Predatory Pricing Tests – Anti‐competitive Bundling Tests – Cross‐subsidization Tests
  15. 15. Postulate 4: Specifying Key Parameters of  Costing Model i d l – Accounting principles Accounting principles  – Disaggregation level – Products and Services – Accounting period & production timeline – Criteria of Assets Valuation Criteria of Assets Valuation – Cost Standards & Categorization (SAC, FDC, LRAIC,  MC)) – Types of Models (Top Down vs. Bottom Up, HCA,  yp ( p p, , CCA, BCA) 
  16. 16. Postulate 4: Specifying Key Parameters of  Costing Model i d l – Internal Transfer Pricing Internal Transfer Pricing – Life Span of Assets – Weighted Average Cost of Capital – Activity costs attributable to network directly to Activity costs attributable to network, directly to  services, indirectly to services – Unattributable costs’ allocation principles – Recommended CCA concepts (Excess Capacity,  p ( p y, FCM, OCM)
  17. 17. Accounting Separation OMAN MODEL
  18. 18. Sultanate of Oman Market Overview • Located south‐east of Arabian  Peninsula next to Saudi Arabia  and the UAE.  and the UAE • Divided into three main  Governorates and five Regions   Governorates and five Regions • 309,500 square kilometers  • GDP GDP  US $ 60 b US $ 60 b • Population 2.743 million * • Teledensity Teledensity  – Mobile: 130 % – Fixed: Fixed:       10% 10% *Excluding Expats ; 0.6 M  ( Oman TRA Market Statistics – June 2009)
  19. 19. Oman Telecom Liberalization Oman Telecom Liberalization Oman joined the WTO in Nov 2000 O j i d th WTO i N 2000 Committed to liberalize the market by Jan ‘05 TRA was established in Mar 2002 Second Mobile License issued in Mar 2005 Second Mobile License issued in Mar 2005 – Nawras; Jointly owned by Q Tel with local –O M bil S b idi fG t dO t l Oman Mobile; Subsidiary of Govt. owned Omantel Second Fixed License issued in Nov 2008 – Nawras Plans to install IGE / MAN (www.nawras.om ) – Omantel  270 K Subs (10%) / NG Upgrade ( )/ pg
  20. 20. Regulatory Framework * Regulatory Framework  Licensing Regime Licensing Regime – Class I License – Public Fixed and Public Mobile Networks – Class II License – Public Value‐Added Service Class II License  Public Value Added Service – Class III License – Private Telecommunications Service Interconnection I t ti – LRIC based charges • Omantel & Oman Mobile FDC / LRIC model • Fixed and Mobile Termination determined annually Fixed and Mobile Termination determined annually – RIO and RAO * www.tra.gov.om
  21. 21. Regulatory Framework Regulatory Framework Universal Service Obligation  Universal Service Obligation – USF established to subsidize service for un‐served areas  – Part of royalties paid by operators to be dedicated for USF f l db b d d df – Underserved  Areas selected by TRA; to be offered for  bidding SMP Remedies – Accounting Separation g p – Transparency – Access to Network Access to Network
  22. 22. Current Oman Telecom Market  TRA Report 30 JUN 2009 Total Mobile Market:  3.562 M  Total Fixed Market:  0.265 M  Market Share Market Share Oman Mobile     50% Omantel        100% Nawras 47% Nawras Preparing to Launch Resellers 3% Source: www.tra.gov.om
  23. 23. AS Framework Roll‐out in Oman ‐ AS Framework Roll out in Oman Update Consultation Paper on Accounting Separation AUG 2008 Responses on AS Consultation Paper OCT 2008 Stakeholders Meeting Stakeholders’ Meeting FEB 2009 FEB 2009 Consultation Paper on Market Dominance Criteria MAR 2009 TRA Position Statement JUL 2009 TRA Guideline / Determination TRA Guideline / Determination NOV 2009 NOV 2009
  24. 24. Oman TRA Consultation Paper SMP Remedies All current Class I license holders are classified as Notified Operators All current Class I license holders are classified as Notified Operators – Omantel; – Oman Mobile – Nawras Remedies – Accounting Separation,  – Cost Accounting /Price Control Cost Accounting /Price Control – Transparency – Non‐discrimination  – Access to Network  – Unbundling of Products 
  25. 25. Oman TRA Consultation Paper Objectives • Remedies/ obligations of the Notified and other Licensees  / • Market‐based level of Accounting Separation  • Overall reporting requirements, format of the SRAs* and  related issues  • A Appropriate audit procedures and audit opinion  i di d d di i i • Cost allocation process of costing models for SRAs  • Mandated Accounting/ Costing Methodologies and  d d / h d l d principles for SRAs  • S Suggested Transfer Charging and CCA methodologies  t dT f Ch i d CCA th d l i • Long‐Run Incremental Costing (LRIC) modeling approach  • M k tD t R Market Data Reporting Requirements and procedures  ti R i t d d
  26. 26. Market based Accounting Separation Market definition Level of development Retail Fixed  •Access Voice •Local and/or national voice telephone services Market not Opened Individual SMP •International voice telephone services Competitive market Retail Data •Retail leased lines •Dial Up Internet •Broadband Internet Wholesale  •Call origination  Fixed Voice •Call termination  Wholesale  •Wholesale unbundled access Wholesale Wholesale unbundled access  “infrastructu •Wholesale Line Rental (WLR) re” •Wholesale broadband access (Bit stream Market) •Wholesale terminating segments of leased lines •Wholesale terminating segments of leased lines •Wholesale trunk segments of leased lines Mobile Market •Access and voice call origination •Voice call termination on individual mobile networks •Wholesale international roaming 
  27. 27. OMAN TRA PRICE CONTROL REGIME OMAN TRA PRICE CONTROL REGIME SEPARATED REGULATORY  SEPARATED REGULATORY Annual ACCOUNTS INVESTIGATIVE COSTING  INVESTIGATIVE COSTING Rare Case STUDIES FDC / LRIC MODELING  / Annual INTERCONNECT TARIFF  APPROVAL TARIFF REBALANCING/ ADC  Annual APPROVALS PRODUCTS PRICING  Each Product APPROVALS Occasional DIRECTIVE 
  28. 28. AS Obligation for SMP TRA Position Statement Jul 2009 What to Submit? When to Submit? Methodology document 3 months after TRA Decision Issuance TD FDC/HCA FY 2009 One Year after the Decision TD FDC/CCA FY 2010 6 month after Year-end th ft Y d TD LRIC Results FY 2010 TD FDC/CCA FY 2011 6 month after Year-end TD LRIC Results FY 2011
  29. 29. Timeline – TRA Position Statement Jul 2009 Timeline TRA Position Statement Jul 2009 FY 2011  TRA  FY 2009  FDC/CCA,  DECISION FDC/HCA LRIC NOV  FEB  NOV  JUL  JUL  2009 2010 2010 2011 2012 METHODOLOGY  FY 2010  DOCUMENT  DOCUMENT FDC/CCA,  FDC/CCA LRIC
  30. 30. Omantel Response to AS Challenge Omantel Response to AS Challenge  Omantel is one of the first Telcos of the Region to have  implemented ABC in the Region Omantel Group is already providing fully segmented costing  analysis for Fixed Line (Omantel) and Cellular (Oman Mobile)  businesses to the TRA, annually, based on; businesses to the TRA annually based on; – Top‐down FDC – LRIC Model  The Group is gearing up to meet AS obligations  p g g p g Arguing with TRA to reduce arduousness of the obligations   
  31. 31. OMANTEL – The Challenge is to Turn  Challenge into Opportunity Cost  Management / Efficiency   Improvement  Leveraging  “Effective”  Business  Business fulfillment of  fulfillment of Information  Regulatory  for Value  Requirements Creation Accounting  Separation  Separation Model Performance  Budgeting  Management  and  Strategic  and Decision  dD i i Financial   Fi i l Making Model
  32. 32. Important References Important References* Identification of Competition Problems and  Remedies by Mark Scanlan & Ulrich Stumpf ITU Regulatory Accounting Guide – March 2009 ITU Costing Experts’ Training Documents – Nov  2008 Oman TRA Accounting Separation Consultation  Paper Oman TRA Market Statistics – June 2009 You can download, these documents from IIR Telecom Costing website
  33. 33. Q & A For any further query, please contact  For any further query please contact Safdar Imam Sr. Costing Specialist, Omantel g p , safdar.syed@omantel.com or ssimam@gmail.com
  34. 34. ALQURAN ALHAKIM Verse 284, Chapter 2,  Verse 284 Chapter 2 ‫ﻟﻠﻪ َﺎ ِﻲ اﻟﺴ َﺎ َات و َﺎ ِﻲ اﻟْﺄرْض ۗ وِن ﺗﺒْ ُوا َﺎ ِﻲ َﻧﻔﺴﻜﻢْ أوْ ﺗﺨْ ُﻮﻩ ﻳ َﺎﺳﺒْ ُﻢ‬ ‫ﱠﻤ و ِ َﻣ ﻓ َ ِ َإ ُ ﺪ ﻣ ﻓ أ ُ ِ ُ َ ُ ﻔ ُ ُﺤ ِ ﻜ‬ ‫ِﱠ ِ ﻣ ﻓ‬ ّ ‫ِﻪ ﱠ ُ َ َ ﻔ ُ ﻟ َﻦ ﻳﺸ ُ وﻳ َ ّ ُ ﻣﻦ ﻳﺸ ُ و ﱠ ُ ََ ُ ّ َ ْء َ ِﻳﺮ‬ ‫ﺑ ِ اﻟﻠﻪ ۖ ﻓﻴﻐْ ِﺮ ِﻤﻦ َ َﺎء َ ُﻌ ِب َﻦ َ َﺎء ۗ َاﻟﻠﻪ ﻋﻠﻰٰ آ ِ ﺷﻲ ٍ ﻗ ِﻳﺮ‬ ٌ ‫ﺪ‬ ‫ﻞ‬ ‫وﻳ ِب‬ ‫ﺬ‬ ‫ِﺮ‬ To Allah belongs all that is in the heavens and all that is on the earth, and whether you disclose what is inside you or conceal it Allah it, will call you to ACCOUNT for it. Then He forgives whom He wills and punishes whom He wills. And Allah commands everything.
  35. 35. Activity Based Costing ABC Design at OmanTel Resources Activities Cost Objects Equipment Equipment 1st Level 1st Level Groups Groups Switching Network Blocks by Region Network Blocks by Region Switching Transmission Eqmt BTS’s Fiber Optic Cable Fiber Optic Cable Cross‐connects Cross‐connects Etc. Etc. Resource Pools Resource Pools 2nd Level 2nd Level ‐‐Personnel Personnel Client Facing Departments Departments Client Facing ‐‐Fleet Fleet Activities by International Routes by Carrier International Routes by Carrier ‐‐Buildings OmanTel Directorate HEM Activities by General General Buildings Organizational Business Unit / ‐‐Communications Directorate HEP Business Unit / Carrier’s Carrier’s Communications Cost Centers Corp. Planning Global ‐‐Hardware/ Software Hardware/ Software / Global Products & Services Products & Services Financial  Serv. Financial Serv Regions Customer Groups Customer Serv. Network Activities Network Activities Regions Other Cost Objects Support Serv. by Business Unit / 3rd Level 3rd Level Mobile C.U. by Business Unit / Other Cost Objects Fixed C.U. Network Block Network Block Basic Services b y Region Basic Services b y Region Other Costs Other Costs Network Blocks Network Blocks International ‐‐Depreciation Depreciation Administration Support Activities Support Activities ‐‐Cost of Capital Cost of Capital Hardware & Software Hardware & Software Customer Groups Regions Cost of Capital Cost of Capital Etc. Etc by Business Units/ by Business Units/ by Business Units/ b B i U it / ‐‐Maintenance Maintenance Hardware & Software Global Global Regions ‐‐External Supplies External Supplies ‐‐Etc. Etc. Groups Hardware & Software Billing Systems Hardware Groups Hardware Groups Payroll System Groups 4th Level 4th Level Etc. TIMS TABS Products / Services by Region Products / Services by Region Payroll Software Groups Software Groups and Customer Group Etc. Other Cost Objects Other Cost Objects Revenues Revenues Common Costs and Revenues Common Costs and Revenues Common Costs and Revenues C C t dR
  36. 36. Segment Definitions for Dominant FBO - Domestic/International Network Tandem Tandem exchange/ exchange/ International interconnect interconnect gatew ay Local gatew ay gatew ay exchange h exchange h sw itch sw itch International Tandem - Local-tandem Linecards/ transm ission tandem transm ission ports transm ission International services D om estic netw ork Custom er A ccess netw ork

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