Enhancements to Accounting Separation in Singapore

1. ENHANCEMENTS TO ACCOUNTING SEPARATION IN SINGAPORE Overview of Revisions to the Accounting Separation Guidelines 25 May 2001

2. Agenda • Introduction and Forum Objectives • Background • Proposed Revisions to the Accounting Separation Framework

3. Background • Change drivers • Objectives and role of accounting separation • Approach to developing an enhanced accounting separation framework

4. 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

5. 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

6. 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

7. The Role of Accounting Separation ICT Sector Objectives Efficiency, fair market conduct competition, industry self-regulation Regulatory Competitive Safeguards • Accounting Separation • Classification of FBOs • IRS regulation • Prohibition of cross-subsidies & unfair competition Accounting Separation: Information to enable iDA to administer regulatory safeguards Information iDA general information gathering powers Accounting Separation

8. 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

9. Approach to Development ofEnhanced 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

10. 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

11. 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

12. 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

13. 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)

14. Level of Disaggregationof Services Dominant FBOs Access Domestic Network International Network Retail Services Customer access Domestic calls Domestic leased circuit s’vcs International calls International leased circuit s’vcs Mobile domestic access & calls Narrowband Internet Access Broadband Internet Access Other Activities All Other FBOs Fixed Domestic Services International Fixed & Mobile Services Mobile Domestic Services Narrowband Internet Access Broadband Internet Access Other Activities Wholesale Wholesale & Retail Retail

15. Accounting SeparationSegment 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

16. Segment Definitions forDominant 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

17. Segment Definitions for DominantFBO - Access/Domestic Network

18. Segment Definitions for DominantFBO - Domestic/International Network

19. Segment Definitions forNon-Dominant FBO Reporting • Fixed Domestic Services • International Fixed & Mobile Services • Mobile Domestic Services • Narrowband Internet Access • Broadband Internet Access • Other Activities

20. 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.

21. 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

22. Cost Allocation Methodology -Overview Dominant FBOs Based on causation Structured tiered cost driver approach with simplified allocation of indirect & overhead costs Prescribed allocation methodologies for key cost and revenue items Detailed methodologies to be documented in PCAM and approved by iDA All Other FBOs Based on causation Licensees may determine their own allocation methods consistent with principle of causation Detailed methodologies to be documented in PCAM and approved by iDA

23. Cost and RevenueAttribution 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

24. 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

25. Cost and RevenueAttribution 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.

26. Cost Allocation Methodologyfor 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

27. Cost Allocation Methodology forDominant FBOs Simplified Cost Driver Methodology* *See page 16 of ASG

28. Cost Allocation Methodologyfor 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

29. Overview ofReporting Requirements Dominant FBOs Income Statement for each Detailed Segment Income Statement for each Simplified Segment St’ment of Mean Capital Employed for each Detailed Segment Reconciliations to Audited Financial Statements Non-financial information Audit Report All Other FBOs Income Statement for each Simplified Segment Reconciliation to Audited Financial Statements Non-financial information Audit Report Income Income Capital

30. 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.

31. 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.

32. Simplified SegmentIncome 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.

33. Simplified SegmentIncome 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

34. Reconciliation of Consolidated Income Statements • A Reconciliation of Consolidated Income Statement will be required under both Detailed Segment Reporting and Simplified Segment Reporting • AReconciliation 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

35. 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.

36. 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.

37. 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.

38. 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

39. Reporting Timeframes for Detailed Segment Reporting Report Period & Frequency Timeframe To be submitted within 4 months of the end of the reporting period Income Statements 6 monthly To be submitted within 4 months of the end of the reporting period Reconciliation of Consolidated Income Statements Annually To be submitted within 4 months of the end of the reporting period Statements of MCE 6 monthly

40. Reporting Timeframes forDetailed Segment Reporting (cont) Report Period & Frequency Timeframe To be submitted within 4 months of the end of the reporting period Reconciliation of Consolidated MCE Statement Annually Non-financial Information Report To be submitted within 4 months of the end of the reporting period 6 monthly To be submitted within 2 weeks of the audit completion Audit Report Annually

41. Reporting Timeframes forSimplified Segment Reporting Report Period & Frequency Timeframe To be submitted within 4 months of the end of the reporting period Income Statements 6 monthly To be submitted within 4 months of the end of the reporting period Reconciliation of Consolidated Income Statements Annually To be submitted within 4 months of the end of the reporting period Non-financial Information Report 6 monthly

42. Reporting Timeframes forSimplified Segment Reporting (cont) Report Period & Frequency Timeframe To be submitted within 2 weeks of the audit completion Audit Report Annually

43. 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 *Subject to extension if required

44. 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

45. 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.

46. Industry Consultation & Proposed Timeframe For Completion Activity / Milestone Date 21 June Q3, 2000 Deadline for submission of industry responses iDA review of industry feedback and finalisation of framework