relevance and issues of ifrs on regulatory cost modelling · retail minus used to determine prices...
TRANSCRIPT
Relevance and Issues of IFRS
on Regulatory Cost Modelling14 November 2018
Version 1.0
Funded by the European Union
2
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
3
IFRS support harmonization of external reporting over the globe becoming vital with globalization.
IFRS Framework – General Conceptualization
IFRS
IAS
Interpretations
The Framework for Preparation and Presentation of Financial Statements – IASB* Framework
International Financial Reporting
Standards (IFRS) consist of:
*International Accounting Standards Board
A common global language for business
affairs so that company financial statements
are understandable and comparable across
boundaries
Particularly important and helpful for
companies with subsidiaries in several
countries
Progressively replacing different national
accounting standards
EU- Listed companies must comply with
IAS/IFRS by 2005
Stock exchange-national listing rules to be complied, IAS/IFRS based reporting frequently
covered in the rules
National laws – still take precedence over IAS/IFRS
Framework
4
The key objective of financial statements (and IFRS / IAS) is to help to predict sustainability of financial performance.
IFRS Framework – Key objective of IFRS/ IAS
IASB Framework Key Elements of IFRS
Balance sheet (B/S)
Profit and Loss statement (P/L)
Cash flow statement (C/F)
Statement of changes of equity
Footnotes
“Users of F/S”-> primarily the investors/ owners, regulators
“Management”- agent hired by owners (=principals)
The objective of financial statements (F/S) is to provide information
about :
financial position
financial performance and,
cash flows of an entity
that is useful to a wide range of users in making economic
decisions. F/S show the results of the management's stewardship of
the resources entrusted.
IFRS/IAS shall enable and support:
Presentation of the information about the past
Maximization of its predictive value for users (= for the future)
5
IFRS Framework - Complete Set of Financial Statements.
The complete set of F/S provide a framework, guidelines and rules across all industries to present “financials” and make them public.
COMPLETE SET OF FINANCIAL STATEMENTS
Statement of changes in
equity
Statement of cash flows
NotesComparative information
Statement of financial position (Balance Sheet)
Statement of profit & loss and other comprehensive
income
All changes in
equity
Summary of major
cash inflows and
outflows
Significant accounting
policies and other
explanatory notes
Figures for
preceding period for
all amounts reported
Assets
Liabilities
Equity
Income (including gains) and
Expenses (including losses)
6
Agenda
01 IFRS Framework
02 IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04 Specific Cases
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
7
Important accounting issues for Telcos when being compliant to IFRS rely on the characteristics of telecom business.
IFRS Issues for Telcos - Top Ten Accounting Issues for Telco (1/2)
Revenue recognition IAS (18) and IFRIC* interpretations are principle-based rather than sector-specific, which has
resulted in a degree of inconsistency in the recognition of revenues by telecoms. A joint revenue
recognition project between FASB** and IASB also may change the revenue landscape in the future.
Capacity transactions Indefeasible rights of use (IRU) – contracts that entitle telecoms to buy/sell capacity or network.
Accounting for IRU can be complex and vary based on the facts and circumstances of
individual contracts.
Intangible assets Spectrum or wireless licenses, software (both acquired and internally developed) and goodwill
are significant to the statement of financial position of telecoms and to the decision maker in any
acquisition.
Property, plant and
equipment
Telecoms are faced with the challenging task of reviewing capitalization policies, detailed asset
tracking and component depreciation. The nature of any telecom’s “mass asset” accounting will
come under close scrutiny as part of the adoption of IFRS.
Impairment of non-financial
assets
A one-step approach requiring impairment losses to be recorded in the event the carrying amount
of an asset exceeds its recoverable value. Consideration of the time value of money (i.e.,
discounting) is required.
*IFRIC is the interpretative body of the IASB; **Financial Accounting Standards Board
8
Lease accounting and provisions and contingencies are gaining attention among other items due to the transformation of the sector.
IFRS Issues for Telcos - Top Ten Accounting Issues for Telco (2/2)
Leases Considering the operating costs required by telecoms and the changing face of sector, lease
accounting is gaining attention.
Financial instruments Telecoms generally have financial instrument accounting issues owing to the treasury structures
used to assist material network infrastructure build.
Provisions and
contingencies
The standard requires the recognition of a present obligation as a provision based on the probability
of occurrence of outflow of resources. This may result in the recognition of additional amounts, as
compared to the existing standards currently applied by telecoms.
First-time adoption of IFRS Selecting accounting policies at the time of preparing the opening statement of financial position not
only affects the first IFRS financial statement but also the financial statements for subsequent
periods.
Presentation of financial
statements
Under IAS 1 entities present “complete” financial statements along with comparatives: Statement
of financial position, Statement of comprehensive income, Statement of changes in equity,
Statement of cash flows and notes.
9
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
10
Price regulation uses predefined remedies and tools to determine prices. Cost models, ERT and price/margin squeeze tests are influenced by IFRS.
Relevance of IFRS on Price Regulation - Generic Tariff Regulation Framework Outline
Obligations of all Market Players Imposed by NRAs*
Market Players with SMP Market Players w/o SMP
Ex ante Process (predefined remedies/tools)
Benchmarking
Price Cap
Cost Model
Retail Minus
Approval Required
But…
No Approval Required
Ex post Assessment (at any time)Margin Squeeze
Ove
rall
Whole
sale
Regula
tion
Fra
mew
ork
(R
efe
rence O
ffer)
Ta
riff
Re
gu
lati
on
Fra
me
wo
rk
Benchmarking
Economic Replicability Test (ERT)
11
Top down cost modelling is the remedy which presents more relevance to IFRS implementation as well as margin/price squeeze tests.
Relevance of IFRS on Price Regulation - Description of Retail and Wholesale Tariffs Regulation Measures
Cost Model Based on specific operator´s costing information from accounting and financial records (top-
down approach) or on an hypothetical efficient new entrant cost structure (bottom-up approach) to
determine unit costs per service at wholesale and/or retail levels.
Price Cap Price cap regulation uses a formula to determine the maximum allowable price increases for a
pre-defined basket of services for a specified period. It permits the recovery of unavoidable cost
increases (e.g. inflation – CPI*, tax increases, etc.) through price increases.
Retail Minus Used to determine prices for wholesale services. The retail minus methodology begins with the retail
price and deducts the calculated retail costs (the minus), resulting in a price for the wholesale
service.
Benchmarking Comparable international prices for pre-defined services or basket of services are collected and a
'price corridor' is determined. Regulated wholesale and/or retail prices fall within this determined
'price corridor‘.
Margin/Price Squeeze Test A margin/price squeeze occurs when a single dominant wholesaler sells services to a retailer at a
price too high for the retailer to make any significant profit. This anti-competitive behavior can
be detected through a series of tests.
*Note: Consumer Price Index
12
Relevance of IFRS on Price Regulation – Top-Down and Bottom-Up Approaches; FAC/FDC vs. LRIC
Out of the two main modelling approaches, the top down approach has more touch points with IFRS by definition, however it is not fully compliant.
FAC/FDC
LRIC
As accounting approach, the FAC/FDC methodology is based on the expenses incurred by the operator and allocates them to each service in
accordance with the cost causation principle.
As an economic approach, the LRIC methodology considers that the cost of a service is equal to the change in total cost resul ting from a
discrete variation in output in the long run (that is when all inputs are variable).
Bottom-up
Calculation of Opex per netw ork element, depreciation
and cost of capital
Pricing of modelled netw ork assets at current or historical
prices
Creation of a netw ork model based on actual or hypothetical
structures
Allocation of total costs to services by means of service routing factors and mark-ups
Top-down
Derivation of operating costs and depreciation from actual
accounting records
Calculation of cost of capital by applying pre-tax WACC
on average capital employed
Allocation of total costs to services by means of service routing factors (element based
costing)
Direct reference toaccounting records
Direct reference toactual or hypothetical
network structures
IFRS
13
CCA Approach
HCA Approach
Relevance of IFRS on Price Regulation - HCA vs. CCA
A preferred cost valuation methodology in price regulation is CCA/FL which differs in some extent from IFRS which uses normally HCA.
HCA Approach HCA relies on what was built in the previous years to estimate what should be built for the coming
years.
CCA Approach CCA estimates the number of assets for a given year without taking into account what was
previously built.
Pros Cons
Depends heavily on the availability and
accuracy of extensive and detailed historical
data.
Reflect more closely the history of the
deployments corrected for potential
inefficiencies.
May not reflect the historical structure.
Could be difficult to achieve the level of
efficiencies in the case of significant drop in traffic.
Sends a more efficient signal on how much to
invest each year.
With an economic approach, it gives the same results as the historical approach except if
traffic is decreasing which is rarely the case for
telecommunications network.
14
Relevance of IFRS on Price Regulation - The Two Approaches Side by Side
CCA involves major adjustments of financial accounts if applied in the context of cost models. Assets need to be revalued at CCA / FL costs.
Historical Cost Accounting (HCA) vs. Current Cost Accounting (CCA)
Usually exogenous variable (based on taxation rules, industry standards, etc.) Asset life
Might be endogenous, calculated by solving commercial optimization problem
Assetvaluation
Based on historic equipment purchasing prices Based on current replacement value / market value of equipment
Depreciationmethod
Tends to use financial accounting depreciation (straight-line, accelerated)
Tends to use economic depreciation methods
Tends to result in higher telecom asset values; neglects price trends
Meaning
Tends to result in lower telecomasset values; depreciation might be higher due to
price erosion
Not suitable for mimicking a competitive market place
Costingtheory
Suitable for simulating the cost of an efficient late entrant who is free to chose technology
15
Regulatory pricing often requires to reevaluate assets using CCA and MEA methods that are more suitable for economic costing than for accounting.
Relevance of IFRS on Price Regulation - Problem of Asset Valuation
Asset Valuation Methods
HCA and CCA is about the price tag we put on assets employed. HCA is based on historical purchasing prices, whereas CCA refers to
current prices or MEA values.
Historical values
Current values
Modern equivalent assets (MEA)
Value of modern assets an operator would deploy today to create specific network capacities (switching, transmission, etc.)
Assets are revalued to reflect current cost of modern, but stable technology to provide a similar level of functionality and capacity
Different effects on different network elements: costs of labour intensive assets (cable/ducts) will usually be higher, costs of
technology intensive elements (switches, transmission) will be lower
Advantage: General agreement that MEA more suitable for economic costing
Disadvantage: MEA costs can be difficult to determine
16
Relevance of IFRS on Price Regulation - Problems of Current Cost Accounting in IFRS Environment
Under CCA, depreciation is the reduction in market value of an asset. While CCA is the theoretically soundest approach its, implementation is difficult.
Problem of Deriving Current Market Values
What is the current market value of an asset?Key question
Problems
No working secondary market for used telecom
assets
No current market prices available
How to estimate the current value?
Solutions(examples)
Revaluation of existing asset by applying correction factor
for MEA
Cash Flow Models(Economic Depreciation)
1 2
17
An approach for asset revaluation to account for MEA prices requires the collection of MEA prices and input about the installed capacity.
Relevance of IFRS on Price Regulation - Elaborating Current Market Values - Asset Revaluation with MEA can Deviate from IFRS
MEA Calculation Example Two Steps:
Replacement cost of existing asset
Accumulated depreciation
150,000
-60,000
Net Book Value existing asset 90,000
Cost of MEA 220,000
Output of existing asset
Output of MEA
20,000 units
40,000 units
MEA cost (for same output as existing asset):
220,000 x (20,000 / 40,000)
110,000
Replacement cost of existing asset becomes 110,000 reduction of
40,000 from present accounting replacement cost of 150,000
Accumulated depreciation needs to be reduced in same proportion: (110 /
150) x 60,000 = 44,000, hence
Revised replacement cost of existing asset
Revised accumulated depreciation
110,000
-44,000
Revised NBV of existing asset 66,000
1. Revaluation of assets:
Estimates of current value of all fixed assets on a
replacement cost or modern equivalent asset
(MEA) basis
Difficulty increases with age and complexity of
network
Generally the newer the network the better and
more up to date is the information about
equipment;
2. Depreciation adjustments:
Real asset lives are applied to the current MEA
values
Accounting entries are adjusted in depreciation in
regard of any holding gain and loss generated by
asset price changes
18
Due to the capability of transforming historical FAC models into LRIC and LRIC standards, it is possible to reconcile with IFRS financial statements.
Relevance of IFRS on Price Regulation – Reconciliation Possibilities
Reconciliation Possibilities with Regulatory Cost Modelling
Historical
FAC
Common
costs
adjustment
Economic
l i fetime
adjustment
Efficiency
adjustment
Historic
LRIC
(top-down)
Current
cost
adjustment
Current
LRIC
(bottom-up)
Increment-
related fixed
costs
LRIC
LRIC Adjustment HCA to CCAAdjustment
LRICAdjustment
Top-Down modeling Bottom-Up modeling
LRIC-Cost Model
Remarks
To enhance the robustness (of by nature imperfect)
Bottom-Up LRIC models it is possible to reconcile
and cross-check the results with Top-Down models
based on accounting records (IFRS).
Usually the implementation of Accounting
Separation procedures are carried out in a Top-
Down manner.
Assumptions of both models should be also
compared.
Integration of Top-Down and Bottom-Up
approaches in a single costing model (excel based)
is favorable for an efficient achievement of cost
modelling goals.
Note: Under CCA revaluation, could happen that
the revalued assets have a higher value than their
calculated value under HCA valuation (e.g. copper
networks) leading to higher unit costs in LRIC
models.
Accounting Separation
Input
IFRS
19
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
20
Out of a long list of major accounting issues for telecoms, three IFRS main areas are identified to be relevant for price regulation.
Specific Issues for Telco Price Regulation – Short List
Specific Issues for Telco Price Regulation
Intangible assets
In-House developed software
Telecommunication licenses
Acquisitions
Leases
Indefeasible rights of use and capacity arrangements
Impairment of assets
Inventories
Inventory and marketing costs
Property plant and equipment
Revenue recognition
Bundled (or multi-element) arrangements
Prepaid sales and revenue
Customer loyalty programs
Content-providing arrangements
Interconnection arrangements
Activation cost and subscription fees
Information technology considerations and parallel reporting
IAS 16 — Property, Plant and Equipment IAS 38 — Intangible Assets IFRS 16 — Leases
Source: KPMG (2010), PWC (2008), PWC (2009a), PWC (2009b), Ernest & Young (2009), Detecon analysis
21
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
22
IAS 16 Property, Plant and Equipment (PPE) outlines the accounting treatment for property, plant and equipment.
Specific Issues for Telco Price Regulation: IAS 16- Property Plan and Equipment (Tangible Assets)
The objective is to prescribe the accounting treatment for property, plant, and equipment.
The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and
impairment losses to be recognised in relation to them.
IAS 16 applies to the accounting for property, plant and equipment, except where another standard requires or permits differing
accounting treatments, such as: assets classified as held for sale (IFRS 5); biological assets related to agricultural activity (IAS 41);
exploration and evaluation assets (IFRS 6); mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
IAS 16 – Objective and Scope
PPE are tangible assets (they have physical substance) that are held for use in the production or supply of goods and services,
for rental to others, or for administrative purposes and are expected to be utilized in more than one period.
e.g. Backbone, Fibre Optic, Cable Infrastructure, etc
23
Initial measurement is at cost including the purchase price and all costs necessary to bring the asset to working condition for its intended use.
Specific Issues for Telco Price Regulation: IAS 16- Property Plan and Equipment (Tangible Assets)
Recognition (reporting in B/S) - the cost of an item of PPE is recognized as an asset if
the item satisfies the definition of an asset, and
the cost can be measured reliably
Initial measurement – at cost including the purchase price and all costs necessary to bring the asset to working condition for its intended
use, i.e. costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, estimated
cost of dismantling
Recognition and Initial Measurement
Illustration:An entity is constructing a new production facility. The cost of the materials used was €20,000, consultancy fees were €1,000 and site preparation costs were €2,000. All of these are direct costs which should be included as part of the cost of the asset.The production facility will require dismantling in five years time at a cost of €800. This cost should be included as part of the cost. If the effect of time value of money is significant, the cost of dismantling the facility should be recognized as its present value.Operating losses of €350 were incurred in the start-up period between the asset becoming ready for use and full production commencing. The start-up period losses cannot be capitalized.
24
Normally recommended depreciation method in IFRS environment is the straight line method and units of production method.
Specific Issues for Telco Price Regulation: IAS 16 - Property Plan and Equipment (Tangible Assets)
Subsequent measurement:
Cost model. Asset is carried at cost less accumulated depreciation and impairment.
Revaluation model. Asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation
and impairment.
Depreciation begins when asset is available for use and continues until derecognition:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset's useful life
The depreciation method used should reflect the pattern in which the asset's economic benefits are consumed by the entity
Subsequent Measurement and Depreciation
Straight-line method
Straight-line method
Units-of-productionmethod
• Annual Depreciation = (Cost of PPE- RV) / Useful life (yrs)
• Annual Depreciation= (Cost of PPE- RV) / estimated production * Actual production
• Annual Depreciation = (Cost of PPE - RV) x Rate%
25
Telecoms face challenging task of reviewing capitalisation policies, detailed asset tracking and component depreciation.
Specific Issues for Telco Price Regulation: IAS 16- Property Plan and Equipment (Tangible Assets)
Mass asset:
the nature of any telecom’s accounting will come under close scrutiny as part of the adoption of IFRS.
Component accounting:
a telecom is required to allocate the initial amount relating to an item of property, plant and equipment into its significant parts or
“components” and depreciate each part separately. This may involve significant judgment on part of the telecom.
Depreciation methods:
when an item of property, plant and equipment comprises significant individual components for which different depreciation methods
or rates are appropriate, each component is depreciated separately.
Telecoms have the option to use one of the depreciation methods as long as it reflects the pattern in which the economic benefits
associated with the asset are consumed.
Relevance for Telecoms
26
Cost recovery are calculated using different depreciation methods. They differ in whether they account for costs of capital and price trends.
Specific Issues for Telco Price Regulation: Depreciation Methods Generally Implemented in Regulatory Cost Modelling (1 of 2 )
Excl. costs of
capital
Incl. costs of
capital
Excluding price trends Including price trends
Annuity
Viable approximation where price stays constant or
no resale is possible
Constant over lifetime of asset, hence the age of
the asset becomes irrelevant
Depreciation is generally underestimated in the
early years of investment
Straight line depreciation
Viable approximation where price stays constant or
no resale is possible
Costs of capital have to be accounted for
separately
Tilted straight-line depreciation
Often better approximation than straight line
depreciation since prices tend to fall over lifetime
Costs of capital have to be accounted for
separately
Tilted annuity
Often better approximation than annuity since
prices tend to fall over lifetime
Depreciation is generally underrepresented in the
early years of investment
27
Specific Issues for Telco Price Regulation: Depreciation Methods Generally Implemented in Regulatory Cost Modelling (2 of 2 )
Economic depreciation reflects the periodic change in market value of an asset defined as the discounted future cash flows generated by the asset.
EconomicDepreciation Input Factors
Economic Depreciation = Loss of Asset’s Market Value in period
= MVt+1 – MVt
Market Value MVt = Sum of discounted Free Cash Flows
=
Free Cash Flow Calculation
tn
1t
Out
t )WACC1(xFCF
Cash inflows (excl. interest) in period t
- Cash outflows (excl. interest) in period t
- Taxes, which decrease residual income from asset
- Capex for replacement and expansion + increases in WC
= Free Cash Flow (before interests, dividends and credit
repayments)
In
tCF
Out
tCF
tTax
tInvest
tFCF
Discount rate (weighted average cost of capital)
MEA asset prices over time
Operating costs over time
Utilization profile of the asset
…
Factors determine the economic life of an asset
28
The Regulatory Legacy Civil Engineering Assets (RLCEA) based on the EU Recommendation of 2013 defines a Regulatory Asset Base (RAB).
Specific Issues for Telco Price Regulation: Regulatory Legacy Civil Engineering Treatment (1 of 3)
Regulatory Legacy Civil Engineering Assets (RLCEA) and Regulatory Asset Base (RAB)
MEA: Modern Regulatory Assets
CEA: Civil Engineering Assets
FAR: Fixed Asset Register
Total Network CAPEX in Year 0 of Analysis
Reusable CEA
CEA-MEA based
(new investments
Fully depreciated CEA
Non reusable CEA
Not considered
Extracted from FAR
Annualization (calculation of
depreciation charge and cost of
capital)
Extracted from BoQ
Indexation Method
29
The RLCEA based on the EU Recommendation of 2013 implements the indexation only to the reusable CEA.
Specific Issues for Telco Price Regulation: Regulatory Legacy Civil Engineering Treatment (2 of 3)
Regulatory Legacy Civil Engineering Assets (RLCEA) and Regulatory Asset Base (RAB)
MEA: Modern Regulatory Assets
CEA: Civil Engineering Assets
FAR: Fixed Asset Register
Total Network CAPEX in Year 0 of Analysis
Reusable CEA
CEA-MEA based
(new investments)
Extracted from FAR
Annualization (calculation of
depreciation charge and cost of
capital)
Extracted from BoQ
Indexation Method
30
Cost models can consider alternatively a fully MEA approach to calculate the RLCEA based on the technical modeling, differing from IFRS.
Specific Issues for Telco Price Regulation: Regulatory Legacy Civil Engineering Treatment (3 of 3)
Regulatory Legacy Civil Engineering Assets (RLCEA) and Regulatory Asset Base (RAB)
MEA: Modern Regulatory Assets
CEA: Civil Engineering Assets
FAR: Fixed Asset Register
Total Network CAPEX in Year 0 of Analysis
Reusable CEA
CEA-MEA based
(new investments)
Technical modeling
Annualization (calculation of
depreciation charge and cost of
capital)
Extracted from BoQ
31
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
32
IAS 38 specifies when and how intangible assets should be recognized, measured, amortized and tested for impairment.
Specific Issues for Telco Price Regulation: IAS 38- Intangible Assets Principles & Interpretation
Underlying principles of IAS 38 Interpretation
Definition Identifiable (separately) non-monetary asset without physical substance
Recognition
Tests to be applied:
Probable future economic benefits (therefore some costs directly expensed- start-up
costs, training, advertising)
Cost can be measured reliably (those internally generated not recognized- eg. brands,
customer lists, internally generated goodwill)
“PIRATE” criteria testing
Amortization
For those with definite useful life-> Review useful time and method at least each
fin.year; amortization till 0 residual value
For those with indefinite useful life-> Review assumption each fin. year
Impairment Impairment tests at least annually
Measurement at / after acquisition At cost (directly attributable)/ afterwards following cost model or revaluation model
33
Intangible assets related investment represent important category, eating up substantial part of Capex budget.
Specific Issues for Telco Price Regulation: IAS 38- Intangible Assets- Relevance for Telco
Beside network related investments (reflected in tangible assets), intangible assets and related investment represent second most
important category – proportion even increasing, especially for established operators
For many Telcos , some key Intangible assets are:
ERP systems / licenses
Tendering for new licences / spectrum
R&D
R&D costs normally are reported in the P&L account as Opex, however they can be treated as intangible assets if it can be proved that
R&D have probable future economic benefits
Relevance for Telcos
34
In some real-life situations, there is only thin demarcation line between expense and intangible asset.
Specific Issues for Telco Price Regulation: IAS 38- Intangible Asset s- PIRATE
Research Development
Criteria for Decision (PIRATE)
Investigation with prospect of obtaining of knowledge and
understanding.
To be expensed when occurred. (P/L)
Application of findings/ knowledge to plan/design/ production of
new/ substantially improved products (…future economic
benefits)
To be capitalised (recognised as intagible asset) and amortised.
(B/S)
• Probable future economic benefitsP
• Resources adequate to complete use/sellR
• Intention to complete and use/sellI
• Ability to use/sellA
• Technical feasibilityT
• Expenditure can be measured reliablyE
35
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
36
IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases.
Specific Issues for Telco Price Regulation: IFRS 16 — Leases
IFRS 16 — Leases
“IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides
a single lessee accounting model, requiring lessees to
recognise assets and liabilities for all leases unless the lease
term is 12 months or less or the underlying asset has a low
value. Lessors continue to classify leases as operating or
finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17”.
“IFRS 16 was issued in January 2016 and applies to annual
reporting periods beginning on or after 1 January 2019.”
Objectives
• Recognition,
measurement,
presentation and
disclosure of leases
• Ensuring that lessees and lessors provide
relevant information
that faithfully
represents those
transactions
Source: https://www.iasplus.com/en/standards/ifrs/ifrs-16
37
According to IFRS 16 leases in some cases can be shown as assets and not as liabilities.
Specific Issues for Telco Price Regulation: IAS 38- Intangible Assets- Relevance for Telco
IFRS 16 guides on how to treat leasing assets, in some cases as Capex
Capex has an impact in cost based pricing
Previous standards prescribed leasing as a sharing obligation, therefore as a liability to be reported in the BS
In IFRS 16 leasing costs can be shown as an asset, however will depend on the operational model and a yearly update (at fair value)
shall be implemented
Relevance for Telcos
38
Agenda
01 IFRS Framework
02 General IFRS Issues for Telcos
03Relevance of IFRS on Price
Regulation
04Specific Issues for Telco Price
Regulation
IAS 16 — Property, Plant and
Equipment
IAS 38 — Intangible Assets
IFRS 16 — Leases
05 Q&A
BACKUP
41
IAS List # Name Issued
IAS 1 Presentation of Financial Statements 2007*
IAS 2 Inventories 2005*
IAS 3Consolidated Financial StatementsSuperseded in 1989 by IAS 27 and IAS 28
1976
IAS 4Depreciation AccountingWithdrawn in 1999
IAS 5Information to Be Disclosed in Financial StatementsSuperseded by IAS 1 effective 1 July 1998
1976
IAS 6Accounting Responses to Changing PricesSuperseded by IAS 15, which was withdrawn December 2003
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003
IAS 9Accounting for Research and Development ActivitiesSuperseded by IAS 38 effective 1 July 1999
IAS 10 Events After the Reporting Period 2003
IAS 11Construction ContractsWill be superseded by IFRS 15 as of 1 January 2017
1993
IAS 12 Income Taxes 1996*
IAS 13Presentation of Current Assets and Current LiabilitiesSuperseded by IAS 1 effective 1 July 1998
IAS 14Segment ReportingSuperseded by IFRS 8 effective 1 January 2009
1997
IAS 15Information Reflecting the Effects of Changing PricesWithdrawn December 2003
2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases 2003*
IAS 18RevenueWill be superseded by IFRS 15 as of 1 January 2017
1993*
IAS 19Employee Benefits (1998)Superseded by IAS 19 (2011) effective 1 January 2013
1998
IAS 19 Employee Benefits (2011) 2011*
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1983
42
IAS List # Name Issued
IAS 21 The Effects of Changes in Foreign Exchange Rates 2003*
IAS 22Business CombinationsSuperseded by IFRS 3 effective 31 March 2004
1998*
IAS 23 Borrowing Costs 2007*
IAS 24 Related Party Disclosures 2009*
IAS 25Accounting for InvestmentsSuperseded by IAS 39 and IAS 40 effective 2001
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Separate Financial Statements (2011) 2011
IAS 27Consolidated and Separate Financial StatementsSuperseded by IFRS 10, IFRS 12 and IAS 27 (2011) effective 1 January 2013
2003
IAS 28 Investments in Associates and Joint Ventures (2011) 2011
IAS 28Investments in AssociatesSuperseded by IAS 28 (2011) and IFRS 12 effective 1 January 2013
2003
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
IAS 30Disclosures in the Financial Statements of Banks and Similar Financial InstitutionsSuperseded by IFRS 7 effective 1 January 2007
1990
IAS 31Interests In Joint VenturesSuperseded by IFRS 11 and IFRS 12 effective 1 January 2013
2003*
IAS 32 Financial Instruments: Presentation 2003*
IAS 33 Earnings Per Share 2003*
IAS 34 Interim Financial Reporting 1998
IAS 35Discontinuing Operations Superseded by IFRS 5 effective 1 January 2005
1998
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS 38 Intangible Assets2004*
IAS 39
IAS 40IAS 41
Financial Instruments: Recognition and MeasurementSuperseded by IFRS 9 where IFRS 9 is appliedInvestment PropertyAgriculture
2003*20162014
43
IFRS List
Title Date issued Effective Date
IFRS 1 — First-time Adoption of International Financial Reporting Standards 24 Nov 2008 01 Jul 2009
IFRS 2 — Share-based Payment 19 Feb 2004 01 Jan 2005
IFRS 3 — Business Combinations 10 Jan 2008 01 Jul 2009
IFRS 4 — Insurance Contracts 31 Mar 2004 01 Jan 2005
IFRS 5 — Non-current Assets Held for Sale and Discontinued Operations 31 Mar 2004 01 Jan 2005
IFRS 6 — Exploration for and Evaluation of Mineral Resources 09 Dec 2004 01 Jan 2006
IFRS 7 — Financial Instruments: Disclosures 18 Aug 2005 01 Jan 2007
IFRS 8 — Operating Segments 30 Nov 2006 01 Jan 2009
IFRS 9 — Financial Instruments 24 Jul 2014 01 Jan 2018
IFRS 10 — Consolidated Financial Statements 12 May 2011 01 Jan 2013
IFRS 11 — Joint Arrangements 12 May 2011 01 Jan 2013
IFRS 12 — Disclosure of Interests in Other Entities 12 May 2011 01 Jan 2013
IFRS 13 — Fair Value Measurement 12 May 2011 01 Jan 2013
IFRS 14 — Regulatory Deferral Accounts 30 Jan 2014 01 Jan 2016
IFRS 15 — Revenue from Contracts with Customers 28 May 2014 01 Jan 2017
IFRS 16 - Leases 13 Jan 2016 01 Jan 2019
IFRS 17 – Insurance Contracts 18 May 2017 01 Jan 2021
Conceptual Framework