fixed assets staying at the front of the pack(eng)

8/4/2019 Fixed Assets Staying at the Front of the Pack(Eng)

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Fixed assetsStaying at the front of the pack

Telecommunications Benchmarking series


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About Ernst & Youngs

Global Telecommunications Center

In a rapidly-changing environment,

telecommunications operators are facing the

challenges of growth, operational efciency,

convergence, technology and increasing

regulatory pressures. Ernst & Youngs Global

Telecommunications Center brings together a

worldwide team of professionals to help you achieve

your potential a team with deep technical experience

in providing assurance, tax, transaction and advisory

services. The Center works to anticipate market trends,

identify the implications and develop points of view onrelevant industry issues. Ultimately it enables us to

help you meet your goals and compete more effectively.

Its how Ernst & Young makes a difference.

ey.com/telecommunications


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2 Fixed Assets Staying at the front of the pack

Telecommunications Benchmarking Series

Foreword

Increasing regulation, the emergence of new technologies and a commoditizingtelecommunications market are making it difcult for traditional industry

players to create competitive advantage.

Given its capital-intensive nature, a telecom companys competitive edge comes

from how fast it can adapt its network its xed assets to deliver the new

products and services customers are demanding. Yet, the rapidly converging

global reporting and regulatory frameworks are leveling the playing eld in terms

of xed assets management and reporting.

In this environment, turning strategic xed assets management into a differentiator

requires the same precision and control as cyclists jostling for a position at the front

of the pack.

To nd out how organizations are responding to these challenges, in 2007Ernst & Young conducted its second online global study to determine the impact

of global reporting and regulatory frameworks on a telecom company and its ability

to manage its assets. The ndings were combined with secondary research and

Ernst & Youngs own insights and analysis to create the following report.

Ernst & Young would like to thank the participating companies from around the world

for their time and input. We believe this report, which discusses accounting practices

and reporting and regulatory changes in the context of industry trends, will be of

interest to them and other senior telecommunications executives. It encapsulates the

industry-wide information needed to compare and contrast each companys xed assets

management strategies with those of its industry peers.


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3Fixed Assets Staying at the front of the pack

Contents

Methodology 4

How to use this report 4

Participating companies 5

Overview 6

Fixed assets management to sustain

a competitive advantage 12

Strength: A standardized approach is creating greater

consistency and transparency 14Control: Operators are beginning to invest in people and systems

to improvexed assets management 16

Balance: Emerging technologies are placing signicant pressure

on asset service lives 18

Condence: Maintaining shareholder condence 20

Focus: New investment strategies 22

Flexibility: A broader skill set could improve xed assets

management 24

Management self-test: Are your xed assets

being strategically managed? 26

Appendices: 28

Glossary 28

Sources 33


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In 2007, Ernst & Young developed and

disseminated an online survey about

how telecom companies are respondingto the current challenges of xed assets

management, including the impact of new

reporting and regulatory requirements.

This survey is available to telecom

companies at anytime throughout the

year, with a report analyzing the ndings

produced annually.

Of the 15 responding telecom companies

that participated in this years survey, 14

are based outside the US. Of those, nine

are required to comply with International

Financial Reporting Standards (IFRS),with another two companies due to comply

in the next two years and the countries of

the remaining three now considering IFRS

implementation. In addition, all companies

that are publicly listed in the US are to

comply with the Sarbanes-Oxley Act.

For the study, telecom companies were

asked detailed questions about:

The importance of xed assetsaccounting

Their current xed assets practices,policies, procedures, and systems

The impact, if any, that transitionto IFRS has had on their xed assets

accounting

Their current treatment of specicasset categories

93% of the participating companies said

there was nothing unusual about their

network infrastructure that it is typicalfor the industry making meaningful

comparisons possible.

How to use this report

The Overview section provides a high-level summary of the key ndings of our

study. The second section, Fixed assets

management to sustain a competitive

advantage, takes an in-depth look at some

of the major issues telecom companies

have faced since their transition to

IFRS and Sarbanes-Oxley. This section

concludes with a Management self-

test designed to help senior telecom

executives determine if their companies

are on track. The nal sections, Fixed

assets in review and the Survey Results,allows those executives responsible for

xed assets management to dig down into

the details of current industry practices.

Methodology

Fixed assets management can be dened as the tasks associated

with the planning, reporting, and control over a companysproperty plant and equipment and intangibles.


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The 15 telecom companies that participated in this years study are from Africa, Asia-

Pacic, UK/Europe and the Americas. These companies represent more than US$300

billion in combined annual revenues and US$250 billion in combined total xed assets.

Source: Global Telecom Fixed Assets Survey, Ernst & Young, 2007. Note: Information was current at time

of the study. Material is presented in aggregate form because participants were promised anonymity.

* Consent letter allowing the use of company name not available at time of study publication.

Participating companies

Ernst & Young thanks

the participating telecom

companies and telecom

company executives whose

contributions made our

report possible.

AT&T Inc.

United States

Belgacom SA

Belgium

Deutsche Telekom AG

Germany

Globe Telecom, Inc. & SubsidiariesPhilippines

KT Corporation

South Korea

SK Telecom Co., Ltd

South Korea

South America Telecom Operator*

South America

South America Telecom Operator*

South America

Telefnica SA

Spain

Telecom Corporation of New Zealand

Limited

New Zealand

TeliaSonera AB

Sweden

Telkom SA Limited

South Africa

Telstra Corporation Limited

Australia

TELUS Corporation

Canada

Vodafone Australia Limited &

Vodafone New Zealand Limited

Australia & New Zealand

Only participating companies are entitled to the full survey results. To register

your interest in participating in this survey please contact your local Ernst & Young

representative. Alternatively submit your enquiry to Ernst & Youngs Global

Telecommunications Center at [email protected]


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Overview


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Telecom companies worldwide are under enormous pressure to deliver new, data-rich

products to customers, while at the same time meeting shareholder demands for

protability. In an environment where competition continues to escalate, investorsremain skeptical, and evolving technologies fuel customer demand, achieving the

balance required for effective xed assets management requires focus, control,

and well-planned execution.

This is particularly the case given the following three converging factors, which are

creating an increasingly turbulent arena in which xed assets management must keep

its balance.

Investment in evolving technologyTelecom companies are investing heavily in evolving technologies as they migrate

to a world based on Internet Protocol (IP). But the industrys increased scrutiny

of return on investment (ROI) is driving a rigorous investment approach, focused

on solid business case justication and realistic return projections. Increasingly,

companies need accurate and detailed knowledge of the value of both legacy and

leading-edge assets. This is becoming increasingly challenging as legacy assets

become obsolete and past experience has little bearing on the service lives of new

technologies.

Market reputation and ratingInvestors are focusing more on the balance sheet and particularly on xed assets,

which comprise the bulk of a telecom companys capital base. Market commentators

and shareholders alike will be closely monitoring how telecom companies maneuver

their way to next-generation networks in the most protable and effective way.

New rules and regulationsAround the globe, increasing numbers of telecom companies are complying with IFRS

and Sarbanes-Oxley. This both increases the complexity of verifying and accountingfor xed assets, and standardizes xed assets management, leaving little room for

differentiation.

Against this backdrop, strategic xed assets management will remain one of the keys

to success in the telecommunications market.


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Overview

Assessing the impact

This report examines how telecom companies are currently managing xed assets, andthe impact, if any, of the recent transition to IFRS and Sarbanes-Oxley.

It brings into focus the following points:

For most telecom companies, the new regulations have created greater transparencyand, more importantly, a consistent approach to xed assets management and

reporting. This places further pressure back on operators to manage their xed

assets more effectively within required frameworks.

Some telecom companies are realizing the critical importance of effective xed assetsmanagement, and appear to be investing accordingly in people and systems.

Between the heightened consumer demand for data-rich products and services, andthe emergence of new and nimble competitors offering converged services, telecom

companies are under pressure to transition to evolving technologies requiringthem to balance the need for cost control with the push to update or invest in new

infrastructure.

In this consolidating environment, choosing the right asset investment strategyand articulating it clearly will be vital to sustaining both future protability and

shareholder condence.

Telecom companies may need to adopt the new and broader expertise and skillsrequired to invest in, and manage, assets strategically, especially assets that underpin

growth segments.

Further investment in proactively managing xed assets will be required for telecomcompanies to build on and to enhance competitive advantages.


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Overview

Study Highlights

Key ndings Supporting data Implication(s)

Strength

A standardized

approach is creating

greater consistency

and transparency

Almost three-quarters of respondents nowadopt an annual review of their useful lives.

61% verify their xed assets register throughautomated or physical verication on an

annual basis compared to only 41% in 2005.

A consistent approach of capitalizationpolicies has been adopted by operators,

except for major activities undertaken for

internally developed business software.

Continuous monitoring of regulatory and reporting frameworksis required to ensure compliance.

Competitive advantages established for xed assets managementmay be eroded, and therefore telecom companies may need to think

of other innovative ways to remain competitive.

Control

Operators are

beginning to invest in

people and systems to

improve xed assets

management

The number of people employed to managexed assets appears to be increasing, with

86% of respondents employing more than

10 people responsible for xed assetsmanagement, compared to 64% in 2005.

Most respondents utilize automatedtechnology, such as Enterprise Resource

Planning (ERP) systems, to track and

monitor xed assets maintenance and service

lives.

Even though some investment into people and systems appearsto be made, telecom companies may need to continuously assess,

and more than likely invest more, to maintain control over their

xed assets.

Ineffective controls over service life determination could exposecompanies to signicant future adjustments.

Companies utilizing shared service functions, and/or outsourcepartners, may need to ensure adequate resources are in place over

their xed assets, or control could be easily lost.

Balance

Emerging technologies

are placing signicant

pressure on asset

service lives

43% of respondents say the emergence ofnew technologies has affected the service

lives of their existing networks, both xed-line

and mobile, compared to 24% in 2005.

Since the adoption of IFRS, 38% ofrespondents, compared to 17% in 2005, claim

the useful life of assets has been changed.

The pressure to update or replace network assets has intensied,therefore increasing the risk of traditional assets being impaired.

As stipulated by IFRS, annual review of service lives is vital toensuring assets are appropriately matched to their useful life. More

frequent reviews may be required, particularly for those assets at

greater risk of impairment.

Telecom companies may need to consider the most effectivemethod of rationalizing their traditional asset portfolio to minimize

the operational costs for retiring and redundant assets.


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Overview

Study Highlights (continued)

Key ndings Supporting data Implication(s)

Condence

Maintaining

shareholder

condence

Respondents taking impairment chargesincreased only slightly from 18% in 2005 to

21%.

A comparison to previous data shows thatmost traditional asset service lives are being

preserved eg, External Access Copper Cables

service life has remained at 15 years.

However, one respondent recorded animpairment charge on their 3G assets due to

less-than-anticipated growth in 3G services.

Consistent application of service life policies is required to minimizethe risk of earnings volatility.

A slower-than-anticipated roll-out of next-generation networks iscausing operators to preserve the service life of traditional assets.

Operators may need to keep track of this transition process to

mitigate the risk of impairment and earning volatility.

Clear and precise articulation of strategy is required to maintaininvestor condence, particularly in a consolidating market

environment.

Focus

New investment

strategies

Respondents ranked growth segments suchas broadband, mobile, and telecom customer

premises equipment as the assets mostaffected by changes in strategy election and

technology

Surprisingly, past experience still remainsone of the most signicant factors used by

respondents in determining service lives for

assets. However, there does appear to be a

shifting emphasis to vendor estimates which

may be reassuring due to rapidly changing

technologies.

Operators may need to sharpen their ability to determine servicelives, particularly for assets that underpin growth segments.

In an IP environment, companies may need to follow guidance fromvendors, who possess intimate knowledge of each technology and

network, and are best placed to estimate an appropriate useful life.

If guidance is not used, service lives of newer assets in particular

are likely to be inappropriately matched to useful life, thus

increasing risk of impairment.

Flexibility

A broader skill set

could improve xed

assets management

64% of respondents say their xed assetfunction is responsible for planning,

reporting, and control of xed assets.

Interestingly, the study found that 40% ofrespondents use non dedicated accounting/

nance teams only, leaving critically needed

engineering/IT skills outside management.

With intensifying pressures, and a standardized approach beingadopted, operators may need to continue their investment into xed

assets management to remain competitive.


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Overview

IFRS and Sarbanes-Oxley create a new playing feld

IFRS was developed by the International Accounting Standards Board (IASB) in

response to concerns about the reliability and credibility of nancial reporting among

public companies around the globe. For much the same reasons, Sarbanes-Oxley was

signed into US law in 2002.

Compliance for most countries is now mandatory, with all European Union (EU)

member countries, and most countries in Central Asia, the Americas, and Asia-Pacic

now IFRS compliant or in the process of transition. Likewise, compliance with the

United States Generally Accepted Accounting Principles (US GAAP) is still required for

US telecom companies. Telecom companies will need to comply with both IFRS and US

GAAP if they are:

US-based and have operations in IFRS mandated countries, or

based in IFRS mandated countries and listed on US exchanges.

For many global telecom companies compliance with Sarbanes-Oxley is also mandatory.

IFRS and Sarbanes-Oxley share several objectives, among them to:

Create greater transparency in nancial reporting

Allow greater comparability of nancial reporting between companies operatingin various countries, or across national and international borders

Develop standard ways for handling complex nancial transactions.

In essence, these reporting requirements and regulatory frameworks have created a newenvironment, which assures investors that all global companies are following the same

or similar accounting procedures.


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Fixed assets managementto sustain a competitive advantage


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Given their dominance of a telecom companys balance sheet, managing xed

assets effectively has always been important in driving protability. However, since

the rst Ernst & Young xed assets management study in 2005, two factors haveemerged to make it harder to create competitive advantage in this way.

First, new regulatory requirements have enforced a standard approach to reporting

and management making differentiation more challenging. Second, xed assets

management itself has become more complex as consumer demand and increased

competition have driven investment in new technology and networks.

Thus, the following discussion should appeal to the broad range of

telecommunications industry executives seeking to create competitive

advantage in the face of one or both of these new challenges.


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Fixed assets management

Strength:

A standardized approach iscreating greater consistency

and transparency

The greater jurisdiction over internal

controls required by regulatory and

reporting frameworks has resulted

in telecom companies adopting a more

frequent and formalized review of their

xed asset registers. The study found

that adopting IFRS and Sarbanes-Oxley

requirements has led to operators

standardizing the way they manage

xed asset functions, in terms of both

instituting regular and more granular

reviews and in adopting more consistent

capitalization policies.

Annual reviews of service lives

Not surprisingly, given IFRS requires

companies to annually review asset

service lives, the study found almost

three-quarters of respondents review

their asset service lives annually, with

7% reviewing quarterly. Supporting

this nding, in 2007 only three survey

respondents were adopting ad hoc

methods of service life reviews, down

from six survey respondents in 2005.

Interestingly, over 60% of respondents

now also annually verify their xed asset

registers through either an automatedor physical verication process, compared

to 41% in 2005. The increased emphasis

on control environments has made

telecom companies more granular in

their operational and nancial analysis,

bringing about greater transparency.

Clearly, as more countries converge

to IFRS, even more companies will begin

conducting annual reviews eventually

making this a standard practice.

Consistent approach to

capitalization

The study also found that operators are

adopting more of a consistent approach

to capitalization policies. For example 93%

of respondents capitalize replacement

projects, compared to 82% in 2005.

Moreover, 100% capitalize software

upgrades to increase functionality,

compared to 94% in 2005. Aligning

with US GAAP treatment for subscriber

acquisition and retention costs, in 200793% of respondents opted to expense

customer acquisition costs, as compared

to 82% in 2005.

The only exception to this standardizing

approach to capitalization policies is

around internally developed businesssoftware, where the study found a mix

of capitalization policies being adopted.

It appears that, with minimal prescriptive

accounting guidance on this issue, some

companies are electing to take a more

conservative approach to minimizing the

presence of intangibles on their balance

sheets when it comes to internally

developed software.

Surprisingly, the study uncovered a

trend away from evaluating networks

for impairment at the one aggregated/ubiquitous network towards the separate

network cash-generating unit. Only

38% of respondents adopted the one

aggregated/ubiquitous network in 2007,

a sharp drop from 53% in 2005. Instead,

43% of respondents now adopt the

separate network cash-generating units,

compared to 35% in 2005.

With IP being so pervasive and requiring

the entire network to deliver all products

and services, we would have expected

to see a preference by telecom companiesto evaluate their networks at the one

aggregated level rather than individual

segments. Thus, this may be an area

where operators can create advantage

by adopting an aggregated approach that

more closely describes the interrelation

of an organizations xed assets.

As xed assets reporting and practices

become more standardized, telecom

companies may need to consider

developing other innovative ways of

managing their xed assets to sustaincompetitive advantages.


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All respondents capitalize softwareupgrades to increase functionality

Are software upgrades to increase

functionality capitalized or expensed?

Capitalized 100%

Expensed 0%

Separate network cash-generating units most preferred

How do you evaluate your network for impairment testing purposes?

One aggregated/ubiquitous network 38%

Separate network cash-generating units

(ie, xed, mobile, etc.) 43%

Product/service type 0%

Geographic 13%

Other 6%

Most respondants annually verify their

xed assets register

How often do you verify your xed asset

register through automated or physical

verication?

Monthly 0%

Quarterly 0%

Semi-annual 8%

Annually 61%

Other 31%


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Control:

Operators are beginningto invest in people and

systems to improve xed

assets management

Increased regulation appears to have

corresponded with additional investment

in xed assets management and reporting.

By 2007, telecom companies had

responded to the additional requirements

mandated by IFRS and Sarbanes-Oxley,

by investing further in both people and

systems.

In 2005, one-third of respondents had less

than 10 people responsible for their xed

assets management. Some two years later,

this had dropped to only 14%, with 58% of

respondents employing between 10 and

99 people.

In addition, all but one respondent

utilizes automated technology, such

as ERP, to track and monitor its xed

assets maintenance and service lives.

These automated systems are essential

for telecom companies to track their

vast number of xed assets in line with

regulatory and reporting requirements.

More people responsible for xed

assets management

How many people within your organization

are responsible for xed assets management?

Less than 10 14%

1099 people 58%

100200 people 14%

Greater than 200

people 14%

Automated technology utilized for

xed asset maintenanceWhat primary database and software

technology is used for tracking and

maintenance of assets and their service lives?

Manual 0%

Spreadsheet 7%

ERP system 72%

Other 21%


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Centralization may mask

underinvestment

Given the growing competitive pressures

of the telecom market and the additional

compliance now required in xed

assets reporting, it is pleasing to see

that telecom companies appear to be

improving controls over their xed assets.

However, these results need to be taken

with caution, as many telecom operators

are centralizing and/or outsourcing their

non-core functions. This move to increase

productivity may result in more people

being responsible for a variety of non-core

activities, with xed assets management

being just one of the many activities

undertaken.

The change in global operating models

was examined in another Ernst & Young

industry study,Asia Calling: The Rise of

the Asian Telecommunications Industry,

which was based on interviews with 57

senior telecom executives across Asia,

including major operators, technologyproviders, private equity investors,

analysts, and regulators. This study

highlighted how the operating model for

telecom is being redened, with many

Western telecom operators centralizing

and/or outsourcing back-ofce functions,

including xed assets management.1 If this

is also the case with study respondents,

xed assets management may not in fact

be as well resourced as it appears. This

also raises the issue of control over xed

assets. If telecom companies are utilizing

third parties to manage xed asset

functions, this often removes day-to-day

management control. In this case, telecom

operators must continually assess the

situation to ensure an appropriate level

of control over xed assets.


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Balance:

Emerging technologies areplacing signicant pressure

on asset service lives

Telecom companies are under enormous

pressure to keep up with the increasing

demands of consumers for high-speed,

data-rich communications services.

In recent years, products such as premium

content services, which encompass

games, ringtones, gambling, and TV

infomedia, have increased in popularity.

In fact, by 2010, revenues from data,

which supports the delivery of these

products, are expected to grow to US$495

billion worldwide. Compared to voice

revenues for xed and mobile, which

is to remain at growing at a mere 1%

per year, data revenues are expected to

grow at approximately 10% year to 2010.2

For most telecom companies, delivering

such services requires upgrading or

installing new technologies or networks.

Given the velocity of emerging

technologies and speed to market of

new products and services, it was nosurprise the 2007 study found the impact

of new technologies on the service lives

of existing networks had almost doubled.

As many as 43% of respondents said the

emergence of new networks had affected

the service lives of existing networks,

up from the 24% reporting this in 2005.

For most telecom companies, transitioning

to IFRS has made the impact of emerging

networks on traditional assets more

noticeable, as IFRS requires an annual

review of the useful lives of xedassets. From the IFRS perspective, this

annual review ensures service lives are

appropriately matched to useful life and

identies any indicators of impairment.

Given this increased focus on regularly

reviewing useful life, it is not surprising

the study found that since the adoption

of IFRS, 38% of respondents, compared

to 17% in 2005, noticed the useful life of

assets had been affected by the transition.

Looking to a future where more countries

are mandated by IFRS, we would expect

increasing pressure on the service livesof assets, particularly traditional assets,

as further new products and services are

launched onto the market. This pressure

will be heightened by the fact that

transitioning consumers to new networks

and/or technologies often requires

companies to cannibalize former products

and services, increasing the exposure

to asset obsolescence.

As telecom companies upgrade to new

technologies and networks they will

need to consider the most effectivemethod of rationalizing their traditional

asset portfolio. Operating costs such as

accommodation, power, and maintenance

for retiring and redundant assets will need

to be minimized and eliminated where

possible to assist in a seamless, cost-

effective transition process. All too often

we see telecom companies add to the

asset base without taking the necessary

steps to rationalize the asset and cost

base. Again, telecom operators utilizing

third parties to manage their xed assetswill need to be diligent in checking that

these costs are being mitigated and that

assets are being controlled effectively.


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IFRS impacting useful life of assets

Since the adoption of IFRS, what major changes have occurred?

Asset write-downs/write-offs

8% Yes 92% No

Any other one-time charge relation to xed assets

8% Yes 92% No

Impacted the useful life of assets

38% Yes 62% No

Impacted the amortization period/date

of amortization0% Yes 100% No

Impacted the presentation and/or classication

of certain asset types (ie, internally generated

software as intangibles)

15% Yes 85% No

Not applicable

31% Yes 69% No


New networks affecting service lives

of existing networks

Has the emergence of new networks

(UMTS/3G for mobile and IP networks for

xed line) affected the service lives of your

existing networks (GSM for mobile and

copper-based for xed-line network)?

Yes 43%

No 57%


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Confdence:

Maintaining shareholdercondence

In formalizing and executing their

investment strategy, telecommunications

executives have very little margin for error.

Riding the wave of consumer demands

and understanding when and how much

to invest into what technologies will be key

to a telecom companys future success,

in terms of sustaining both commercial

performance and shareholder condence.

Given the speed with which consumerpreferences can change, choosing the

right asset investment strategy and

articulating it clearly is vital to winning

and holding shareholders trust.

This is particularly true given the renewed

surge in merger & acquisition activity

over the past two to three years. For

example, the telecom landscape has

changed dramatically in the US with the

mega-mergers of SBC/AT&T, Verizon/MCI,and AT&T/BellSouth/Cingular.3

A similar trend is also emerging in

South America and the Middle East with

companies such as Telefonica, America

Movil and Etisalat increasing their

presence in the Americas, and Middle East

and North African markets respectively.

Asia is also seen as a consolidation hot

spot, with some signicant deals recently

completed or in progress. In fact, Central

Asia/Asia-Pacic accounted for 44% of

global telecoms deals in JanuaryApril2007, up from 13% in 2006.4

With industry consolidation continuing

to reshape the competitive landscape

of the global telecommunications market,

operators will need to be in control of

all aspects of their business to sustain

a competitive advantage.

Slight increases in impairment

charges

Despite this pressure on telecom

companies, the study found the number

of respondents recording an impairment

charge over the past 12 months only

increased slightly, from 18% in 2005

to 21% in 2006. With the increasing

number of new networks and technologies

putting existing networks at higher risk

of obsolescence, we would have expected

a higher risk of impairment.

That said, it appears that the rapid

deployment of next-generation networks,which would threaten the use of some

traditional assets, has not materialized

as forecasted. For example, ber-to-

the-premises (FTTP) /home (FTTH)

subscriptions reached 27 million

worldwide in 2006, accounting for just

10% of the global broadband market.5

The market appears to have polarized,

3G investment remains a concern

Have you recorded an impairment charge on

your UMTS/3G license and/or assets due to

less-than-anticipated growth in 3G services?

Yes 8%

No 92%

Impairment charges on existing

networks have remained steadyt

Have you recorded an impairment charge on

the existing network assets in the past 12

months?

Yes 21%

No 79%

Average service life for External

Access Copper Cables has remained

largely unchanged

Main

05 years 13%

1115 years 49%

1620 years 25%

2125 years 13%

Distribution

1115 years 50%

1620 years 50%


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with some telecom operators adopting

an asset-light strategy, ie, outsourcing

networks, while others are heavilyinvesting in next-generation networks and

ber. This polarization may be inhibiting

the roll-out of new networks.

This trend was reected in the survey

ndings, with the preservation and even

increase in the average service lives

of some traditional assets. For example,

the average service life for External

Access Copper Cables, which in the long

run is to be all or partially superseded by

optical ber, remained around 15 years.

This is consistent with our survey ndingsin 2005. Likewise, the average service life

for PDH transmission assets, which are not

optical ber compatible, increased slightly

from 8.5 years in 2005 to 9.7 years

in 2007. It appears that even though

operators are moving to a next-generation

network environment, the transition

appears to be more gradual than that

forecasted, preserving the lives of assets

required to support traditional network

delivery.

However, growth of DSL technologiesmay be one of the primary reasons for

the gradual migration to next-generation

networks. DSL enables greater capacity

and capabilities through existing wires;

hence by upgrading copper networks

with DSL technologies, telecom companies

are enabling broadband functionality.

In terms of subscribers added, DSL is

currently the fastest segment of the

Internet market, compared with cable

broadband, other broadband and

narrowband. It accounts for approximately67% of global broadband connections

and will grow at a faster rate than cable

broadband between 2006 and 2011.6 Even

though cable broadband has a speed and

reliability advantage over DSL, it suffers

from low household coverage in many

markets, eg, the UK, where it only reaches

50% of households.

In preparation for delivering broadband,

VoIP, and IPTV services, many global

telecom operators announced aggressive

ber deployments. However, it appearsthat these upgrades and service

deployments are occurring at a slower

pace than anticipated. For example, FTTP

is set to account for only 16% of the global

broadband connections market in 2011.7

Telecom companies therefore will need

to rely heavily on traditional assets in the

short to medium term.

Likewise, even though many global

operators have already formulated their

next-generation network strategies, they

are still in the process of consolidatingexisting separate networks into one

infrastructure based on IP. Many believe

it will take a number of years for telecom

companies to achieve this strategy, but

substantial investment is under way.

With transition being more gradual than

anticipated, the risk of obsolescence and

hence impairment may be further off than

originally expected.

Trouble looming from 3G over

investment

That said, one respondent did record an

impairment charge on its 3G assets. This

is no surprise given the largely unexpected

lack of demand for new services such as

3G, mobile TV, and m-commerce, which

has been particularly evident in Europe.

The number of 3G mobile subscribers

represents only 4% to 5% of total mobile

connections. Despite this, most analysts

and market commentators remain largely

upbeat on 3G offerings. For example,

Juniper Research expects over one billion

mobile subscribers worldwide will be using

a broadband connection by 2012, of which

70% will utilize a 3G technology called High

Speed Packet Access (HSPA).8


24/40



Focus:

New investment strategiesThe majority of a telecom companys xed

assets make up the core network that

delivers communications products and

services to customers. Globally, the two

key segments for product and services

growth are broadband and mobile,

compared to xed-line services which

are forecasted to remain static and/or

marginally decline.

Although forecasts for these two growth

segments vary, most analysts believe

that global mobile revenues will surpass

xed-line revenues in the next year, and

mobile subscribers will exceed four

billion worldwide by 2010.9 In addition,

there is market consensus that global

broadband revenues will grow at an

average compound growth rate of 6%

from 2006 to 2010, with revenues

reaching US$1,559 billion.10

Changes in assets underpinning

broadband and mobile delivery

Not surprisingly, respondents ranked

broadband, followed by telecom customer

premises equipment, mobile, and

intangibles, as the asset categories most

affected by changes in strategy election.

Similarly, respondents named the asset

categories that underpin the delivery

of broadband and mobile communication

services as being most affected by

changes in technology. Specically,

they named broadband, data, telecom

customer premises equipment, mobile,and transmission. In future, as telecom

companies continue to capitalize on

growth opportunities in broadband and

mobile, any asset category that helps

to deliver rich content is likely to require

constant monitoring.

Past experience is no longer

the best indicator of future

services lives

Given the increase in demand for

emerging technologies and networks,

it was concerning that respondents ranked

past experience as the second most

signicant factor used in determining

asset service lives.

Accounting guidelines was the primary

factor with 57% of respondents ranking

this as most signicant, followed by past

experience at 50%. However, respondents

recognized that past experience isbecoming less relevant to asset service

lives, with its perceived impact reducing

from 88% in 2005 to 73% in 2007.

Encouragingly, more companies had a

greater focus on vendor estimates, up

to 47% in 2007 compared to 35% in 2005.

As IP technologies and networks become

more pervasive, telecom companies will

need to follow guidance from vendors

who possess the intimate knowledge of

each technology and network, and are

best placed to estimate an appropriateuseful life.

We expect factors such as past experience

will be less signicant, as they relate

to legacy assets, having no bearing on

IP-based related assets.


25/40



Broadband assets most affected by

changes in strategy election

Which asset categories and their applied

service lives have been most affected by

changes in strategy election? (Select one

or more options)

Broadband Access 40%

Data 20%

External Access

Copper Cable 7%

Intelligent Network

Switching 13%

Local Access and

Transit Switches 7%

Optical Fiber 20%

Radio 7%

Shelters 13%

Teleco Equipment on

Customer Premises 33%

Buildings 0%

Duct/Pipe 7%

Intangibles 27%

ISDN 7%

Mobile Customer

Access Radio 27%

Pair Gain 7%

Satellite 7%

Structures 13%

Transmission 13%

Note: Table does not total 100% because respondents

were able to choose more than one category.

Accounting guidelines and past

experience most signicant in

determining asset service lives

Which have the most signicant impact in

determining the service lives for your assets?

(Select only one or two options.)

Regulatory issues 14%

Past experience 50%

Company policy 29%

Accounting

guidelines 57%

Industry practices 21%

Vendor estimates 7%

Others 0%

Note: Table does not total 100% because respondents

were able to choose more than one category.


26/40



Many leave critical engineering and IT

outside the management mix

Who is responsible within your organization

for xed assets management?

Accounting

& Finance 40%

Operations 7%

Combined 40%

Dedicated Team 13%

Broad skills required for xed assets

What are the primary tasks and

responsibilities of the xed assets

management function?

Planning 0%

Reporting 7%

Control 29%

All of the above 64%


27/40



Flexibility:

A broader skill set couldimprove xed assets

management

To meet the extensive requirements

of regulatory reporting and strategy

selection, xed asset teams need to have

a mix of accounting, nance, IT/network

engineers, and administrators. This is

particularly true since the study found

that broad skills are required to manage

a xed asset function effectively, with

64% of respondents making their xed

assets function responsible for planning,

reporting, and controlling xed assets.

However, the study found that 40% of

respondents put assets management

purely in the hands of accounting and

nance, leaving critical engineering

and IT outside the management mix.

Only 13% had a dedicated xed assets

management team.

Dedicated, multi-skilled teams

requiredIn future, as more countries converge

to IFRS, xed assets accounting will

become increasingly standardized,

making differentiation harder. At

the same time, the emergence of

new technologies will make assets

management increasingly complex.

Given these challenges, telecom

companies may require dedicated,

multi-skilled teams if they are to achieve

the precision and control needed tostay ahead of the pack in xed assets

management.

Sustaining a competitive

advantage

In comparison to the 2005 survey, this

years study revealed a number of key

results that demonstrate a strong focus

on strategic xed assets management.

However, with regulation and reporting

requirements standardizing the approach

to xed assets management, telecom

companies may need to pay further

attention to the following actions

to enhance their competitive position:

Assess the level of control over xed

assets, particularly those assetsmanaged by third parties, and

implement suitable management

processes to maintain control over

xed assets.

Determine the appropriate resourcesand systems required to effectively

manage xed assets in the wake of

more advanced products and services.

Develop a robust plan, outliningtimelines and the tracking mechanisms,

for the transition to next-generation

networks, ensuring a seamless andcost-effective process.

Identify forward looking indicators thatmatch service lives appropriately to the

useful life of new assets.

Telecom companies taking this type

of proactive approach to xed assets

management going beyond the

requirements of compliance may be

well positioned to achieve and sustain

a competitive advantage.


28/40


Issue Implications Self-test questions

Regulatory andreporting compliance

Companies will need continuous monitoring ofregulatory and reporting frameworks to ensure

statutory compliance.

Do you fully understand all requirements to statutorily complywith frameworks?

Are your teams suitably credentialized to meet compliancerequirements?

Can you access appropriate accounting technical advice?

Do you have the processes, systems, and tools to properly verify,test, and report your xed assets on a regular basis?

Appropriate asset

verication controls

Sarbanes-Oxley requires companies to have

controls that ensure network assets exist on the

date the company reports.

Do you have enough resources assigned to provide the appropriatecontrol over xed assets?

Are you regularly assessing the control environment for assetsmanaged by third parties?

Are systems to track assets automated?

Market forces Increasing consumer demand and competition

continues to pressurize telecoms to update or

replace their core network assets.

Do you have a robust plan in place to verify, track, and manage themigration to next-generation networks?

Are capital management programs sufcient to fund networkexpansion?

Do your plans for rationalizing traditional assets address reducingoperating costs for retiring and redundant assets?

Capitalization More consistent capitalization policies

reduces the risk of costs being inappropriately

capitalized. However, companies may need to

obtain further guidance on the application of

GAAP principles for individual circumstances.

Are your capitalization policies appropriately implemented and wellunderstood?

Are you seeking suitable technical advice on areas where thereis less prescriptive accounting guidance?

Management self-test:Are your xed assets being strategically managed?

The following questions should stimulate and facilitate discussions among colleagues

to help to move your company forward through the transition.


29/40


Issue Implications Self-test questions

Depreciation/amortization

To mitigate the risk of impairment, companieswill need to sharpen their ability to determine

realistic service.

Do you have the right mix of nance and operations andengineering talent on your xed asset accounting team to properly

assess each asset?

How are you planning to periodically review and reassess assetsbased on industry trends?

How much reliance are you placing on forward looking factors suchas vendor estimates rather than historical factors such as past

experience to determine appropriate service life?

Goodwill Companies will need to continually assess the

value of their goodwill.

Do you understand the nature of the goodwill and to which CGUit belongs?

Impairment IFRS requires an indicators approach to annual

impairment testing of all assets.

Do your identied CGUs align to your strategic plans for yourasset portfolio?

Are you regularly assessing the appropriateness of impairmentindicators for testing purposes?

Intangibles Stricter criteria may require some costs that

used to be capitalized to be expensed, which can

create earnings volatility.

Do you have the resources necessary to properly assess and testeach asset?

Have you the appropriate models in place for intangibleimpairment testing?

Convergence Telecom and IT platforms are converging.

Traditionally these assets have had vastly

different service lives.

Do you have robust plans in place to manage the integration oftelecom and IT assets?

Do these plans include the assessment of appropriate service lives?


30/40


Denition of Assets

Category Sub-category Description

Broadband Access Head End Electronic control center of cable television (TV) and/or Internet network installed at exchange

site. Includes receivers, patch panels, modulators, and scrambling equipment.

Broadband Nodes Receives optical signal from head end and transmits to another node or hubs in broadband

distribution network. Includes optical receivers, transmitters, and splitters.

Broadband Distribution Hubs, customer taps, ampliers, and coaxial cable used for the distribution of cable TV and/

or Internet signals and cabling of multiple dwelling units (MDUs) (eg, apartment buildings)

enabling access for customers.

DSLAM Digital subscriber line access multiplexer. This is xDSL technology on copper pairs that provides

customer access to core network connectivity at enhanced speed rates. xDSL refers to variants

of digital subscriber line, eg, DSL, ADSL, HDSL, SDSL, and VDSL.

Buildings Network (owned) Major-owned buildings used to house network plant and equipment.

General Purpose (owned) Major-owned buildings used primarily for administrative purposes.Network (leased) Major-leased buildings used to house network plant and equipment.

General Purpose (leased) Major-leased buildings used primarily for administrative purposes.

Data Edge Routers Routers that provide access to the network.

Backbone Routers Routers that direct network trafc.

File Servers A computer containing les.

ATM Frame Relay Asynchronous transfer mode frame relay.

Duct/Pipe Main Houses main access cable.

Distribution Houses distribution access cable.

External Access

Copper Cables

Main Large copper pair cable from the local access switch to the rst cross-connect point (eg, branch

into smaller distribution cable).

Distribution Medium to small-sized copper pair cable from the customer premises to the rst cross-connect

point (eg, conuence of smaller distribution cables into larger main cable).

Intangibles Spectrum Licenses Licenses acquired from government agencies that permit operation of various mobility services

for xed period.

Business Software Internally developed or acquired software that is used in front ofce and back ofce operations

(eg, billing, service activation, employee, and payroll systems).

Network Software Software acquired from vendors that is used for the provision of products and services (eg,

directly related to revenue generation).

International Submarine

Cable Investments

Indefeasible rights of use (IRUs) or any other forms of acquiring capacity in submarine cables.

Intelligent

Network Switching

Intelligent Network

Switching

All integrated digital network trafc switching equipment and network terminating units (NTUs)

specically dedicated to performing the function of switching and delivering intelligent networkproducts CENTREX functions.

AppendicesGlossary


31/40


Denition of Assets (continued)


ISDN ISDN Integrated services digital network. All switching equipment, broadband multiplexer (BMUX)

equipment and NTUs specically dedicated to performing the function of ISDN [not European

telecommunications standards (ETSI)] switching and delivery.

Local Access and

Transit Switches

Local Access Switch Voice frequency switched network (VFSN). Digital access switch, including remote line switch,

group switch, processors, input/output (I/O), and all other items to support the access switch

function (eg, distribution frame to connect customer access main cable, and support ironwork).

Transit Switch VFSN digital transit switch, including group switch and processors, I/O, and all other items

to support the transit switch function (eg, distribution frame to connect customer access

main cable, and support ironwork). Functions include inter-carrier switching and inter-region

switching.

Mobile Customer

Access Radio

GSM Radio Global systems for mobile radio component, including antennae (excludes supporting structure

and power).

GSM Network Switch andControl

Global system for mobile switch and control.

CDMA Radio Code division multiple access radio component, including antennae (excludes supporting

structure and power).

CDMA Network Switch and

Control

Code division multiple access switch and control.

3G Radio Third-generation radio component, including antennae (excludes supporting structure

and power).

3G Network Switch

and Control

Third-generation switch and control.

Optical Fiber Inter and Intra Long-haul optical ber between major cities and optical ber cable between core switches

(within a region), including coax cables (eg, inter- and intra-regional).

Distribution Optical ber cable from the local access switch toward the customer.

Pair Gain Small/Medium Pair Gain Electronic method of augmenting access cable (particularly main cable). Up to 20 customer

lines; asset includes both remote and exchange unit.

Large Pair Gain Electronic method of augmenting access cable (particularly main cable). In excess of 20

customer lines; asset includes both customer and exchange unit.

RIM Remote integrated multiplexer. An electronic method of augmenting access cable (particularly

main cable) and integrating with the local access switch.

Radio Point-to-Point High-capacity (2 MB to 140 MB) radio used for inter-switch working.

Small Capacity Customer Small-capacity (two channels up to 2 MB) radio used for customer access.

Satellite Ground Receiving antennae, network earth stations, and transmission assets specic to satellite.

Terrestrial/In-Orbit Satellites in geostationary orbit that receive and transmit voice and data services.

Transponders (owned

or leased)

Capacity acquired on geostationary satellites and used as part of network.


32/40


Appendices

Denition of Assets (continued)


Shelters Non-permanent Any shelter which is non-specic to the equipment it houses, generally is large enough to allow

personnel access, and is relocatable.

Structures Tower Self-supporting lattice structure.

Mast Guyed lattice structure.

Pole Solid structure.

Telecom Equipment

on Customer

Premises

Servers, PABX, and IP-PBX Private automatic branch exchange (PABX). Internal protocol private branch exchange

(IP-PBX). All owned network equipment (eg, servers and routers located at the customers

premises).

Transmission PDH Plesiochronous digital hierarchy. Includes all line terminal and multiplexer (MUX) equipment

support infrastructure and cross-connect frames.

SDH Synchronous digital hierarchy. Includes all line terminal, tributary cards support infrastructure,

and cross-connect frames.

DWDM Dense wave division multiplexing. Equipment that increases the capacity of optical ber by use

of multiple wavelengths (colors).

Telecom and Finance Terms

Term Description

Bandwidth This is a common measure for transmission capacity. For analog transmission, it is measured

in cycles per second; for digital transmission, it is measured in bits per second.

Capitalization Costs Business expenses that are written off or deducted over a period of time through depreciation

or amortization schedules.

CGUs Cash-generating units.

Composite/Group Asset Accounting Assets that are grouped together in the xed assets ledger based on a nancial record and therefore

are not separately identiable.

CPE Customer premise equipment. All telecommunications terminal equipment located on the customers

premises, including telephone sets, private branch exchanges (PBXs), data terminals, and customer-

owned coin-operated telephones.

DSL Digital subscriber line.

EBIT Earnings before interest and taxes.

EBITDA Earnings before interest, taxes, depreciation, and amortization.

ERP A business management system that integrates all facets of the business, including planning,

manufacturing, sales and marketing.

EU European Union.

Fixed Assets (Net) All property, plant, leasehold improvements, and equipment, net of accumulated depreciation

or depletion.


33/40


Appendices

Telecom and Finance Terms (continued)

Term Description

FTTH Fiber-to-the-home. A distribution system that uses optical ber cable to connect telephone networks

to nodes that are located in the homes of customers.

FTTP Fiber-to-the-premises. A ber-optic network that connects directly from the carrier network to the

user premises.

GAAP Generally accepted accounting principles.

IAS International Accounting Standards (IAS 36 is the international accounting standard for the

impairmentof assets).

IASB International Accounting Standards Board.

IFRS International Financial Reporting Standards issued by the IASB.

Impairment The permanent decline in the value of an asset.

IP Internet Protocol. Part of the transmission control protocol (TCP) family of protocols that tracks theoutgoing address of nodes, routes outgoing messages, and recognizes incoming messages.

IT Information technology.

LMDS Local multipoint distribution systems.

MDF Main distribution frame. Equipment which terminates or interconnects calls on the main external

access network.

OECD Organization for Economic Co-operation and Development.

Outsource To obtain goods or services from an outside supplier.

PP&E Property, plant, and equipment are tangible assets held for use in the production or supply of goods

and services, for rental to others, and/or for administrative purposes.

ROI Return on investment.

Sarbanes-Oxley The US Act that mandated a number of reforms to enhance corporate responsibility, enhancenancial disclosures, and combat corporate and accounting fraud.

SEC US Securities and Exchange Commission.

TCP/IP Transmission control protocol/Internet Protocol. A widely used network protocol that supports

communication across interconnected networks and between computers, with diverse hardware

architectures and various operating systems.

Unitized Asset Accounting Assets that are separately identiable in the xed assets ledger as both a nancial and a physical

record are recorded upon acquisition.

UMTS Universal mobile telecommunications system. Offers personal telecommunications services that

use the combination of wireless and xed systems to provide seamless telecommunications services

to its users.

US GAAP US generally accepted accounting principles.

WIP Work in progress.

3G A term commonly used to describe the third generation of technology used in a specic application

or industry, particularly used in mobile telecommunications.


34/40



35/40


Sources

Asia Calling: The Rise of the Asian1Telecommunications Industry,

Ernst & Young report, June 2007, 2007 EYGM Limited

Worldwide Telecom 20062010 Forecast,2IDC, April 2006,

2006 IDC

SDC Platinum,316 April 2007,

2007 The Thomson Corporation

Worldwide Broadband Services420072011 Forecast,

IDC, June 2007,

2007 IDC

Over One Billion Mobile Net Users on Tap,5www.eMarketer.com, 9 August 2007,

via eMarketer,

2007 eMarketer Inc.

Wireless Intelligence,6April 2007,

2007 Wireless Intelligence

Telecom Service Revenues7Worldwide, by Technology,

20062010 (millions and CAGR),

Insight Research, November 2006,

via eMarketer,

2007 eMarketer Inc.

Global 3G Subscribers Exceed8100m Report,

Total Telecom, 9 June 2006,

via Factiva

2006 Total Telecom.

All rights reserved.


36/40


Contacts

Vincent de La Bachelerie

Global Telecommunications

Leader

Tel: +33 1 4693 6205

E-mail: [email protected]

Lisa Friel

Telecommunications Leader

Americas/USA

Tel: +1 210 242 7143


Holger Forst

Telecommunications Leader Central Europe

Tel: +49 221 2779 20171


Richard Ireland


China & Far East

Tel: +86 10 5815 3285


Olivier Lemaire


Continental Western Europe

Tel: +352 42 124 8356


Prashant Singhal


India

Tel: +91 124 4644000


Mark Gregory

Telecommunications Leader Northern Europe, Middle East, India & Africa

Tel: +44 20 7951 5890


Craig Boyhan


Oceania

Tel: +61 3 9288 8452



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Notes


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40/40

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2008 EYGM Limited.

All Rights Reserved.

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