Introducing Analysys Mason: expertise in regulatory accounting
Q1 2008
For more information please contact:
Joan Obradors
Email: joan.obradors@analysysmason.com
Web: www.analysysmason.com
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Why is regulatory accounting important?

Accounting separation is a key regulatory tool which assists NRAs in
checking that the prices of their SMP operators are, where appropriate,
non-discriminatory and cost-oriented. It is also a tool which can be useful
in the detection of anti-competitive cross subsidies

The broad principles of accounting separation (such as, for example, the
use of causal cost drivers to allocate costs to services) are widely
accepted and understood. However, the detailed implementation of these
principles varies greatly between countries

Analysys Mason has extensive experience of auditing and reviewing
regulatory accounts prepared by operators to meet the regulatory
obligations imposed by their regulators. Over the last three years, we
have carried out more than 20 projects on the implementation and
review of accounting separation models in more than six European
countries
Accounting separation process
Implementation
support
Training
Maintenance
Model construction
(FAC, TDLRIC, A/S)
Technical and operational data (governs the flow of costs between system elements)
• Review of the information
availability and quality
• Definition of the system (cost
pools and allocations)
• Construction of the system
• Documentation of the system
and preparation of outputs
Direct costs (e.g.
payments to other
operators
• Review of regulatory
Directly
allocatable
activities
Revenue sources
requirements (context, services)
All Activities
Materials
3rd party services
Final Product costs
• Assessment of the system
Cost pools:
adding staff,
materials,
3rd party
services,
other opex
Staff costs
Other operating
expenses
Regulatory audits
Cost pools:
depreciation
and capital
employed
Intermediate Product costs
Model construction
Depreciation and
Capital employed
(preliminary
categorisation)
Cost sources
Analysys Mason’s approach to regulatory accounting
Asset
revaluation
Efficiency
adjustments
Other
activities
documentation
• Reconciliation with statutory a/c
• Validations of data inputs,
Cost of
capital
Regulatory
audits
revaluation process and
calculations
• Analysis of the system results
• Documentation of the findings
and recommendations for future
submissions
Depreciation
methodologie
s
Technical
reports
A good cost accounting model can be used to make commercial decisions on
retail prices, as well as examine issues of price regulation
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Steps involved in creating a cost accounting system
Definition of cost pools
• Reconciliation with
statutory accounts
• Mapping of cost pools
• Definition of allocation
drivers
• Calculation of allocation
drivers
• Sanity check data inputs
• Best practices
Calculation of asset costs
• Revaluation of assets
• Depreciation
• Develop methodology:
•
•
•
methodology
• Calculation of cost
•
•
•
of capital
Lifetimes
Efficiency adjustments
Best practices
•
FDC versus LRAIC
Services to be costed
Accounting separation
Review the impact of the
different costs in the
regulated services
Consistency of the results
Data collection and calculation of drivers are key issues
Published financial
Published
financial
accounts
accounts
Reconciles
Stage
StageHCA
-- HCA
HC
Stage
A
Stage
- CCA
Staff costs,
costs,
Staff
- TDLRAIC
Model
materials,
materials, 3rd
3rd
Staff costs,
party services,
services,
party
rd costs,
materials, 3Staff
other
other operating
operating
party services,
materials,
materials,3 rd
expenses,…
expenses,…
other operating
party 3services,
expenses,…
other operating
expenses,…
Depreciation
Depreciation
Depreciation
(a)
Depreciation
(b)
Cost of
of capital
capital
Cost
employed
employed
Cost of capital
employed
Cost of capital
employed
500
400
300
200
100
0
-100
-200
Related tasks WAS
Barriers to competition
Construction of the models
• Impact analysis
• Forecast outcomes for
•
•
future periods
Training to allow the
client to process future
updates
Discussions/
presentations with/to
the regulator
Additional services
• Specification of the
•
•
•
database system
requirements
Supervision of
implementation
Prepaparation and review
of documentation
Provision of support during
the auditing process
Our models are flexible and produce accurate and credible results
Max 380
250 opex in Year10
0
1
2
3
4
5
6
7
8
9 10 11 12
Regional
exchange
Local
exchange
Local
exchange
*Source: Analysys Mason
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Double audit, by the operator and the regulator, is considered
best practice to validate the regulatory accounting system
External audit methodology
Review the reconciliation
• Reconciliation between
the statutory accounts
and the regulatory
accounts
• Accordance with the
manual approved by
the regulator
Review implementation of
accounting principles
• Implementation of the
accounting principles:
 causality
 transparency
 objectivity
 consistency
Review the allocations
and calculations
Review the input data
• Inventory review
• Assets lifetimes review
• Drivers review
• Traffic data review
• Revision of the service
breakdown
• Check the database used
The system has to be consistent with the network structure
and reconcile with financial statements
• Revision of asset
•
•
•
•
Costs data
SDH
ADM
Trial balance
SDH
ADM
Costs data
Costs in
the model
SDH
ADM
SDH
ADM
Local
exchange
SDH
ADM
•
74%
Tandem
FAR Digital exchange
IT
Local
exchange platforms
SDH
ADM
•
methodologies
Review the consistency
GRC versus GBV
Efficiency treatment
revision
Local
Audit example
SDH
ADM
fully depreciated assets
• Review the CCA
Test on inventory samples and benchmarking exercises are
used to validate figures in the costing systems
Income
statement
IT
platfoms
• Review the treatment of
allocation
Revision of cost
allocation
Cost of capital calculation
Depreciation calculation
Accounting separation
and calculation of transfer
charges
  
Trial
balance
Review the revaluation
process
• Parent Digital Tel
exchanges
20%
6%
Trunk
• GRD40 697 million
Tandem
exchange




The percentages come directly
from the matching asset
elements to switching layers
• We have identified a sample
asset elements
• Then we do a match to see if it
is coherent with FNO’s match
Access
Access
Switching
Transmission
Other
Core network
Retail
Other OLOS
Other OLOS
Customer
*Source: Analysys Mason
Analysys Mason has been involved in the implementation and review of numerous
accounting separation models and is at the forefront of regulatory costing
Country
Client type
Project scope
Our achievements
Western Europe
NRA
Auditing the regulatory cost accounts of a major fixed
network operator. Revision of whether the accounting
principles had been correctly implemented, allocation
methods, inputs, current cost valuation and
reconciliation
• The client’s accepted our findings, to the extent of some
of our reports being sent directly to the SMP as
discussion documents and parts of them being copied
verbatim in the final decisions of the NRA
• We have been hired subsequently
to assist the NRA in other regulatory issues
We have carried out similar projects in three different countries in Western Europe. In all three cases we have been hired to do subsequent audits,
which demonstrates the clients’ satisfaction with the work undertaken and our management of the relationships with all stakeholders
Europe
Leading mobile
network operator
To produce, in 12 weeks, a multi-purpose costing
system for a mobile operator for both regulatory
submissions and management decision-making.
Build a top-down FAC model with the purpose of
being implemented in the financial system of the
operator to provide regular reporting
• The customer was fully satisfied with the project outcome
• We continue to work with them on various related issues.
The system has been subsequently upgraded (by us) to
LRAIC
We have developed FAC and LRIC systems from scratch in nine different countries in Western Europe, MENA and Asia. In some cases, we have
performed updates to the model, most notably in Spain, where we are about to start our fourth annual engagement. Most of the projects followed a common
methodology and had an exclusively regulatory focus. We have also undertaken other projects where the system provided extra information (e.g. to a
marketing department wishing to understand the pricing implications of new 3G services) and/or we adapted existing costing tools to deliver results suitable
for external publication
MENA region
Mobile operator
Production of an accounting procedure manual,
revaluation, FDC and LRAIC methodology and many
related matters, in response to the regulator’s directive
on accounting separation. Design the methodology in
accordance with local regulation and best practices,
build models, test and deliver
• The FDC and LRAIC results made maximum use of the
client’s existing accounting data
• They were straightforwardly prepared for audit and
updated by the client for the following year, with a small
assistance from us
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Some of our high-profile assignments on regulatory accounting
are presented in the following slides
Case studies
Client type
Summary
Case study 1
IBPT
External revision of Belgacom’s separated accounts and accounting
separation obligation on behalf of IBPT
Case study 2
Mobile operator
Development of two top-down regulatory costing systems for a
mobile operator in the MENA region
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Case study 1: External revision of Belgacom’s separated accounts
and accounting separation obligation on behalf of the IBPT
Business challenge
• Accounting
separation is a key regulatory tool which assists NRAs in checking that the prices of their SMP operators are, where appropriate, nondiscriminatory and cost-oriented. It is also a tool which can be useful in the detection of anti-competitive cross subsidies
• Analysys
Mason was commissioned to assist the Belgium regulator, IBPT, in the context of preparing separated accounts for Belgacom in 2004, and
facilitate the implementation of the accounting separation obligation under the New Regulatory Framework
Approach
• Reviewed the compliance of Belgacom’s accounting separation model
with cost accounting principles
• Revised the revaluation of assets, including revaluation and
annualisation methodology, treatment of fully depreciated assets,
lifetimes and efficiency treatment
• Reviewed international practices regarding auditing and the work carried
out by Belgacom’s auditors
Background
Review
legislation
• Reviewed the documentation provided as part of the accounting
separation process by Belgacom and other operators
–
AS methodology
Revaluation
–Efficiency
–Audit
–Service breakdown
–Documentation
–
Review
international
experience
• Reviewed the breakdown of services and the results of the accounting
separation exercise, including the fulfilment of legal obligations
European level
International practices
–Belgium
–
Review
Belgacom’s
information
Compliance of the AS model with
regulatory accounting principles
Assessment of 2004 AS methodology
–
Evaluation of the revaluation and
annual asset cost calculation
Documentation
AS model
–Ad-hoc spreadsheets
Opinion of the auditor’s work
and 2005 objectives
Cost standards
CCA methodologies
–Depreciation
–Treatment of FDA
–Efficiency
Review the service breakdown
and AS results
–
–
–
Review
treatment
assets
Assessment of Belgacom’s
AS 2004 model
–
Analysys of
sensitivities
Opinion on the documentation
provided as part of the AS process
Benefits and results
• We made recommendations on possible improvements and modifications to the actual accounting separation model of Belgacom, its submission and the
auditing process, taking into account compliance with European best practices on accounting separation systems
• Our wide-ranging experience of providing consultancy services on regulation and accounting separation to operators and regulators throughout the world
meant that our client gained a deep understanding of the subject
Case study 2: For a mobile operator in the MENA region,
developed two top-down regulatory costing systems
Business challenge
• Our client was required to produce a manual proposing methodologies for attribution, revaluation, FAC and LRIC methodology, accounting procedures
and many related matters, in response to its regulator’s directive on accounting separation
• The regulator was relatively newly established, so care was required to avoid inexperience leading to the burdening of this emerging telecoms market
with inappropriately transposed ‘European’ style regulatory accounts
Approach
First mission
Review
regulator’s
accounting
requirements
Review client’s
existing costing
systems
Second mission
Produce outline
sketch chart of
accounts, cost
allocation
methodology and
service list
Elaboration of
first-draft manual
Elaboration of
second-draft
manual
Elaboration of
‘first-cut’
prototype model
Completion of
prototypes
 Training session
 Collect CVRs
(and other) data
 Draft and hand
over data request
 Work with client
to gather data
Third mission
Support for regulator's
response
 Workshops:
methodological
choices
 Update
deliverables
 Assist with data
collection issues
Benefits and results
• The
methodology we designed met international best practice, while avoiding unnecessary complication. It was approved by the regulator, without
significant amendments, after a short and friendly exchange of questions and answers
• The FDC and LRIC results made maximum use of the client’s existing accounting data. They were straightforwardly prepared for audit, and updated by
the client for the following year, with a small amount assistance from us
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