accounting separation and beyond

8/2/2019 Accounting Separation and Beyond

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Accounting Separationand beyond From Compliance to Value Creation

p e r s p

e c t i v

e s



The expected addition o Operational

or Functional Separation to the

remedies available to European

regulators in the orthcoming

revisions o the ElectronicCommunications Directives has

raised the prole o all

separation-based remedies

including Accounting Separation.

Accounting Separation is a less

intrusive and much less costly

remedy to implement and it can

provide a deence against the

imposition o more intrusiveseparation obligations.

Regulators increasingly see

Separation (Accounting, Functional

and potentially Structural) as a

common suite o measures designed

to tackle perceived incentives o

operators to discriminate against

other access seekers in avour otheir own downstream businesses.

These remedies are designed to:

• impose and police

non-discrimination obligations

in the provision o access to the

dominant operator’s network

• increase transparency of the

business perormance reporting

or the operators

• identify cross subsidies within the

dominant operator’s businesses

• demonstrate price non-discrimination

• identify predation strategies

applied by the dominant operator

particularly through price and

quality squeezes

PwC can provide insight and

expertise to assist you in relation to

Separation and in particular to help

minimise the risks o regulators

imposing disproportionateoperational separation obligations.

Why Accounting Separation isimportant again



• Is your Accounting Separation good

enough to stay the threat o Functional

or Structural Separation?

• Are there additional actions you could take

to enhance or complement Accounting

Separation which would reduce the risk o

more intrusive orms o Separation?

• Are you negotiating with the Regulator?

What are your negotiated options and

what is the impact o implementing them?

Are there trade-os available and how

can you take advantage o them?

• Could your Separated Accounts

potentially expose issues to the regulator

and your competitors? What steps can

you take to pre-empt and mitigate this?

• What controls and processes do you

need to ensure reliability o non-nancial

data? How will you ensure that your data

meets audit requirements?

• How will you streamline the preparation

o your Separated Accounts? What is

required and how will this impact your

systems, processes and people?

• How will you ensure that you get your

strategy and implementation right rst

time? Not doing so may mean large

penalties rom the regulator and heavy

costs to undo past mistakes.

• How can you maximise the business

benets o implementing Accounting

Separation?

• How can you use the inormation in your

decision making? For example, how do

you use protability analysis o activities,

products, customers and channels to

help you mobilise your strategy.

• What are the alternative business models

that may boost shareholder value

creation? For example, is your current

stand-alone value higher than a

hypothetical sum-o-parts?

Accounting Separation is a key challengeor telecom operators

Eective

ullment o

regulatory

requirements

Alignment

with the

organisation’s

processes

Leveraging

or

Value

Creation



• We will create one team, combining our

consultants and your sta to ensure

maximum eciency and better

knowledge transer, both on the job

and via structured learning

• We use eective project management

that covers all phases o the project:initiation, team mobilisation,

day-to-day progress monitoring,

timely consideration o potential issues

and delays, consideration o large scale

project risks, and stakeholder

management which includes managing

the relationship with the Regulator.

• We perorm an in-depth review o all data

both nancial and non-nancial input to

the models to ensure reasonableness

and the best outcome or you

• We apply very robust analytical

procedures or the review o the results

• We are committed to deliver within

challenging deadlines

• We apply robust methodologies

developed and rened over the last

10 years and applied successully with

a large number o our clients

• We provide you with comprehensive

model documentation that provides a

clear audit trail o the models built

• We have the commercial expertise to

assist you in transorming a pure

regulatory reporting capability into

inormation to assist your commercial

and strategic planning

• We are a large organisation with

perormance improvement and strategic

and transactions expertise which we use

to complement our regulatory and

commercial costing capabilities

PwC is the leading expert to help you with Accounting Separation

We bring a tried and tested approach and a rst class team

to ensure our clients achieve the best outcome

Extensive experience o regulatory consultations

and negotiations in addition to our dedicated

Telecommunications Regulatory Centre o

Excellence – over 100 assignments.

More than 140,000

people in 149 countries

across our network

share their thinking,

experience and solutions

to develop resh

perspectives and

practical advice.

We have expanded the

boundaries o Accounting

Separation into commercial

and strategic protability

analysis, and KPIs or 20 mobile

and xed operators.

Our client base

generates over 70% o

telecommunications revenue

world-wide, and includes 18 o

the top 20 global telecom players.

We have over 200

person-years experience

in Accounting Separation

and have produced

20 sets o separated

accounts with no audit

qualications.

We produced the

rst set o Separated

Accounts or BT

and eircom.

We are telecomindustry and

unctionalspecialists

We haveexpertise in

understandingEconomics and

Costing

We are telecomIndustry and

unctionalspecialists

We have aglobal ootprint

and localknowledge

We have atrack record and

operationalexperience in AccountingSeparation &

Product Protability PwC



StatementsProduction, Audit andPublication

Cost modelDesign,

Implementation& Review

Evaluation oregulatory

requirementsand consultation

Manageregulatorychanges/ improvereporting

Assist withimplementation

o theoperatingmodels

From Compliance to Value Creation… through enhancing perormance andtransorming the business model

Dene servicedelivery and

operatingmodels

ConsiderStrategic

Investment

Options

CompareSum-o-parts

vs currentmarket value

Assessprotability oBusiness Units

Designenhanced

governance andmanagement

processes

DevelopKPIs and

accountabilitiesor cost

reduction

Targetineciencies and

propose costreduction

Assesseciency o

various unctions,channels,network

Redenemarketing andbrand strategy

DevelopKPIs and

accountabilitiesor customer

centricity

DevelopTarget

Operating

Model

Dene Visionor a Customer

Centricorganisation

Assess protabilityo CustomerSegments

Compliance

‘minimum costs tomeet the rules’

Business Alignment and

Transactions

‘shit business unit

strategy to be more eectivein the competitive market’

Business Alignmentand Transactions

‘shit business unit

strategy to be more eectivein the competitive market’

EnhancePerformance

‘using data to identiy costreduction opportunities’

Transform theorganisation model

‘become customer centric’

Meeting regulatory obligations is not

optional, but… PwC believes that the

steps that ollow are opportunities to

enhance perormance, transorm thebusiness model, thereore create value.

Companies can use costing data as a

catalyst or improved perormance and/

or transormational change. They can

also use this data as a means to analysehow well positioned they are to respond

to competition through redening the

business units’ operating models.

As-is

To-beOperationalise models

‘build own internalcapability’

Manage stakeholder toachieve the desired

outcome



The results achieved: management oregulated revenues, insight into protabilityby product, customer and channel

Business challenge

Methods o pricing based on cost-orientationconsidered by our client

A European incumbent operator was

struggling with intensied competition

and harsh regulatory conditions in the

light o liberalisation…

The operator was acing unknown

territory with an onslaught o regulatory,

market and competitive challenges:

• Aggressive liberalisation in the market

led by an inexperienced regulator

• SMP designation or key prot-making

products in wholesale & retail markets

• Regulator’s adoption o reduced mobile

termination rates that did not refect the

operator’s realities

• Declining customer base (20% a year)

and erce competition rom mobile

and cable operators especially in

protable city areas

• High degree o regulatory intervention

on retail pricing thereby restricting the

operator’s ability to implement

retention strategies

• Lack o internal expertise and

experience to quickly and cost-

eectively design and implement a

regulatory reporting capability

Fully Allocated Cost

Historical costs

Top-down *starting rom Financial Records

Current costs

Network and operational eciency

WACC

Long Run Incremental Cost

Bottom-Up

*based on best practice engineering

M e t h o d o l o

g y

M o d e l

C o s t b a s i s

K e y d a t a

a d

j u s t m e n t s



Our Approach

PwC took a total business

approach to helping the client,

and demonstrated how it could

transorm its regulatory reporting

capabilities to provide powerul

commercial insights and assist their

business decision-making.

Over the past years, we have been theconsultant o choice or this operator

and we have worked with the senior

management across its regulatory and

business strategies. PwC was

instrumental in developing and

implementing our client’s regulatory

strategy and regulatory reporting

capabilities:

• We designed and implemented their

Fully Allocated Cost model and

Separated Accounts based on Historic

and Current Cost Accounting principles

and assisted in achieving a clean audit

o these accounts

• Ongoing production o Separated

Accounts and management o

relationship with the auditors

• Development o Top Down and

Bottom Up Long Run Incremental

costing capability used or

interconnection rate setting

• Determination o comparative eciency

using the stochastic rontier econometric

technique. Results were used as inputs

to the incremental cost model

• Assistance in negotiations and

submissions to the regulator

• Complete revaluation o its xed assets

using Current Cost Accounting principles

ollowed by an end to end Fixed Asset

Register Reconstruction exercise

• Adjustments to the regulatory reporting

capability to enable use o inormation

or commercial decision making,

protability and channel analysis and

pricing decisions

We adopted a multi-dimensional

and customised approach or the

client including:

• Detailed case studies o practice

in other European countries

• Targeted investigations on other

issues such as treatment o

depreciated assets and large

capital work in progress balance

• Comprehensive scenario analysis

to quantiy the impact o dierent

calculation methods or key data

inputs on the operator’s unit costs,

e.g. depreciation methods,

WACC calculation

Our client has realised tangible

regulatory and commercial

benets as a result o our work

• Tangible cost savings or the client

– we implemented the capability

more quickly and cost eectively

than would be the case had the

client done the job themselves

• Operational and compliant

regulatory reporting capability

and robust costing inormation

or interconnection price setting

• Knowledge transer and training

to client

• Condence o the regulator in the

quality and reliability o its reporting

• A series o regulatory wins including

an increase in mobile termination

rates and push back on harsher

reporting requirements

• Complete visibility o product and

channel protability and margins

• Rigorous retail price monitoringthat enables competitive yet

compliant pricing



This publication has been prepared or general guidance on matters o interest only, and does not constitute proessionaladvice. You should not act upon the inormation contained in this publication without obtaining specic proessional advice.No representation or warranty (express or implied) is given as to the accuracy or completeness o the inormation contained in

this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do notaccept or assume any liability, responsibility or duty o care or any consequences o you or anyone else acting, or reraining toact, in reliance on the inormation contained in this publication or or any decision based on it.

© 2009 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” reers to PricewaterhouseCoopers LLP(a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global networkor other member rms o the network, each o which is a separate and independent legal entity.

www.pwc.co.uk/telecoms

Contacts

Alastair Macpherson – Partner

+44 20 7213 [email protected]

Alistair is a Partner in the UK practice and the leader o our

Telecommunications Regulatory Centre o Excellence. He has worked

in the telecommunications industry or over 20 years or operators,

regulators and governments in over 40 countries specialising in the

provision o regulatory policy, economic and strategic advice to the

telecoms sector. Prior to joining PwC, he worked or BT where he was

responsible or implementing BT’s Accounting Separation, Top Down

and Bottom Up incremental costing capability.

Dr Robert Bates – Director

+44 20 7804 0795

[email protected]

Robert is a Director in the Strategy practice with 15 years experience in

the telecommunications sector. A chartered accountant by training,

the majority o his experience has ocused on costing, regulation and

interconnection. Robert provides advice and assists with theimplementation o Accounting Separation, Current Cost Accounting

and Long Run Incremental Costing solutions in a number o dierent

operators. He was responsible or the BT regulatory audits, including

Accounting Separation, Current Cost Accounting and LRIC or the rst

ve years o his career.

Ioana Dobre – Assistant Director

+44 20 7583 5000

[email protected]

Ioana is an Assistant Director in the Strategy practice with 10 years o

consulting experience in telecommunications. She has advised senior

management teams or more than 20 clients across Europe, Asia and

Caribbean to design and implement sophisticated costing and

protability solutions to dene and support their commercial and

regulatory strategies. She is a trained Chartered Management

Accountant and holds an MBA in International Strategy. Prior to joining

PwC she worked or Vodaone.

Catherine Lunn – Manager

+44 20 7213 8547

[email protected]

Catherine is a Manager in the Strategy practice with 4 years experience

in the telecommunications sector. The majority o her experience is in

regulatory costing or both mobile and xed operators including six

Accounting Separation projects, LRIC modelling and Fixed Asset

Register Reconstruction with a number o operators in the UK and

Europe. She has also worked on commercial costing projects.

accounting separation and beyond

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