Accounting Documents. For the year ended 31 December Sure (Guernsey) Limited

Transcription

1 For the year ended 31 December 2014 Sure (Guernsey) Limited

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 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 Volumes and usage data requirements Calculation of the Network Business transfer charges to the Retail Business... 20

3 4.4 Other intra-sure transfer charges Reporting of transfer charges Current Cost Accounting (CCA) and General Accounting Policies Basis of Preparation of Regulatory Accounts 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 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 230 IT Hardware Customer Systems Asset Class Distribution Lines - Cables and Ducts Asset Class Submarine Cables Asset Class 515 Support Block Asset Class 565 MSAN Equipment Asset Class Mobile Switch, 705 GSM Base Stations & Radio Equipment, 740 Mobile Data, 745 3G Core Infrastructure, 750 3G Radio Network Controllers Asset Class 800 Internet Backbone Equipment 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 Cost Object (Product) Level Reporting Procedure Statement Production Improvements in Methodology... 38

4 Appendix A: Financial Statement Pro forma 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 Sure (Guernsey) limited ( Sure ) 1, has been found to be dominant 2 in the following markets: Wholesale fixed-line telecommunications market (excluding wholesale off-island leased lines 3 ) Retail fixed-line telecommunications market (excluding retail leased lines) 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) 4 to Sure, to prepare and maintain accounting records in a form that enables the activities specified in any direction given by the Chief Executive of the GCRA to be separately identifiable, and which the Chief Executive 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 (the Guidelines ), in December Sure has used these Guidelines as the main basis for the production of its Separated Regulatory Accounts ( Regulatory Accounts ). These Accounting Documents are provided to further set out the methodologies and procedures used, to highlight Sure s interpretation of the Guidelines where necessary and to assist users of the Regulatory Accounts in understanding their preparation. More detailed descriptions of the processes and systems underlying the Regulatory Accounts are contained within the Cost Attribution Methodology (CAM), which describes the processes and drivers used to derive the fully allocated costs of Sure 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 Accounts 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 Accounts 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 Accounts 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. 1 Sure (Guernsey) Limited was previously known as Cable & Wireless Guernsey Limited ( C&WG ). C&WG was originally part of Cable and Wireless Communication PLC ( CWC ). On the 3rd April 2013, the Bahrain Telecommunications Co BSC ( Batelco ) completed the acquisition of certain companies from CWC, including C&WG. With effect from 23 rd May 2013, C&WG was renamed Sure (Guernsey) Limited. For simplicity we refer throughout this document to Sure, including where we refer to instances where at the time the legal entity was C&WG. The exception is if we are referring to any documents that include the previous company name in their title, where we use the company name as used in the title. 2 GCRA 05/19 and 08/07 Price control for Cable & Wireless Guernsey, Decision Notice. 3 As per 4 The GCRA was established in June 2012 and replaced the Office of Utility Regulation ( OUR ). Some of the documents and licences referred to in this document were issued prior to June 2012 and therefore by the OUR rather than the GCRA. For simplicity we have referred to all such documents as being issued by the GCRA. i

6 Introduction 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 (CCA) 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. 7. Current Cost Accounting 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 Accounting records Sure s Accounting records Sure 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. Sure 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 Accounts 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 Accounts are therefore produced by overlaying the requirements of the GCRA Guidelines on Sure s statutory accounting record structure. 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 Sure 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 Sure 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 Sure 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 Accounts of the Businesses, the parts of the previous year s Regulatory Accounts affected by the changes shall be restated. 1

9 Businesses 2. Businesses In accordance with the GCRA Guidelines, Regulatory Accounts 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 (service withdrawn in 2012) 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 Sure 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 the conveyancing 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). It should be noted that Sure withdrew its dial-up Internet service on 1 st December 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 3

11 Businesses 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. 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 Sure 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 (Internet bandwidth) and consultancy services. In addition, Sure has interests in non-telecommunications activities, such as disaster recovery suites and commercial property rentals. 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 Sure 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 Sure s accounting records to their ultimate attribution to Businesses. It explains both the system used to produce the Regulatory Accounts 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 Sure 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 Sure s revenues relate to costs, b) the demonstration within Sure s Regulatory Accounts 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 Sure 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 Sure 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 Sure 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 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 Sure 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 Sure 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 mark-ups 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 Sure 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 Activity Based Costing (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 nonfinancial 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 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 or products and services. 7

15 Attribution Methods Current Cost Sure is required by the GCRA Guidelines to prepare its Regulatory Accounts 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 Accounts 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. Sure 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 Sure and the GCRA only), showing for each driver: o Data as per the CAM o More detailed instructions o Individual/team responsible for providing the base data o Individual/team who calculated driver 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-CQa is used to apportion the costs of: Professional consultancy Creditors re consultancy 8

16 Attribution Methods Using the same driver for both 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-CQa 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. Sure 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 sold in the period. 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. 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 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 Sure 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, Sure s 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 Sure 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. Sure 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 and calls to mobiles 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, which are 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 (a legacy Broadband access service) 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. In addition, revenue relating to non-telecommunications activities, such as disaster recovery suites and commercial property rentals. 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 allocated or apportioned using an Activity Based Costing methodology. Where apportionment is required it consists of a two-stage process, with distribution to defined Activity Based Costing activities and then a mapping of these activities to Businesses, Activities and Network Elements, as defined within the Accounting Separation framework Apportionment to Activity Based Costing activities Department costs Sure has split its business into various Business departments, such as Customer Operations, Product Management and Enterprise Sales, with a number of support departments, such as Financial Planning & Analysis (FP&A), Human Resources and IT Operations. Each of the departments holds all of the General Ledger costs that are department related, which primarily relate to staff costs. For most departments, each has been required to analyse its function into a number of specific activities that it performs. For instance, the Customer Operations department has identified activities such as exchange line/isdn provision, 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 Sure 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 this has occurred, 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, e.g. the Human Resource department provides greater support to the FP&A department than vice versa, therefore Human Resources is exhausted before FP&A. 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 Sure 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. In summary: an activity may be wholly attributable to a Business, Activity or Network Element. 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 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 Cash at bank and in hand 14

22 Attribution Methods 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 Sure is required to calculate an allowable cash balance that reflects the cash it requires to hold for working capital purposes. Sure deems allowable cash to be the average sum of: adjusted trading balances held at the opening and closing dates for trade creditors & trade debtors the balance due for Corporate Tax on the specified date one month s company salary and associated costs 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 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 a Local Access Network requirement. 16

24 Attribution Methods Overhead plant Overhead plant is solely used by the Sure 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 Sure s billed revenue analysis, and for relevant call types, its interconnect payments and receipts. The CDR data used within Sure s Regulatory Accounts are based on analysis of every CDR within the accounting period, i.e. no sampling is undertaken. Previous analysis undertaken by Sure 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 switches, 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, Sure prepares separate Regulatory Accounts for twenty one businesses, which have been defined by the GCRA. Sure is required to prepare Regulatory Accounts on a current cost basis using Transfer Charges calculated in accordance with the principles outlined below. Results are calculated based on Sure s Reference Offer rates for call conveyance. More details can be found on pages ii and 51 of Sure s Separated Regulatory Accounts. Non-conveyance costs are applied 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. Wholesale services are charged to the Retail Business 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 Sure 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. The GCRA issued a Decision Notice to Sure relating to Price Control, within document GCRA 08/07 5. The GCRA s Director General used a pre-tax nominal Weighted Average Cost of Capital (WACC) of 11.6% (for a 12 month period) for Price Control purposes. 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 Accounts 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) 5 Price Control for Cable & Wireless Guernsey Decision Notice, OUR 08/07, February