1 GCRA 05/19 and 08/07 “Price control for Cable & Wireless Guernsey, Decision Notice
7. Current Cost Accounting (CCA) 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.
C&WG Accounting records
C&WG 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.
C&WG 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 Statements
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 Statements are therefore produced by overlaying the requirements of the GCRA Guidelines on the statutory accounting record structure of C&WG.
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 C&WG'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.
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 C&WG’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 C&WG 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 Statements of the Businesses, the parts of the previous year’s Regulatory Statements affected by the changes shall be restated.
2. Businesses
In accordance with the GCRA Guidelines, Regulatory Statements 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
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 C&WG itself 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 conveyance 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.
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).
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
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 C&WG’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 and consultancy services.
In addition, C&WG has interests in non-telecommunications activities. 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.
3. Attribution Methods
3.1 Introduction
This document describes the attribution methodologies used to fully allocate C&WG'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 C&WG's accounting records to their ultimate attribution to Businesses. It explains both the system used to produce the Regulatory Statements 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 C&WG 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 C&WG’s revenues relate to costs,
b) the demonstration within C&WG’s Regulatory Statements 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 C&WG group 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.
3.2 Attribution Methodologies
3.2.1 Overview
C&WG'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 C&WG 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.
3.2.2 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. The main revenue drivers deal with interconnect receipts from other operators, relating to call traffic.
3.2.3 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.
3.2.3.1 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.
3.2.3.2 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 C&WG’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).
3.2.3.3 Unattributable Costs
As stated above C&WG 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.
3.2.4 Mean Capital Employed
Mean capital employed is defined by C&WG 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 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.
3.2.5 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 non-financial 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.
3.2.6 Current Cost
C&WG is required by GCRA directive 04/25 to prepare its Regulatory Statements 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 Statements is therefore consistent with that in the preparation of the underlying historical cost based information.
3.2.7 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.
C&WG'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
C&WG'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