ENHANCEMENTS TO
ACCOUNTING SEPARATION
IN SINGAPORE
Overview of Revisions to the
Accounting Separation Guidelines
25 May 2001
PwC
Agenda
Introduction and Forum Objectives
Background
Proposed Revisions to the Accounting Separation
Framework
Confidential 2 PricewaterhouseCoopers
Background
Change drivers
Objectives and role of accounting separation
Approach to developing an enhanced accounting
separation framework
Confidential 3 PricewaterhouseCoopers
Change Drivers
The following factors impact on the information IDA needs to
undertake its regulatory functions:
Market liberalisation
New Code of Practice for Competition
Digital convergence and rapid technological change
Confidential 4 PricewaterhouseCoopers
Objectives of Accounting Separation
- International Experience
Objectives of accounting separation vary between different countries
and include the following:
Monitoring cross subsidisation
Comparison between internal transfer prices and external wholesale
service charges for vertically integrated operators
Analysing potential anti-competitive pricing behaviour, such as
predatory pricing
Determination and monitoring of interconnect charges
Monitoring industry and service trends
Tariff regulation
Confidential 5 PricewaterhouseCoopers
Objectives of Accounting
Separation in Singapore
To provide a structured reporting framework which will enable iDA to:
Ensure that Dominant FBOs do not favour their downstream
operations and affiliates in providing inter-operator services
Monitor compliance with the cross-subsidisation provisions
applying to Dominant Licensees under the COP
Establish and maintain objective reference points for evaluating
information provided by Licensees in relation to ad hoc studies
Monitor the provision of IRS by Dominant Licensees
Monitor ICT market performance and trends
Confidential 6 PricewaterhouseCoopers
The Role of Accounting
Separation
ICT Efficiency, fair market conduct competition,
Sector industry self-regulation
Objectives
Regulatory • Accounting Separation
• Classification of FBOs
Competitive
• IRS regulation
Safeguards
• Prohibition of cross-subsidies & unfair
competition
Information iDA general Accounting Separation:
information Information to enable
iDA to administer Accounting Separation
gathering
powers regulatory safeguards
Confidential 7 PricewaterhouseCoopers
The Role of Accounting
Separation (cont)
Accounting separation provides a complementary tool rather
than a substitute for the various competitive safeguards in place
under the COP.
It is intended to provide iDA with the information it requires to
effectively administer the regulatory framework.
However, accounting separation itself also acts as a primary
safeguard against potential anti-competitive cross subsidisation
by ensuring transparency of Licensees’ financial costs and
revenues.
It also provides the industry with a general level of comfort that
the regulator is able to monitor the conduct of Dominant
Licensees
Confidential 8 PricewaterhouseCoopers
Approach to Development of
Enhanced AS Framework
Review of effectiveness of existing accounting separation
framework in Singapore
Review of experience in other jurisdictions
– Hong Kong, UK, Australia, USA, EU
Identification of iDA’s information needs
Aim to optimise information objectives while considering the
administrative burden
Confidential 9 PricewaterhouseCoopers
The Proposed AS Framework:
Two-level approach
Detailed Segment Reporting (DSR)
– As a general rule, DSR will apply to Dominant FBOs and the entities
over which they have control
– In addition, IDA may direct any other FBO or SBO that is related to a
Dominant FBO to report on DSR basis (reserve power)
Definitions of control and related entity are contained in the ASG
– Control is defined by 50% rule
– Related entity is defined by 20% rule
Confidential 10 PricewaterhouseCoopers
The Proposed AS Framework:
Two-level approach
Objectives of DSR
– To enable IDA to monitor pricing, potential anti-competitive conduct
and IRS (O/T/T) charges
– Separate reporting of major service segments, including
wholesale/retail separation
At the present time, DSR will apply to:
– SingTel, SingNet, SingTel Mobile, SingTel Paging
– SCV
Confidential 11 PricewaterhouseCoopers
The Proposed AS Framework:
Two-level approach
Simplified Segment Reporting (SSR)
– Apply to all FBOs except Dominant FBOs or any Licensees that
are required to report on DSR basis
– Applies only to the licensed FBO entity (i.e. does not apply to
controlled or related entities)
Objectives of SSR
– Main purpose is to enable IDA to monitor market trends
– Higher level of aggregation to minimise regulatory burden
Confidential 12 PricewaterhouseCoopers
The Proposed AS Framework:
Exemptions
A Licensee may apply for an exemption from accounting
separation or from complying with certain provisions of the
Guidelines
IDA may grant an exemption if it concludes that:
– the amount of revenues or costs generated by the Licensee are
insignificant; or
– the information about the Licensee’s business is likely to be of
limited value to IDA in meeting the objectives of accounting
separation
– An exemption may be reviewed & revoked by IDA
– Onus on Licensee to notify IDA if circumstances on which the
exemption was granted change (eg substantial increase in
revenues)
Confidential 13 PricewaterhouseCoopers
Level of Disaggregation
of Services
Dominant FBOs All Other FBOs
Access Fixed Domestic Services
Wholesale
Domestic Network
International Fixed & Mobile
Wholesale & Retail
International Network Services
Retail Services Mobile Domestic Services
Customer access
Domestic calls
Narrowband Internet Access
Domestic leased circuit s’vcs
Retail
International calls
Broadband Internet Access
International leased circuit s’vcs
Mobile domestic access & calls
Other Activities
Narrowband Internet Access
Broadband Internet Access
Other Activities
Confidential 14 PricewaterhouseCoopers
Accounting Separation
Segment Definitions
The division of the organisation’s operations for accounting
separation must reflect the objectives for the use of the
information produced:
– Separation of activities that are subject to different
competitive intensities
– Separation of the upstream and downstream activities of
vertically integrated or related Licensees
– Separate reporting of high growth/important services
Confidential 15 PricewaterhouseCoopers
Segment Definitions for
Dominant FBO Reporting
Access
Domestic Network
International Network
Retail Services
– Customer access
– Domestic calls
– Domestic leased circuit services
– International calls
– International leased circuit services
– Mobile domestic access & calls
– Narrowband Internet Access
– Broadband Internet Access
– Other Activities
Confidential 16 PricewaterhouseCoopers
Segment Definitions for Dominant
FBO - Access/Domestic Network
HDB flats,
private appartments,
commercial buildings
Tandem Tandem
exchange/ exchange/
interconnect interconnect Telecom riser
Local
gateway gateway exchange
switch switch
Building MDF
Tandem-
tandem Local-tandem Line cards/
transmission transmission ports
Roadside cabinets
Landed houses
or standalone MDF
Network Customer Access
Confidential 17 PricewaterhouseCoopers
Segment Definitions for Dominant
FBO - Domestic/International Network
Tandem Tandem
exchange/ exchange/
International
interconnect interconnect
gateway Local
gateway gateway
exchange exchange
switch switch
International Tandem- Local-tandem
Linecards/
transmission tandem transmission
ports
transmission
International services Domestic network Customer Access
network
Confidential 18 PricewaterhouseCoopers
Segment Definitions for
Non-Dominant FBO Reporting
Fixed Domestic Services
International Fixed & Mobile Services
Mobile Domestic Services
Narrowband Internet Access
Broadband Internet Access
Other Activities
Confidential 19 PricewaterhouseCoopers
Cost Basis - Overview
Initially accounting separation will be based on Historic Cost
Accounting
Within a further 2-3 year timeframe,* accounting separation will be
migrated to Current Cost Accounting (CCA), consistent with global
telecommunications regulatory trends
To move directly from the current accounting separation framework
to a new reporting architecture and CCA would be very complex
and require a substantial implementation period
A two-phased approach will produce immediate improvements in
the information provided, but also allow a manageable
implementation process
*The timeframe will depend on the preparations required by Licensees. Propose to consider
Licensees’ feedback during the consultation process in determining an appropriate timeframe.
Confidential 20 PricewaterhouseCoopers
Cost Basis - HCA Reporting Basis
In general, reporting Licensees should prepare their accounting
separation statements
– in accordance with Singapore GAAP; and
– in accordance with the accounting policies that the Licensee
uses for statutory financial reporting,
iDA may direct Licensees to use particular accounting policies for
specific items from time to time, in order to ensure that the
accounting separation reports provide meaningful information
necessary for iDA to perform its regulatory functions, or to allow
comparability between Licensees
iDA may approve alternative methodologies which may be
requested by a Licensee
Confidential 21 PricewaterhouseCoopers
Cost Allocation Methodology -
Overview
Dominant FBOs All Other FBOs
Based on causation Based on causation
Structured tiered Licensees may determine
cost driver approach their own allocation
with simplified allocation methods consistent with
of indirect & overhead costs principle of causation
Prescribed allocation Detailed methodologies
methodologies for key to be documented in
cost and revenue items PCAM and approved by iDA
Detailed methodologies
to be documented in
PCAM and approved by iDA
Confidential 22 PricewaterhouseCoopers
Cost and Revenue
Attribution Principles
Costs/revenues may be attributed to services according to the
following categories:
– Direct cost/revenue: Solely caused/generated by a particular
service/product/asset/function & recorded in the accounts
against the relevant service/product/asset
– Directly attributable cost/revenue: Solely caused/generated
by a particular S/P/A/F but not recorded in the accounts
against the relevant S/P/A/F
Confidential 23 PricewaterhouseCoopers
Cost and Revenue
Attribution Principles (cont)
Indirectly attributable cost/revenue: Part of a pool of common
costs/revenues but which can be attributed to a particular
S/P/A/F though a non-arbitrary and verifiable cause and effect
relationship
Unattributable cost/revenue: Part of a pool of common
costs/revenues which cannot be identified to a particular S/P/A/F
through a non-arbitrary and verifiable cause and effect
relationship
Confidential 24 PricewaterhouseCoopers
Cost and Revenue
Attribution Principles (cont)
Dominant FBOs are required to separately identify the attribution categories
of costs in their accounting separation statements as follows:
– Direct & directly attributable
– Indirectly attributable
– Unattributable (allocated in proportion to contribution margin)
Non-dominant FBOs are required to separately identify:
– Direct, directly attributable & indirectly attributable costs
– Allocated unattributable costs
All FBOs are not required to separately identify the attribution categories of
revenues in their accounting separation statements.
Confidential 25 PricewaterhouseCoopers
Cost Allocation Methodology
for Dominant FBOs
The preferred approach is a simplified cost driver attribution
methodology. The key features of this approach are:
Attribution of costs/revenues is based on causation using identified
cost drivers (e.g. activity based costing)
A heirachical attribution and allocation methodology
Prescribed allocation methods for certain cost/revenue items
Indirect costs which are difficult or complex to apportion are
allocated in proportion to each segment contribution margin
Unattributable costs (e.g. overheads) are allocated in proportion to
each segment contribution margin
Confidential 26 PricewaterhouseCoopers
Cost Allocation Methodology for
Dominant FBOs
Simplified Cost Driver Methodology*
Revenues, Costs,
Assets, Liabilities (1) Group direct,
directly attributable costs into
1 1 to the four major cost
centre groups.
1 Support
Support
1 (2) Indirect attribution of
Plant Groups Functions Groups
major support plant costs
2 to primary plant groups
Primary Plant Groups and retail activity groups.
(3) Support function costs
4 to unattributable remainder.
3
(4) Direct attribution of
Domestic International primary plant costs to
Access Network Network access, domestic network
or international network
5
5 (5) Direct attribution of
Retail 5 internal wholesale access,
Activity domestic network &
2
Groups international network costs
to retail activity groups
(6) Allocation of unattributable
6
costs to access, domestic
Unattributable network, international network,
Remainder and retail in proportion to the
Domestic International contribution of each segment or
Access Network Network retail service
Report Report Report
Retail
Activities
Report = Attribution test = Causal relationship = Arbitrary Allocation
*See page 16 of ASG
Confidential 27 PricewaterhouseCoopers
Cost Allocation Methodology
for Non-Dominant FBOs
A more flexible approach will be used for Non-Dominant FBO
cost and revenue allocation:
Attribution of costs/revenues is based on causation using identified
cost drivers (e.g. activity based costing) as determined by the
Licensee*
Indirect costs which are difficult or complex to apportion are
allocated in proportion to each segment contribution margin
Unattributable costs (e.g. overheads) are allocated in proportion to
each segment contribution margin
But subject to approval by iDA
Confidential 28 PricewaterhouseCoopers
Overview of
Reporting Requirements
Dominant FBOs All Other FBOs
Income
Income Statement for each Income Statement for each
Income
Detailed Segment Simplified Segment
Income Statement for each
Simplified Segment
St’ment of Mean Capital Employed
Capital
for each Detailed Segment
Reconciliations to Reconciliation to
Audited Financial Statements Audited Financial Statements
Non-financial information Non-financial information
Audit Report Audit Report
Confidential 29 PricewaterhouseCoopers
Detailed Segment Reporting
Income Statements
Income statements prepared for each segment will identify:
Revenues for each segment, with separate identification of revenue
from external sources, the Licensee’s internal businesses and from
related entities;
Costs for each segment, with separate identification of direct and
directly attributable costs, indirectly attributable costs and allocated
unattributable costs, charges from internal businesses, charges
from related entities and charges from other Licensees. Fixed and
variable cost should also be separately reported; and
The calculated return for each segment.
Confidential 30 PricewaterhouseCoopers
Detailed Segment Reporting
Income Statements (cont)
Detailed segment income statements will be required for:
Each of the Detailed Reporting Segments that are provided by the
Dominant Licensee and/or its controlled entities; and
In addition, entities that are subject to Detailed Segment Reporting
must provide income statements for each of the Simplified
Reporting Segments, in order to enable IDA to monitor the
completed markets for these services.
Confidential 31 PricewaterhouseCoopers
Simplified Segment
Income Statements
Income statements prepared for each segment will identify:
Total revenues for each segment;
Costs for each segment, with separate identification of:
– fixed and variable costs;
– direct, directly attributable and indirectly attributable costs;
– allocated unattributable costs; and
The calculated return for each segment.
Confidential 32 PricewaterhouseCoopers
Simplified Segment
Income Statements (cont)
Simplified segment income statements will be required for:
Each of the Simplified Reporting Segments that are provided by the
a non-dominant Licensee
Confidential 33 PricewaterhouseCoopers
Reconciliation of Consolidated
Income Statements
A Reconciliation of Consolidated Income Statement will be required
under both Detailed Segment Reporting and Simplified Segment
Reporting
A Reconciliation of Consolidated Income Statement provides a
reconciliation of the consolidated Income Statements for all
segments with the Licensee’s audited Income Statement, or
Consolidated Income Statement where a Licensee’s business is
structurally separated
Confidential 34 PricewaterhouseCoopers
Detailed Segment Statements of
Mean Capital Employed
Statements of Mean Capital Employed should be submitted for
each segment
The “mean capital employed” is defined as total assets less current
liabilities, excluding corporate taxes, dividends payable and long
term liabilities. That is, it is the total written down value of non-
current assets and working capital.
The mean is computed as the average of the start and end values
for the relevant period.
Confidential 35 PricewaterhouseCoopers
Detailed Segment Statements of
Mean Capital Employed
The Statement of Mean Capital Employed has two main purposes:
it allows for a calculation of return on capital employed for each
separated segment and activity; and
it allows for the more accurate allocation of capital charges to the
Income Statement, e.g. depreciation.
Confidential 36 PricewaterhouseCoopers
Detailed Segment Reconciliation of
Mean Capital Employed Statement
The Reconciliation of Mean Capital Employed Statement provides:
a reconciliation of the individual segment Statements of Mean
Capital Employed to the Licensee’s audited Balance Sheet or
consolidated Balance Sheet where a Licensee’s business is
structurally separated.
Confidential 37 PricewaterhouseCoopers
Non-financial Information Report
iDA proposes that all reporting Licensees should provide
information on key operational and service usage parameters as
part of the standard reporting requirements for accounting
separation.
Network usage parameters will be used by iDA to:
– estimate the unit costs and revenues of each reported
service
– monitor market trends in the services subject to
accounting separation
Confidential 38 PricewaterhouseCoopers
Reporting Timeframes for
Detailed Segment Reporting
Report Period & Frequency Timeframe
Income Statements 6 monthly To be submitted within
4 months of the end
of the reporting period
Reconciliation of To be submitted within
Annually 4 months of the end
Consolidated Income
Statements of the reporting period
Statements of 6 monthly To be submitted within
MCE 4 months of the end
of the reporting period
Confidential 39 PricewaterhouseCoopers
Reporting Timeframes for
Detailed Segment Reporting (cont)
Report Period & Frequency Timeframe
Reconciliation of To be submitted within
Annually 4 months of the end
Consolidated
MCE Statement of the reporting period
Non-financial 6 monthly To be submitted within
Information Report 4 months of the end
of the reporting period
To be submitted within
Audit Report Annually 2 weeks of the audit
completion
Confidential 40 PricewaterhouseCoopers
Reporting Timeframes for
Simplified Segment Reporting
Report Period & Frequency Timeframe
Income Statements 6 monthly To be submitted within
4 months of the end
of the reporting period
Reconciliation of To be submitted within
Annually 4 months of the end
Consolidated Income
Statements of the reporting period
Non-financial 6 monthly To be submitted within
Information Report 4 months of the end
of the reporting period
Confidential 41 PricewaterhouseCoopers
Reporting Timeframes for
Simplified Segment Reporting (cont)
Report Period & Frequency Timeframe
To be submitted within
Audit Report Annually 2 weeks of the audit
completion
Confidential 42 PricewaterhouseCoopers
Administrative Requirements
Procedure and Cost Allocation Manual (PCAM) must be
developed by each Reporting Licensee
Licensee must file its proposed PCAM with iDA 90 days after the
date of effect of the ASG
iDA approval period for the PCAM will be 90 days*
Detailed specifications for the content of the Licensee’s PCAM
are set out in the ASG
PCAM (including detailed cost allocation methods) must be
approved by iDA
Any changes to PCAM must be filed with, and approved by, iDA
There will be no public disclosure of Licensee’s PCAMs or
accounting separation reports
Confidential *Subject to extension if required 43 PricewaterhouseCoopers
Audit Requirements
Reporting Licensees will be required to obtain an annual
independent audit of their accounting separation reports
The auditor is appointed by the Licensee and responsibility for
completion of the audit lies with the Licensee. However, iDA may
request meetings with the auditor to discuss the auditor’s work
iDA may undertake a re-audit if it is not satisfied with the audit
undertaken by a Licensee’s auditor
The costs of all audits and re-audits must be borne by the
Licensee
Confidential 44 PricewaterhouseCoopers
Audit Requirements (cont)
The auditor shall, in his Auditor’s Report, express an opinion on:
– whether the Accounting Separation Statements for the year
ended have been properly drawn up in accordance with the
Licensee’s PCAM that has been approved by iDA under the
Accounting Separation Guidelines and so as to present fairly,
in all material respects the information reported in each of the
accounting separation statements submitted to iDA.
Confidential 45 PricewaterhouseCoopers
Industry Consultation & Proposed
Timeframe For Completion
Date Activity / Milestone
21 June Deadline for submission of industry responses
Q3, 2000 iDA review of industry feedback
and finalisation of framework
Confidential 46 PricewaterhouseCoopers