PowerPoint PresentationWhere the Industry Stands & What Do We
Do Now
Our goals for today
Look at the Offers
2
• Review Revised A-CAM I & A-CAM II Offers • Revenues &
Obligations • Deployment Milestones • Pros & Cons
• Remaining Legacy is Still Better for Some • Revenues Ahead •
Buildout Obligations • Pros & Cons
3
• FCC feels a forward looking model with “Significant, Verifiable
Deployment Obligations” will deploy broadband & with more
accountability than Legacy Regulation does
• Model-based support is more easily monitored &
regulated
• At the same time, the FCC still places reliance on a model with
Suspect Assumptions & Data Sources
• 477 reporting data • Greenfield engineering assumptions • Census
data almost a decade old & frequently does not
accurately place locations within a census block
4
General Overview of A-CAM
• CostQuest model with greenfield fiber buildout • 2010 census data
& business location data sources • Eligible census block
location based on model • Buildout obligations • Timelines • Speeds
• Compliance gap penalties
• Key conditions changed in successive offers
5
Offer Overview for Revised A-CAM I
• $200 replaced $146.10 for fully-funded locations • Expanded
offers in most cases
• Caused some shifts from capped locations (e.g. $155) to
fully-funded • 2016’s A-CAM carriers on a Glide-Path A-CAM
carriers, already
at $200 per location, got no additional funding or material changes
to their obligations
• No changes in the total number of eligible location counts • but
Revised offer sets support through end of 2028
• But, the big change was the increase in the 25/3 Mbps deployment
obligations based on density & the milestones for 25/3 Mbps
deployments
6
Revised A-CAM I Deployment Obligations
• 10/1 Mbps Milestones remain in place in fully- funded census
blocks, whether or not the new offer is taken
• 25/3 Mbps Obligations, due by Year 10 of the Existing A-CAM term,
now begin in Year 4 of the New Offer
7
Offer Overview for A-CAM II
• A-CAM II is similar to revised A-CAM I • CostQuest model with
greenfield fiber buildout • 2010 census data & business
location data sources • Eligible census block location only
• Buildout obligations • Timeline: 40% of eligible locations in
2022, rising 10%/year, through 2028 • Speeds: 25/3 Mbps location
for buildout Obligations • Compliance gap penalties: No
change
• A-CAM II Key differences • Offer no longer limited to carriers
with less than 90% of locations at 10/1 Mbps • Own fiber/coax cable
deployment does not exclude census blocks • Unsubsidized
competitive overbuild exception is increased to 25/3 Mbps • NO
challenges allowed • FCC Form 477 data updated (December
2017)
8
• A-CAM II revised offers • Only 37 companies received revised
offers
• Mostly decreases
• Everyone received 30 extra days to decide • Election deadline
extended to July 17, 2019
• FCC seeking comments on location shortfalls • How it impacts
compliance gap & penalties still unknown • Good news they are
at least seeking comments on the
issue
9
Location Clarification for A-CAM A-CAM II Public Notice DA
19-650
• Guidance on Final Deployment Obligations • Reasonable request
locations are not part of the deployment
obligations • 5% allowance on fully-funded locations shifts to
capped locations
» Based on density, so some come back in as mandatory 4/1 Mbps
locations others go to reasonable request locations
• Compliance gap applies per year » Not only at final year »
Potentially much larger impact & back to our original
interpretation
• No mention of 10% penalty waiver of unmet Final Deployment
Obligations
» We recommended including 10% penalty if you are even one location
short in your decision to adopt A-CAM II
• If waived in the future that will be additional funding • If not
waived your decision is based on current rules
10
11
Example with an A-CAM II Offer • Included & excluded Reasonable
Request
Locations from obligations (location counts)
A-CAM II Annual Support
4/1 Mbps Locations
Average Support
per Location
Penalty
686,090 686 33.0 17.0 670 630 (40) 1.89 $967.69 (731,571) (686,090)
5,443,236
686,090 686 33.0 17.0 670 601 (69) 1.89 $967.69 (1,261,196)
(686,090) 4,912,847
A-CAM Support Pros
• Fixed support for a full 10 years • Fixed unless you do not have
enough locations • Glide path transition makes up for some of
the
shortfall between A-CAM II offer & previous legacy
support
• With FTTH speeds, deployment milestones should not be an
issue
• Not subject to budget control mechanism (BCM) • Competition will
not impact support over 10 year
window
12
• Locations • Many A-CAM I & likely many A-CAM II
carriers
will not have enough locations NOW to cover all of the eligible
locations they have or would agree to buildout
• Uncertainty over losses of locations over 10 year window •
Compliance gap reductions & 10% penalty
• What happens in Year 11? • Looks a lot like a price cap
carrier
• Still could be impacted by FCC Rule changes
13
• A system we know • Much less dependent on having locations,
particularly in certain areas inside of your exchange (eligible
census blocks)
• Support can increase • If BB-Only/CBOL demand & increases •
If average schedule lines Increase • If cost company & costs
increase
• Generally much lower buildout obligations
14
• Support can decrease if BB-Only/CBOL demand decreases
• Subject to BCM • Could be subject to future FCC Rule changes •
Competitive overlap • Possible reverse auction if more than 95%
of
census blocks are covered by an unsubsidized voice/internet
competitor
15
Legacy Support Unknowns
• BCM • Percentage reduction amounts? • Future changes to budget
(past five years
out)
• Competitive overlap changes • Could be subject to rule change
that if 95% or
greater of study area is competitively served, reverse auction
occurs
16
• Locations • Year 11
• Competitive overlap, for example • BCM
17
So What Does It All Mean?
• Yes, risks either way • The “end” comes, but later • For A-CAM,
locations matter today & throughout • For Legacy, BCM &
more possible rule changes
• Business Data Services (BDS) • Right now for A-CAM Carriers
• Consumer Broadband &-Only Lines (CBOL)
18
The “End” Options Are Still Fluid
• Rural costs remain higher than urban • Low density • Ubiquity of
evolving technologies such as IoT, 5G • Rural support needs
expected to continue
• Communications industry regulation needs • Unsubsidized
competitive overlap • Threat that future rural support may be
auctioned
» What does this do to valuation of rural investment? » When does
this become sensible regulatory policy?
19
Business Data Services (BDS)
• A-CAM I & II adopting carriers (BDS) • FCC 18-146, [Report
& Order, Second Further
Notice of Proposed Rulemaking & Further Notice of Proposed
Rulemaking], Released October 24, 2018
» Allows A-CAM I carriers (later another order allowed A- CAM II
carriers) who are cost-based to elect a new framework for setting
special access rates » Grants forbearance from cost assignment
& separations rules & related reporting requirements
19
Business Data Services (BDS)
• A-CAM I & II adopting carriers (BDS) • Three different types
of special access regulation in
BDS framework » DS3 bandwidth or below to incentive regulation »
Lower capacity circuit-based end user channel terminations prove
competitive & are not subject to ex ante pricing regulation »
DS3 bandwidth or above related from ex ante pricing regulation
& granted forbearance from tariffing requirements
BDS Pros & Cons
• BDS Pros • Cost savings by eliminating annual cost study •
Pricing flexibility • Lower special access pricing to be more
competitive
BDS Pros & Cons
• BDS Cons • Nothing remaining ROR • Forever election • Cost Study
requirement is only a
forbearance of a rule not a rule change • Costs incurred to set
rates
Business Data Services (BDS) Is Right For Me… …If You’ve Taken
A-CAM
• Understand the decision making process • Consider BDS pricing
models • Consider BDS implementation costs • If you are NOT a
material recipient from
NECA’s TS Special Access Pool
Consumer Broadband -Only Loop (CBOL) • FCC 16-33, [Report &
Order, Order on Reconsideration,
& Further Notice of Proposed Rulemaking], Released March 30,
2016
• CBOL, a.k.a. data only &/or naked DSL • The FCC established
funding for broadband-only • CAF-BLS on CBOL
• Not subject to all of the caps HCL USF is • Only subject to
overall BCM
CBOL Pros & Cons
• CBOL Pros • Generally higher USF than voice based USF • Customer
demand, in most areas • More options for customers to choose
what
works for them • Can match competitors, if they are offering,
broadband-only plans
revenues • Once offered, hard to go back to requiring voice
service • Strain on budget, assuming many companies roll
out CBOL • Some coops may have issues as membership is
tied to voice service (consider bylaw changes)
To CBOL or Not to CBOL
• How Do I Decide? • Get a revenue impact analysis • CBOL
tariffing/ detariffing • CBOL rate development • End user pricing,
plans, etc. • A-CAM I or II vs. Legacy
» Incentive for Legacy, where A-CAM just a loss of local
revenues
A-CAM World: Where Do I Stand
• Locations to meet buildout obligations • Consider BDS as A-CAM
fine tuning • CBOL Might Boost My Legacy Support • A-CAM III or
further revised A-CAMs may come • Role of unsubsidized competitive
overlap • Competitive markets may bring USF auctioning
29
LECs Now Provide Better Service Despite Heightened Regulation • The
2019 World of A-CAM & Legacy
Courtesy: NTCA
32
• Webinars, seminars & articles • Many are CPE-eligible • Some
recent Articles:
• FCC Removes Local Rate Floor Requirement • CAF Report & Order
• Changes to Iowa Telecommunications Property Taxes • ESOP Webinar
• Budget Control Mechanism • Revenue Recognition
BKD Thoughtware®
33
James Becker Senior Managing Consultant | BKD 1120 S. 101st Street,
Suite 410 Omaha, NE 68124 402.392.1040 Ext. 22641 402.431.9805
Direct
[email protected]
Bob Abrams Senior Managing Consultant | BKD 8517 Excelsior Dr.,
Suite 301 Madison, WI 53717 608.664.9110 Ext. 40949 608.410.4768
Direct
[email protected]
bkd.com | @bkdllp
The information contained in these slides is presented by
professionals for your information only & is not to be
considered as legal advice. Applying specific information to your
situation requires careful consideration of facts &
circumstances. Consult your BKD advisor or legal counsel before
acting on any matters covered.
Thank You!
Industry
Implementation Strategies
37
ASU 606 – Revenue Recognition Overview • May 28, 2014 – Accounting
Standards Update
(ASU) 2014-09, Revenue from Contracts with Customers, is
released
• Single, converged, comprehensive approach to revenue recognition,
regardless of industry
• Replaces virtually all existing U.S. generally accepted
accounting principles (GAAP) for revenue recognition
38
ASU 606 – Revenue Recognition Overview • Effective dates for
non-public companies
• First annual reporting period beginning after December 31,
2018
• Interim reporting periods within annual reporting periods
beginning after December 15, 2019
• Calendar year-end company – start accounting in 2019
39
• Full retrospective method – restatement of prior year(s)
• Modified retrospective method • Recognize the cumulative effect
of initially applying the
new revenue recognition guidance as an adjustment to opening
balance of retained earnings
• Method chosen by the majority of companies
40
• Modified retrospective method considerations • Apply new standard
to all new contracts • Existing contracts, either
• All existing contracts, or • Contracts that are not
completed
• Potential for lost revenue
Step 4 • Allocate transaction price to performance
obligations
Step 5 • Recognize revenue when (or as) performance obligation
is
satisfied
• Month-to-month with no upfront fees • Month-to-month with
nonrefundable upfront
payments • Non-cancellable contracts with early termination
penalties
43
• Service order/activation fees – no performance obligation
• Installation fees – performance obligation • Equipment
Installment Payment (EIP) Plans –
performance obligation
44
Performance Obligations - Identification • Step 2 is one of the
most critical steps in the
new revenue framework • Major revenue streams
• Local service • Internet • Video
• Bundled service usually includes a discount
45
Performance Obligations - Identification • Example – Residential
triple-play Telco contracts with customer to provide cable
television, internet & landline voice services for a fixed
monthly fee Customer can benefit from each of the three services on
their own None of the contracted services are highly interrelated
or interdependent Telco would conclude that each of the three
services is a distinct good or service This contract would have
three performance obligations
46
Performance Obligations - Identification • Example – Residential
triple-play • However, as a practical matter, because the
three
services are provided concurrently, Telco can decide that it is
acceptable to account for the bundle as one performance obligation
if they have the same pattern of transfer
• Classification of revenue on the income statement will need to be
considered. Required classifications are
• Services • Sales of goods • Gains & losses
47
Performance Obligations - Identification • 606-10-55-18 Practical
Expedient
• If a company has a right to invoice a customer at an amount that
corresponds directly with its performance to date, then the company
can recognize revenue at that amount
• Example – In a service contract, an entity may have the right to
bill a fix amount for each time period (e.g. month)
48
Performance Obligations – Allocation of Discounts • If the sum of
the standalone selling prices of a
bundle of services exceeds the consideration, then the discount is
generally allocated proportionately to all performance obligations
in the contract
• However, this does not apply if there is evidence that the entire
discount relates to only one or more, but not all performance
obligations
49
Performance Obligations – Allocation of Discounts • Paragraphs
606-10-32-37 states • “An entity shall allocate a discount entirely
to one or
more, but not all, performance obligations in the contract if all
of the following criteria are met
• The entity regularly sells each distinct good or service (or each
bundle of distinct goods or services) in the contract on a
standalone basis
• The entity also regularly sells on a standalone basis a bundle
(or bundles) of some of those distinct goods or services at a
discount to the standalone selling prices of the goods or services
in each bundle
• The discount attributable to each bundle of goods or services
described in above is substantially the same as the discount in the
contract, & an analysis of the goods or services in each bundle
provides observable evidence of the performance obligation (or
performance obligations) to which the entire discount in the
contract belongs”
50
Performance Obligations – Allocation of Discounts • Discount
allocated entirely to one or more, but not all, performance
obligations in a contract • Telco enters into a contract with a
residential customer to sell phone,
internet & television services for a total amount of $120.
Telco regularly sells the products individually for the following
prices
• Telco also regularly sells phone & internet services together
for $75 • The contract includes a discount of $20 on the overall
transaction ($140 –
$120), which is allocated proportionately to the three services in
the contract when applying the relative standalone selling price
method
51
Performance Obligations – Allocation of Discounts • However,
because Telco regularly sells phone & internet services as
a
bundle for $75 (at a $20 discount compared with their total selling
price of $95 ($55 +$40)) & television services for $45, it has
evidence that the entire discount should be allocated to the phone
& internet services
• The discount of $20 is individually allocated to those two
services with reference to their relative standalone selling prices
as follows
• Telco will recognize revenue of $32 for phone, $43 for internet
& $45 for television services
52
Selling price ratio Price allocation Calculation
Phone $40 42% $32 (75 * 42%) Internet $55 58% $43 (75 * 58%)
Total $95 100% $75
Commission Expenses
• Companies may pay a commission to personnel for new customer
sign-ups
• Sales commission meet the criteria for recognition as an asset as
a cost to obtain a contract
• Amortize asset on a systematic basis, consistent with the pattern
of transfer of the service
• Over length of the contract • No contract, use judgement to
calculate average customer term
Churn = Customers who churned / Beginning customers Lifetime = 1 /
Churn
53
• Set up a contra-account within customer service expenses
• Credit the expense account for costs deferred as a contract
asset
• Debit the expense account for the amortization of the commission
expense
54
Nonrefundable Up-front fees – Activation & Installation • Many
telecom contracts include nonrefundable up-front
fees that are paid at or near contract inception • Must assess
whether the fee relates to the transfer of a
promised good or service to the customer • Fees administrative in
nature are not separate
performance obligations • Activities that improve the telecom’s
network do not
transfer a good or service to the customer
55
Nonrefundable Up-front Fees – Activation & Installation •
Outside wiring installation
• Connecting the house to the network • Extension of its own
network • Doesn’t transfer a good, no performance obligation
• Inside wiring installation • Customer can benefit from wiring on
its own • Customer could have obtained service from a third
party • Transfers a good, is a performance obligation
56
Lease Standard Amendment ASU 2018-11 • Practical expedient provides
lessors with an
option to not separate non-lease components from the associated
lease components if
• The non-lease components otherwise would be accounted for in
accordance with the new revenue standard &
• The lease component & the associated non-lease components
have the same timing & pattern of transfer
• The lease component, if accounted for separately, would be
classified as an operating lease
• Major opportunity for CPE – set top boxes
57
Performance Obligations – Up- front Payments – Example Telco enters
into a 12-month service contract in which customer is provided a
VOIP system & broadband plan for $500 up front and $75 per
month. Telco has identified the VOIP system & broadband plan as
separate performance obligations
Telco sells the VOIP system separately for a price of $850. Telco
offers a 12-month broadband plan at the same level of service for a
price of $50 per month
58
59
Standalone selling prices Selling Price Ratio Price Allocation
Calculation
VOIP System $850 59% $826 (1,400 * 59%) Broadband Service $600 41%
$574 (1,400 * 41%)
Total $1,450 100% $1,400
• At the inception of the contract – entry Contract Asset
($826-$500) $326.00 Equipment Revenue $326.00
• Monthly service fee billing – entry Receivable $75.00 Broadband
service revenue ($574/12) $48.00 Contract Asset $27.00
Implementation & Documentation Considerations • Identify
portfolio of services
• Monthly recurring, usage based, contract services, point of
sale
• Identify revenue streams within portfolios • Monthly voice, video
& internet, long-distance &
switched access, special access & installations & repairs,
equipment sales, directory
• Document elements of the contract • Document services done for
free/concession
60
Monthly Recurring Services
Usage Based Services
Contract Services Point of Sale
Group : [5000] Local network services 5001 BASIC AREA REVENUE
(250,000.00) Y (250,000.00) 5060 OTHR LOCAL EXCH REV-HU,RC
(5,000.00) Y (5,000.00) Total [5000] Local network services
(255,000.00)
Group : [5080] Network access services 5001.2 DSL WITH INTERNET FEE
150,000.00 Y 150,000.00 5081 INTERS END USR REV-SLC (80,000.00) Y
(80,000.00) 5081.1 INTERS END USR REV-FUSC (25,000.00) Y
(25,000.00) 5081.2 ACCESS RECOVERY CHARGE (30,000.00) Y (30,000.00)
5082.1 INTERSTATE-SWITCHED (9,000.00) Y (9,000.00) 5082.2 NECA
POOLING & FIXED SUPPORT (2,000,000.00) ? 5083 INTERSTATE-SPEC
ACCESS (50,000.00) Y (50,000.00) 5084.2 INTRASTATE-SWITCHED
(100,000.00) Y (100,000.00) 5084.3 INTRASTATE-SPEC ACCESS
(10,000.00) Y (10,000.00) 5084.7 WIRELESS SERVICES (5,000.00) Y
(5,000.00) 5100 LONG DSTNCE MSG REVENUE (100,000.00) Y (100,000.00)
Total [5080] Network access services (2,259,000.00)
Group : [5120] Internet services 7991.15 NONRGULTD REV-INTERNET
(1,000,000.00) Y (1,000,000.00) Total [5120] Internet services
(1,000,000.00)
Group : [5170] Video services 7991.5 TV SELECT REVENUE (100,000.00)
Y (100,000.00) 7991.6 TV PRIME REVENUE (1,000,000.00) Y
(1,000,000.00) 7991.7 TV-DVR REVENUE (50,000.00) Y (50,000.00)
7991.8 TV-STB REVENUE (100,000.00) 842? 7991.9 TV EQUIP SALES
REVENUE (5,000.00) Y (5,000.00) 7991.10 TV-HBO+CINEMAX REVENUE
(10,000.00) Y (10,000.00) Total [5170] Video services
(1,265,000.00)
Group : [5180] Computer sales and services 7991.11 COMPUTER SALES
(50,000.00) Y (50,000.00) 7991.111 COMPUTER REPAIR (50,000.00) Y
(50,000.00) Total [5180] Computer sales and services
(100,000.00)
Group : [5200] Miscellaneous revenue 5230 DIRECTORY REVENUE
(25,000.00) Y (25,000.00) 5240 RENT (50,000.00) 842? 5260
MISCELLANEOUS REVENUE (50,000.00) Y 7991.20 TOWER RENT (60,000.00)
842? 7991.3 NONREG REV-INSIDE WIRE (5,000.00) Y (5,000.00) Total
[5200] Miscellaneous revenue (190,000.00)
(2,405,000.00) (214,000.00) (60,000.00) (130,000.00)
61
• Bundled services • Equipment sold with services • Installation
services • Maintenance services • Activation/service order fees •
Concessions/free products & services • Commissions & other
contract costs
62
Summary
• Great opportunity to take a fresh look at how revenues & the
related costs are recorded
• Companies will be able to question how they currently bill
customers & record contracts with customers
• Impact on total revenues recorded for a month or year might not
be significant
• Documentation of revenue recognition processes & procedures
will be the greatest benefit
63
Questions?
recognition • www.bkd.com/webinar/2018/10/revenue-
recognition-considerations-telecommunications- companies
BKD Thoughtware®
67
bkd.com | @bkdllp
The information contained in these slides is presented by
professionals for your information only & is not to be
considered as legal advice. Applying specific information to your
situation requires careful consideration of facts &
circumstances. Consult your BKD advisor or legal counsel before
acting on any matters covered.
Thank You!
Financial Impacts
Regulatory Effects
70
What Changes? • All leases will be recognized on the balance sheet
of
lessees • Operating leases
• Lease liability • Right of Use Asset • Don’t appear anywhere
under today’s rules
• Finance leases (formerly capital leases) • Lease liability •
Lease assets • Similar to today’s rules
71
• Increase comparability & transparency among entities •
Decade-long joint project between FASB & IASB • Eliminate
off-balance sheet risk & improve comparability • More
reflective of true substance of leasing transactions • Lessor
accounting remained relatively unchanged
74
Effective Dates • Early adoption is permitted
• FASB recently met & is proposing delay for one more year •
New effective date – for annual reporting periods beginning
after
December 15, 2020. Public entities were not allowed this delay • A
Public entity is defined as any one of these
• A public business entity • A not-for-profit entity that has
issued – or is a conduit debt obligor for – securities
traded, listed or quoted on an exchange or over-the-counter market
• An employee benefit plan that files or furnishes financial
statements to the SEC
75
• Modified retrospective transition approach • Essentially allows
companies to continue to use previous
GAAP until existing leases expire or are modified Cannot carry
forward prior classification errors though
• ASU 2018-11, Targeted Improvements, for Lease Standard EXCEPT –
still have to record the right of use asset & lease
liability
• Record only in period adopted with a cumulative effect
presentation for opening retained earnings in period adopted
OR
• Record in all periods presented
76
Transition – Practical Expedients
• ASU 2018-11, Targeted Improvements, for Lease Standard • Lessor
does not need to separate nonlease components
from an associated lease component • Leave combined & account
for as operating lease • Both of the following must be met
• Timing & pattern of transfer of the nonlease component(s)
& associated lease component are the same
• Lease component, if accounted for separately, would be classified
as an operating lease
• Similar to what was already offered for lessees in ASU
2016-02
77
Transition – Practical Expedients
• Practical expedients (All three or none) • Lessee need not
reassess whether any expired or existing contracts
are or contain a lease • Lessee need not reassess lease
classification for any expired or
existing leases • Lessee need not reassess initial direct costs for
any existing lease
• Practical expedient – hindsight in evaluating lessee options to
extend or terminate a lease or to purchase underlying asset
78
• L& Easements • ASU 2018-010 - Contracts not previously
treated as
a lease don’t have to be evaluated for lease under ASC 842
• Apply ASC 842 to any new contracts for easements & apply as
necessary
• Continue existing accounting for easements entered into before
adoption of the standard
79
• Identify & educate • Develop timeline & key milestones •
Identify & collect ALL leases & relevant data • Analyze
data – key elements • Implementation – accounting & reporting •
Ongoing accounting – centralization, new leases,
modifications, monitoring…& much more
81
options • Interest rate • Lease payment
• Fixed • Incentives paid by lessee • Variable (CPI, market
interest rate or other) • Frequency
• Exercise price of purchase option
• Penalties for termination, if any
• Residual value guarantees • Initial direct costs • Non-lease
components
Example Contracts that Could be Leases • Arrangements involving the
use of
• Buildings • Equipment • Trucks • Trailers • Outsourced
arrangements for business operations
& staff (IT function, warehousing) • Data center • Hosting or
other IT arrangements • Dark fiber agreements, etc.
82
Contracts not Under ASC 842
• Leases of intangible assets • Leases to explore for or use
minerals, oil,
natural gas & similar nonregenerative resources
• Leases of biological assets, including timber • Leases of
inventory • Leases of assets under construction
83
What is a Lease? • Right to control use of identified property,
plant
or equipment for a period of time in exchange for
consideration
• “Control” means the customer has both • The right to obtain
substantially all of the
economic benefits from use of the asset • Right to direct use of
the asset
84
What is a Lease?
• Substantive substitution rights • Even if asset is specified, if
lessor has the
substantive right to substitute, the lessee doesn’t have control
& there is no lease
• Substantive substitution right occurs only when • Supplier has
practical ability to substitute (lessee
can’t stop it) • Supplier would benefit economically from
substitution
85
What is a Lease? • Portions of assets
• A capacity portion of an asset can be an “identified asset” if it
is physically distinct
E.g. floor of a building, segment of a fiber cable connecting a
single customer to a larger network
• Capacity of a portion of an asset that isn’t physically distinct
is not an “identified asset” (not a lease)
E.g. capacity of a fiber cable unless it represents substantially
all of the capacity of the asset & gives the customer right to
obtain substantially all the economic benefits from use of the
asset
86
What is a Lease? • For a lease with a term of 12 months or less, a
lessee is
permitted to make an accounting policy election not to recognize
lease assets & lease liabilities
• If a lessee makes this election, it should recognize lease
expense for such leases generally on a straight-line basis over the
lease term
• Consideration of renewal options… • Don’t continually renew
one-year leases to avoid the
Finance Lease accounting • Does require some disclosure • Leases
with RELATED PARTIES should be recognized
consistently with the classification criteria above on the basis of
legally enforceable terms
87
What is a Lease?
• EXAMPLE # 1 • Entered a 15-year contract for fiber-optic cable •
Right to use two specified, physically distinct dark fibers •
Customer decides how to use the fibers
• What equipment to connect to • What data & how much data
fiber will transport
• Telco (supplier) is responsible for repairs & maintenance of
fiber • Do we have a lease?
88
What is a Lease? • EXAMPLE # 1
• Entered a 15-year contract for fiber-optic cable • Right to use
two specified, physically distinct dark fibers • Customer decides
how to use the fibers
• What equipment to connect to • What data & how much data
fiber will transport
• Telco (supplier) is responsible for repairs & maintenance of
fiber • Do we have a lease?
YES
89
What is a Lease? • EXAMPLE # 2
• Entered a 15-year contract for fiber-optic cable • Right to use
specified amount of capacity (equivalent of two
strands of 24 strand fiber) • Telco (supplier) makes decisions
about transmission of data • Telco (supplier) is responsible for
repairs & maintenance of fiber • Do we have a lease?
90
What is a Lease? • EXAMPLE # 2
• Entered a 15-year contract for fiber-optic cable • Right to use
specified amount of capacity (equivalent two strands
of 24 strand fiber) • Telco (supplier) makes decisions about
transmission of data • Telco (supplier) is responsible for repairs
& maintenance of fiber • Do we have a lease?
NO
91
What is a Lease? • EXAMPLE # 3
• 12-month lease of a vehicle with annual renewals at option of
lessee
• Lessee has historically not extended these types of leases • Do
we have a lease?
92
What is a Lease? • EXAMPLE # 3
• 12-month lease of a vehicle with annual renewals at option of
lessee
• Lessee has historically not extended these types of leases • Do
we have a lease?
YES Except
• ROU Asset is not recorded if short-term lease exception is
elected
93
What is a Lease? • EXAMPLE # 4
• Entered a 12-month contract for dark fiber • Additional 12-month
renewals at option of lessee • The fiber is critical to the
operations of lessee • There are no other available options for
lease of
comparable fiber • Do we have a lease?
94
What is a Lease? • EXAMPLE # 4
• Entered a 12-month contract for dark fiber • Additional 12-month
renewals at option of lessee • The fiber is critical to the
operations of lessee • There are no other available options for
lease of
comparable fiber • Do we have a lease?
YES
95
• Installation of servers on premise for purpose of network
service
• Contract is for two years • Servers can be reconfigured &
replaced at the discretion
of supplier • Do we have a lease?
96
• Installation of servers on premise for purpose of network
service
• Contract is for two years • Servers can be reconfigured &
replaced at the discretion
of supplier • Do we have a lease?
NO
97
• Lease of an entire fiber strand between parent &
subsidiary
• There is no written contract or enforcement action between
parties for cancellation
• The fiber is critical to the subsidiary’s operations • No
comparable fibers are available • Do we have a lease?
98
• Lease of an entire fiber strand between parent &
subsidiary
• There is no written contract or enforcement action between
parties for cancellation
• The fiber is critical to the subsidiary operations • No
comparable fibers are available • Do we have a lease?
NO
99
What is a Lease? • EXAMPLE # 7
• A specific server is installed & customer data is maintained
on the server
• Contract is for three years • Replacement will only happen in
case of malfunction • Do we have a lease?
100
What is a Lease? • EXAMPLE # 7
• A specific server is installed & customer data is maintained
on the server
• Contract is for three years • Replacement will only happen in
case of malfunction • Do we have a lease?
YES
101
What is a Lease? • EXAMPLE # 8
• Contract for a building rental at a fixed amount for five
years
• Itemized amounts for real estate taxes & insurance are
included in the fixed price
• Do we have a lease?
102
What is a Lease? • EXAMPLE # 8
• Contract for a building rental at a fixed amount for five
years
• Itemized amounts for real estate taxes & insurance are
included in the fixed price
• Do we have a lease? YES
103
Lease Term • Defined as the non-cancellable period for which a
lessee
has the right to use an underlying asset, including • Periods
covered by an option to extend that the lessee is reasonably
certain to exercise • Periods covered by an option to terminate if
lessee is reasonably
certain not to exercise • Periods to extend or terminate in which
the option is controlled by
the lessor • “Reasonably Certain” is similar to “Reasonably
Assured” (a
high threshold)
Lease Payments • Determine at the commencement date & include
(initial
measurement) • Fixed payments, including in-substance payments,
less any lease
incentives • Variable lease payments that depend on an index or
rate • Exercise price of an option to purchase the underlying asset
• Payments for penalties for terminating the lease • Fees paid by
lessee to entity for structuring the transaction (Such
fees are not included in the fair value of the underlying asset) •
Residual value guarantees – amounts probable of being owed by
lessee
105
Discount Rate
• Three Options for the Discount Rate • Use the stated or implicit
rate in the contract • Use the lessee’s incremental borrowing rate
• Practical expedient which allows the use of a risk-
free rate for a term similar to the lease • Must be applied to all
contracts • Only available for non-public business entities
106
107
Key Factors of Lease • 10-year lease of building • Annual lease
payments of
$100,000 • Lease payments increase
each year by CPI • CPI is 125 at
commencement date • 0% (for ease of example) • Year 2 – CPI to
128
Solution
• $2,400 – variable lease cost
*unless lease modification occurs
Lease Classification • Finance Lease, if the lease meets any of
the
following (a) Transfer of ownership of asset at end of lease term
(b) Option to purchase asset that is reasonably certain to be
exercised (c) Lease term is the major part of the economic life (d)
PV of sum of lease payments & residual guarantee
amount to at least substantially all of the fair value (e)
Underlying asset is of specialized nature, with no
alternative value to lessor at end of lease term
• If none of the above criteria are met, it’s an Operating
Lease
108
• Standard does not contain a bright line on major part or
substantially all
• “Reasonable Approach” • When determining lease classification,
one reasonable
approach would be to conclude: • 75% or more of the remaining
economic life of the
underlying asset is a major part of the remaining economic life of
the underlying asset
• 90% or more of the fair value of the underlying asset amounts to
substantially all the fair value of the underlying asset
109
Additional Practical Expedients
• Lessees & Lessors may make an accounting policy election by
class of underlying asset to NOT separate lease & nonlease
components
• Advantages – easier accounting • Disadvantages – results in
larger lease liability &
ROU Asset
Finance Lease Operating Lease
Balance Sheet Balance Sheet Right of Use (ROU) Asset Right of Use
(ROU) Asset
Lease Liability Lease Liability
(on lease liability) Lease/Rent expense (straight- line)
Amortization expense (on ROU Asset)
Cash Flow Statement Cash Flow Statement Operating Activities –
interest payments
Operating Activities – cash paid for lease payments
Financing Activities – Cash paid for principal payments
Accounting – Initial Measurement
• ROU asset & lease liability • Same process for operating or
finance leases
• Lease liability = PV of future lease payments • Discounted rate
in lease OR • Incremental borrowing rate
• ROU assets = Lease liability + Initial direct costs + Payments
made at or before
lease commencement
Tower Annual lease payments
$15,000
Annual Years Payment
Year 1 100,000$ Year 2 100,000 Year 3 100,000 Year 4 100,000 Year 5
100,000
500,000$
NPV at 3.5% $451,505 Lease liability 15,000 Initial direct
costs
466,505$ ROU asset
• Each payment has two components (interest & principal). Part
I –
• Lease liability $XXX • Interest expense XXX
• Cash XXX • Amortization of the right-to-use asset (similar to how
depreciation
on a capital lease is currently reported)* Part II –
• Amortization of ROU $XXX • ROU asset XXX
• Variable lease payments not in lease liability recorded as
expense when incurred
114
*Shorter of useful life or lease term, unless ownership transfers
or reasonably certain to exercise purchase option – requires useful
life of underlying asset.
Implementation of Financing Lease
115
Assumption - Right to use Cell Tower asset transfers at the end of
the lease term – Financing lease
Amortization Annual Lease Liability Interest Lease ROU of ROU
Payments NPV @ 3.5% Cash Expense Liability Asset Asset
Year 1 100,000 451,505 (100,000) 15,803 84,197 (66,644) 66,644 Year
2 100,000 367,308 (100,000) 12,856 87,144 (66,644) 66,644 Year 3
100,000 280,164 (100,000) 9,806 90,194 (66,644) 66,644 Year 4
100,000 189,969 (100,000) 6,649 93,351 (66,644) 66,644 Year 5
100,000 96,618 (100,000) 3,381 96,619 (66,644) 66,644 Year 6 - - -
- - (66,644) 66,644 Year 7 - - - - - (66,641) 66,641
500,000 (500,000) 48,495 451,505 (466,505) 466,505
Sheet1
Amortization
Annual
Implementation – Operating Lease Operating Leases
• Single lease expense is recognized that runs through operating
expenses for the current year
• Part I - o Amortization of ROU Asset $XXX
• Cash XXX
• Part II - o Lease liability $XXX
• ROU asset $XXX • Overall cost of the lease is allocated over the
lease term on a
straight-line basis • Variable lease payments not in lease
liability recorded as
expense when incurred
117
Assumption – No purchase option or transfer of rights at the end of
the lease term – Operating lease
Annual Lease Liability Lease ROU Lease Payments NPV @ 3.5% Cash
Expense Asset Liability
Year 1 100,000 $451,505 (100,000) 100,000 (84,197) 84,197 Year 2
100,000 $367,308 (100,000) 100,000 (87,144) 87,144 Year 3 100,000
$280,164 (100,000) 100,000 (90,195) 90,195 Year 4 100,000 $189,969
(100,000) 100,000 (93,351) 93,351 Year 5 100,000 $96,618 (100,000)
100,000 (96,618) 96,618
500,000 (500,000) 500,000 (451,505) 451,505
Sheet1
Annual
• Right-to-use asset & lease liabilities should be presented
separate from one another & from other assets &
liabilities.
• No netting of assets & liabilities • Split between current
& long-term • Separate maturity analysis of undiscounted cash
flows
• Short-term lease costs, policy disclosure, & if significant,
short-term lease commitments.
• Variable lease costs not included in lease liabilities • Lease
transactions with related parties
118
119
• FCC 18-179 Order Adopted FASB Rules • Operating leases
• Lessor to record long-term lease receivable in acct 1410 • Lessor
must also recognize a deferred inflow of resources
equal to the lease receivable plus any up-front payments received
from lessee that relate to future periods in acct 4300
• Lessee treatment is the same • 1410 for ROU asset • 4300 for
lease liability
120
• Dark fiber leases • Becoming more & more common •
Non-Regulated & Non-Tariffed
• Flat rate pricing from large mobile providers seeking state-wide
or area-wide pricing
• Competition • NECA tariff pricing concerns/issues
• Switch sharing TS Freeze
option, but does not specifically impact your company’s
revenues
More of a case-by-case basis Evaluate overall financial &
non-financial costs & benefits
• Cost Companies – operating leases may still be viable even after
rule changes
• Need to work directly with your cost consultant as each company
can be different
122
• Third Party Software Options • simpLease • Visual Lease • Lease
Query • uGAAP
• BKD Solution – LeaseVision • Webinar on August 19, 2019 to launch
the service &
demo the solution. Sign up on our Thoughtware page
123
124
125
Continuing Professional Education (CPE) Credit
• Webinars, seminars & articles • Many are CPE-eligible •
August 19 – From Cloudy to Clear: Introducing BKD
LeaseVision (FASB) • More Time Proposed for the New Lease
Accounting
Standard for Private Companies • Internal Control Checklist for
Leases • New Lease Relief Finalized
BKD Thoughtware®
127
bkd.com | @bkdllp
The information contained in these slides is presented by
professionals for your information only & is not to be
considered as legal advice. Applying specific information to your
situation requires careful consideration of facts &
circumstances. Consult your BKD advisor or legal counsel before
acting on any matters covered.
Thank You!
Recognize the history & evolving regulatory environment of the
telecom industry
Categorize major revenue & support streams of
telecommunications companies
Identify telecommunications specific acronyms &
terminology
130
• 1876 – Telephone patented • 1879 – Bell Telephone Company
established • 1885 – American Telephone & Telegraph
(AT&T) established • 1899 – AT&T acquired American Bell •
1913 – AT&T agrees to become regulated
monopoly
131
telephone, telegraph & radio communications • Established the
Federal Communications
Commission (FCC) • Interstate & international jurisdiction •
State Public Utility Commissions (PUCs) have jurisdiction
over most intrastate telecommunications services
132
Telecom History Lesson
• 1984 - Divestiture • AT&T forced to give up its 22 local Bell
companies • 7 Regional Bell Operating Companies (RBOCs)
established, AKA Baby Bells • Ameritech, Bell South, Pacific
Telesis, Southwestern Bell
• AT&T • Bell Atlantic, NYNEX
• Verizon Communications • US West
• Telecommunications Act of 1996 • Opened local markets to
encourage competition • Reduced long-distance rates & increased
the
amount of long-distance usage • Introduced choice • Sought to
maintain a significant distinction between
telecommunications & information services • Codified universal
service
134
• Landline initially regulated utility-like carriers • Defined
franchise areas
• Competitive Local Telephone Company (CLEC) • Gained legitimacy in
the Telecom Act • Initially limited to urban areas
• Internet Service Providers (ISP) • Initially a dial-up modem
information service • Regulation resulted from ISP-bound calling •
FCC’s “Public Interest Obligations” much later
135
• Telecommunications Act of 1996 • Set obligations for
interconnection
• Wireline ILECs must agree to interconnect with CLECs • Agreements
for the exchange of local traffic • Initially, a Rural Exemption
protected rural ILECs • Requirements to negotiate in good faith
according to timelines • Early rules in particular on ISP-bound
traffic to neighboring
areas • Different rules for wireline CLECs & wireless
providers
• Interconnection agreements must be approved by state PUCs
• PUCs would also hear & rule on complaints about process,
delays, connection methods, meet points, etc.
136
Telecom History Lesson
• Telecommunications Act of 1996 • Began to change how state
legislatures & PUCs
viewed telecommunications services & providers • Would internet
access be classified as a long-distance
service? • Would RBOCs be permitted to provide “other
information
services”?
137
wiring for broadband internet service, including Voice over
Internet Protocol (VoIP)
• Computer-to-computer VoIP not subject to same regulation as
telephone companies
• Questions were raised: will VoIP lead to the erosion of local
telephone companies or will it strengthen them?
138
• 50 state PUCs with different requirements • Deregulation created
monopolies rather than
competition • 2010: National Broadband Plan • 2011: Connect America
Fund
139
• Goal is to reform & modernize universal service &
intercarrier compensation (ICC) systems
• Ensure robust & affordable voice & broadband services are
available to Americans throughout the nation
• Provided total budget of $4.5 Billion for Universal Service
Support over 6 years
• Support due to companies is uncertain due to constraints on the
FCC’s budget
140
• Level of state regulation varies
141
• Nonregulated • Video • Sales/lease of equipment • Internet •
Cellular voice
142
143
144
• Revenues Billed on CABS • Carrier: Access customer who ordered a
switched or special
access service • Access: Ability to enter/exit the ECs (Exchange
Carrier’s)
local exchange network • Billing: Process of charging for access
to/from ECs’ end users • System: Hardware & software used to
record & translate
access usage &/or demand into a bill
IXC Billing
• Billed in advance
146
• USF/ICC Order Impact on Access Rates • Beginning in 2011,
terminating interstate switched
access rates are being reduced over a nine-year period • By July
2020, IXCs will no longer be billed for their
terminating MOU • Revenues will need to be recovered primarily from
end
user customer • Most state commissions require terminating
intrastate
switched access rates mirror interstate tariffed rates • FCC said
it would next address originating rates, but so
far, has not done so
Support Mechanisms
neca.org
148
• NECA • Established in 1983 • Administers FCC’s Access Charge Plan
(cost
pooling) • Association of companies participating in
interstate
pools • Cost studies submitted by member companies
support rates filed with the FCC by NECA
Support Mechanisms
• Cost recovery • Cash flow • Reporting obligations
• Provides tariffs to keep pace with emerging market needs
Support Mechanisms
• Average schedule • Receive settlements based on a series of
statistical
formulas • Cost
• Receive settlements based on a company’s actual interstate
investment & expenses (revenue requirement)
• Companies elect pooling option • Once cost is elected, there’s no
going back to average
schedule
• Rates charged to • IXCs • End users
• Support received from received from regulatory agencies • Due
July 31 each year
Support Mechanisms
• Analysis of an ILEC’s expenses & plant investment (Part
32)
• Allocation of expenses & investment between regulated &
nonregulated (Part 64)
• Jurisdictional separation of regulated expenses & investment
between local, intrastate & interstate (Part 36)
• Assignment of regulated expenses & investment to particular
rate elements such as switching, transport, non- access (Part
69)
• Universal Service Funding (Parts 36 & 54)
Support Mechanisms
153
• Universal Service • The FCC recognized decades ago that rural
areas had
lower population density & higher costs • USF support to rural
high cost companies was informal
at first through cost settlements with the Bell System
companies
• As the AT&T Divestiture approached, several USF programs we
know today evolved to meet specific needs
• Eligible Telecommunications Companies (ETCs) were designated by
the FCC, or by state commissions, as worthy of receiving USF
support
Support Mechanisms
• Universal Service • ETC obligations, in general
• Carrier of last resort • Have, & advertise, the availability
of low income offerings • Ability to function in emergency
situations • Meet service quality standards • Comply with all
reporting requirements • More lately, to meet voice & broadband
pricing & Public Interest Obligations
to offer broadband speed & latency goals • States usually
designate ETCs
• States are actually encouraged to add local requirements • State
USF programs often reach beyond federal Lifeline program •
Requirements to show USF is spent for appointed purposes • Outage,
safety & marketing requirements under state rules
Support Mechanisms
155
• Universal Service Fund • System of subsidies & fees managed
by FCC to provide
universal access to telecommunications services in the United
States
• FCC established USAC to administer the collection &
disbursement of universal service funds
usac.org
156
• Universal Service Goals • Promote the availability of quality
services at just,
reasonable & affordable rates • Increase access to advanced
telecommunications services
throughout the United States • Advance availability of such
services to all consumers,
including those in low-income, rural, insular & high-cost areas
at rates comparable to urban areas
• Increase access to telecommunications & advanced services in
schools, libraries & rural health care facilities
• Provide equitable & non-discriminatory contributions from all
providers of telecommunications services to the fund supporting
universal service programs
Support Mechanisms
• Universal Service Fund Programs • High Cost
• Targeted to providers in high cost & rural areas • A major
source of funding for most ETCs
• Lifeline • Subsidizes low-income subscribers who must meet
annual
eligibility requirements & be recertified each year • Subsidies
possible for voice or broadband
• Schools & Libraries • Subsidizes phone, broadband & some
construction
• Rural Health Care • Subsidizes rural health care providers &
businesses serving
them
158
• USF/ICC Order Effects on High Cost • The 2011 USF/ICC Order
outlined the phased end of older
High Cost Program support, to be replaced with the Connect America
Fund (CAF)
• In 2016, High Cost recipients were first offered a path to choose
a new model-based universal service support mechanism called the
Alternative Connect America Model (A- CAM)
Support Mechanisms
159
• A-CAM Funding Timeline • By November 1, 2016, 216 rate-of-return
companies elected 274
separate offers • The amount of support for electing carriers would
exceed the overall 10-
year budget set by the FCC by more than $160 million • On December
20, 2016, a revised offer was released
• Reduced funding for the majority of companies that selected
A-CAM, but reduced buildout requirements as well
• On January 24, 2017, final Order was released • 182 companies
elected 217 revised offers with promised payments to be
coming annually for the next 10 years in support • June 29, 2018,
non “glide path” A-CAM recipients had a chance
to accept more support & additional buildout obligations •
December 2018, revised A-CAM I offers & later A-CAM II
offers
Support Mechanisms
Support Mechanisms
• Model-based (A-CAM) vs. Legacy USF • Legacy
• Just like it sounds, mostly our USF, average schedule or cost,
with a few changes
• Model-based support • Complex model that simulates building a
whole new
network • Excludes low-cost census blocks & census blocks
where
a non-subsidized competitor can provide service • Support tied to
building broadband service to new
locations
• Filings • FCC – www.fcc.gov
• Too many to list • 499-A annual filing due April 1 • 499-Q
quarterly filing due 2/1, 5/1, 8/1 & 11/1 • 481 annual filing
due July 1
• NECA – www.neca.org • Some monthly reporting – line counts,
etc.
• USAC – www.usac.org • Reporting for CAF & Legacy High
Cost
Regulatory Compliance
• Operating Report (Formerly Form 479) • Financial &
statistical reports for telecommunications borrowers • Annual
report
• Broadband Collection & Analysis System (BCAS) • Quarterly
reporting for those with broadband loans
• Annual property tax reporting
• Filings • Annual ETC reporting
• High Cost ETC – FCC Form 481 • Lifeline ETC – FCC Form 555
• Revenue reporting – FCC Form 499 • Broadband & voice
reporting – FCC Form 477 • Ongoing reporting
• NECA – monthly, annual, data Collections • USAC – …if you’re not
in the NECA TS Pool
Regulatory Compliance
Part 32
• Account Structure • 1xxx
Represents accounts which are assets, but not regulated fixed
assets • 2xxx
Represents accounts which are regulated fixed assets • 3xxx
Represents accounts which are depreciation & amortization
reserves • 4xxx
Represents accounts which are liabilities, long-term debt or a
portion of stockholders equity • 5xxx
Represents revenue accounts • 6xxx
Represents expense accounts • 7xxx
Represents other income/expense accounts
• Cash (1130) • Temporary cash investments (1160) • Accounts
receivable (1180, 1190) • Materials and supplies (1220) •
Prepayments (1310)
Part 32
• Long-term note receivables (1200) • Marketable securities (1402)
• Cash value life insurance (1410) • Deferred charges (1439)
Part 32
• Account Grouping • Property, plant & equipment
• Telephone plant in service (2111-2441) • Internet plant in
service (1410) • Video plant in service (1410) • Accumulated
depreciation (3100) • Plant under construction (2003)
Part 32
• Account Grouping • Current liabilities
• Current portion of long-term debt (4050) • Accounts payable
(4010) • Accrued taxes (income 4070, property 4080) • Other accrued
liabilities (4120)
Part 32
• Other long-term liabilities (4310) • Deferred income taxes (4340)
• Other deferred credits (4360) • Deferred tax regulatory liability
(4361) • Other jurisdictional liabilities & deferred credits –
net
(4370)
• Equity - Corporation • Common stock (4510) • Preferred stock
(4510) • Additional paid-in
capital (4520) • Accumulated other
• Equity - Cooperative • Patronage capital
assignable (4550) • Patronage capital
assigned (4550) • Unallocated non-
172
Part 32
Part 32
• Income taxes • Federal (7220, 7420) • State (7230, 7430)
Part 32
• Clearing Accounts • Motor vehicle expenses – Plant – 6112.1
• Expenses related to the maintenance of plant vehicles • Salaries
& wages – change oil, washing • Fuel, repairs, insurance
• Cleared to construction & other plant specific expense
accounts • Other work equipment expenses – 6116
• Expenses related to the maintenance of other work equipment •
Salaries & wages – change oil, washing • Fuel, repairs,
insurance
• Cleared to outside plant construction & outside plant
specific expense accounts based on labor hours
Part 32
• Clearing Accounts • Provisioning expense - 6512
• Expenses relating to the provisioning of materials & supplies
• Salaries & wages for loading & unloading supplies •
Taking physical inventory
• Cleared to construction & plant specific expense accounts
based on material used, does not always clear to zero
• Engineering expense - 6535 • Includes cost relating to general
engineering not related to a
specific project • Cleared to construction accounts based on direct
labor hours,
may not clear to zero
Part 32
Acronyms & Terminology
• Acronyms • ARC – Access Recovery Charge • CABS – Carrier Access
Billing System • CAF – Connect America Fund • CL – Common Line •
COE – Central Office Equipment • DSL – Digital Subscriber Line • EC
– Exchange Carrier • ETS – Ethernet Transport Service • EU – End
User
179
• Acronyms • FCC – Federal Communications Commission • HCL – High
Cost Loop • ICC – Intercarrier Compensation • ICLS – Interstate
Common Line Support • ILEC – Incumbent Local Exchange Carrier • ISP
– Internet Service Provider • IXC – Interexchange Carrier • MOU –
Minutes of Use
180
• Acronyms • NECA – National Exchange Carrier Association • PUC –
Public Utility Commission • SLC – Subscriber Line Charge • TS –
Traffic Sensitive • USAC – Universal Service Administrative Company
• USF – Universal Service Fund • VOIP – Voice Over Internet
Protocol
181
• Terminology • Access Charges – The fees long-distance companies
& other
network users pay to local telephone companies to originate &
terminate calls on their networks
• Access Line – A communications facility extending from a
customer’s premises to a serving central office switch, sometimes
referred to as a subscriber loop, local loop or the ‘last
mile’
• Common Line (CL) Pool – The pool NECA administers for its local
exchange carrier members’ non-traffic sensitive costs of providing
interstate access associated with subscriber loop plant
• Digital Subscriber Line (DSL) – A technology that brings high-
bandwidth information services to the home or small business over
telephone loop plant; DSL technology enables a loop to
simultaneously carry voice, which takes little bandwidth & high
speed data
182
• Terminology • Ethernet – A local area network technology that
connects computers,
printers, servers, etc., in a physical location – carrier ethernet
equipment provides reliable ethernet connectivity beyond the LAN
through the telecommunications network; Ethernet uses twisted pair
(copper), fiber optic & coaxial cable & may also use
wireless connectivity or transport
• High Cost Loop (HCL) Support – This Federal USF fund provides
support to offset high unseparated local loop costs for rural study
areas
• Interstate Common Line Support (ICLS) – This USF fund supports
the interstate common line costs of rate-of-return ILECs by funding
the residual between the ILECs interstate common line costs or
revenue requirement & the revenue collected from the common
line rate elements charged pursuant to NECA’s FCC Tariff No.
5
183
• Terminology • Incumbent Local Exchange Carrier (ILEC) – The
telephone
company that, on the date of enactment of the Telecommunications
Act of 1996, provided telephone exchange service in a specific area
& was deemed to be a member of NECA pursuant to Section
69.601(b) of the Commission’s regulations (47 C.F.R.
69.601(b))
• Intercarrier Compensation (ICC) – Flows of payments among
telecommunications carriers that result from the interconnection of
telecommunications networks under current systems of
regulation
• Internet Protocol (IP) – The method by which packet data is sent
from one area computer to another; every server, router &
switch in an IP network is uniquely identified by at least one IP
address
184
• Terminology • Internet Service Provider (ISP) – Business entity
that provides
internet service to the end user customer • Local Number
Portability (LNP) – The ability to transfer an existing
telephone number assigned by a local exchange carrier (LEC) &
reassign it to another carrier
• Local Switching Support (LSS) – This USF fund supports high local
switching costs of small ILECs
• Minutes of Use (MOU) – A total of all premium & non-premium
originating & terminating interstate traffic sensitive switched
access minutes that are switched in a Class 5 (local) end
office
• Phantom Traffic – Traffic that is terminated but is not billable
because the originating source is not identified
185
• Terminology • Settlement – A settlement is calculated for each
pooling company
based on their individual expense & tax amounts, including a
share of the pool’s calculated rate of return; each company then
receives its settlement minus the access revenue it has already
collected
• Traffic Sensitive (TS) Pool – The pool NECA administers for the
portion of the network where costs vary according to usage; pool
members apply the TS tariff rate elements: Traffic Sensitive –
Switched, including charges to interexchange carriers (IXCs) for
long distance traffic & Traffic Sensitive – Special Access,
including DSL & other broadband services
186
Acronyms & Terminology
• Terminology • Tariff 4 – NECA FCC Tariff No. 4 describes the
location & technical
capabilities of wire centers providing interstate access
telecommunications service; it also provides information to support
the ordering & billing of jointly provided (meet point or
billing percent) interstate access service
• Tariff 5 – NECA FCC Tariff No. 5 contains the rates, regulations,
service terms & conditions that apply to interstate access
services offered by local member telephone companies participating
in the tariff
• Telecommunications Relay Services (TRS) – The interstate
Telecommunications Relay Service Fund, established by the FCC on
July 26, 1993, helps speech & hearing impaired individuals use
telecom services
187
Acronyms & Terminology
• Terminology • Universal Service Fund (USF) – A group of federal
funding programs that
promote universal service goals created by the FCC to provide
support for high cost telco’s, low-income consumers, rural health
care initiatives & schools & libraries
• Voice over Internet Protocol (VoIP) – A technology that allows
users to make telephone calls using a broadband internet connection
instead of a regular (or analog) phone line
Interconnected VoIP – starts/stops on the Public Switched Network
Non-Interconnected VoIP – computer-to-computer calls via the
Internet
188
189
190
• Webinars, seminars & articles • Many are CPE-eligible
• FCC Removes Local Rate Floor Requirement • CAF Report & Order
• Budget Control Mechanism • Revenue Recognition
BKD Thoughtware®
191
Mike C. Spratt, CPA, CIA Director | BKD 1401 50th Street, Suite 350
West Des Moines, IA 50266 515.223.0159 Ext. 42246 515.440.9164
Direct 515.223.5429 Fax
[email protected]
192
bkd.com | @bkdllp
The information contained in these slides is presented by
professionals for your information only & is not to be
considered as legal advice. Applying specific information to your
situation requires careful consideration of facts &
circumstances. Consult your BKD advisor or legal counsel before
acting on any matters covered.
Thank You!
Our goals for today
Contribution Margin Analysis
• BDS order (Cost-based A-CAM I or II adopting carriers)
• Pros o Cost savings by eliminating annual cost study o Pricing
flexibility (hopefully) o Lower special access pricing to be more
competitive
• Cons o Essentially nothing ROR o Forever election o ACAM year 11
uncertainty o First year(s) implementation “growing pains/learning
curve”
196
increase) • Pros
o Generally higher USF than voice-based USF o Customer demand, in
most areas o More options for customers to choose what works
for
them • Cons
o Loss of local residential/business access service revenues
o Once offered, hard to go back to requiring voice service o Strain
on budget, assuming many companies roll out
CBOL
197
• Legacy or A-CAM – Switch Consolidations • Pros
o Lower costs, including maintenance contracts o For Cost companies
switching recovery frozen o Create a revenue stream if you host for
neighboring
companies • Cons
o Watch out for double recovery o Switchless concerns & issues
o Loss of control if you purchase host switching from
neighbor
198
• Legacy or A-CAM – Dark Fiber Leases (ROR based)
• Pros o Pricing flexibility/market-based rates o More likely to
win ETS circuits o Can offer & still remain in NECA or other
tariff
• Cons o Cost Study impact o Dot the I’s & cross the T’s (do
everything right)
• Especially if in NECA’s tariff o Consider implications of new
lease rules on accounting
199
• VOIP Phone Systems • Replacing traditional key systems with Voice
Over
Internet Protocol system • Many businesses switching to VOIP
systems to
save money
• VOIP Phone Systems • Pros
o Similar to legacy key system environment o Equipment is widely
used & available
• Cons o Additional training for technicians o Sales staff needed
for demos & sales calls o Truck rolls to install equipment
which can be expensive
depending on service territory o Less access revenue
201
• Edging off Existing Fiber Routes to provide Broadband
• Manufacturing, large farming operations on the edge of
communities where you have fiber route going right by
• Expansion of the network in small increments in a focused
manner
202
• Edging off Existing Fiber Routes to provide Broadband
• Pros o Pick up new customers – broadband, circuits, dark fiber o
Often not significant CapEx costs since main route already
there o Can lead to additional customers once you get 1 or 2 o
Often can get customers to pay for part of build
• Cons o Requires some marketing to potential customers o Need to
determine pricing, look at payback analysis o Can be pretty
competitive
203
Non-Regulated Environment • Video Replacements
• Over the top platforms & related devices o Netflix o Hulu o
Sling o Amazon Prime o YoutubeTV o Sony Playstation Vue o HBO Now o
Roku, etc. o Disney – coming soon! o Plus many others
204
• Video Replacements – OTT platforms & related devices
• Pros o No longer negotiating programming contracts o Get
customers off existing video platform which loses
money o Keep the customer by selling additional broadband
which
has much better contribution margin o No set-top boxes or
middleware to manage & maintain
• Cons o Need to train staff on OTT options so they can
educate
customers o Need to try several & then pick 1 or 2
205
Non-Regulated Environment • Managed Wi-Fi
• Initial installation of Wi-Fi routers to ensure best signal where
the customer needs it most
• Apps available to test Wi-Fi signal throughout the home
• Work with customer to understand where they want & need the
best signal
• Place router in best spot or advise use of extenders or multiple
routers
• Educate client so they know where devices will work best to
optimize their broadband usage experience
• Ongoing maintenance to help customers as needs arise
206
• Managed Wi-Fi • Pros
o Help customers maximize the broadband experience o Could
encourage them to purchase higher speeds since
they are better educated on how to get the most out of their
network
o Customer looks to your company for complete service • Cons
o Spending more time in the customer premise o Training needed for
technicians o Some additional testing equipment, though generally
pretty
inexpensive
207
• Internet of Things (IoT)/Smart Home Installation &
Management
• So many devices out there to create a “Smart Home” o Garage door
openers o Thermostats o BBQ Grills & Smokers o Refrigerator
& other home appliances o Gaming systems o Doorbells o Home
security o Audio systems o Lights o The list goes on &
on…
• Help the customer manage their devices & get the best
performance
208
• Internet of Things (IoT)/Smart Home Installation &
Management
• Pros o Increases need for broadband services o Providing more
complete solution to customers
• Cons o Training needed for technicians so they can help
customers o Spending more time in the customer premise o Likely to
drive increased backhaul needs for company
209
• Home Security Installation & Monitoring • Installation of
security systems for homes &/or
businesses o Sell the equipment & get paid a fee for the
installation
• Provide monitoring service (usually in partnering with a third
party)
210
• Home Security Installation & Monitoring • Pros
o Another touchpoint with customers o Similar to other products
& services o Opportunities to upgrade broadband
• Cons o More time in the customer premise o Additional training
for technicians o Some additional equipment needed o Technology
changes frequently
211
computer setup, etc. for both residential & small- medium sized
businesses
• Sell the hardware & software as well as fee for the service
provided to install, configure & maintain
212
• Computer Services – network management, firewalls, anti-virus,
computer setup, etc.
• Pros o Often doing all of this for your own companies o Provides
a way to leverage internal function to generate
revenue o Generally good margins
• Cons o Skilled staff needed o More time in the customer premise o
Managing work hours for staff to meet customer needs
213
Non-Regulated Environment
• Web Hosting & Design • Storing &/or designing website
files for customers • Fixed cost for the storage of the site for
them • Variable cost for the design of the site • Recurring costs
for maintenance of the site • For hosting need to consider
redundancy needs to
ensure no gaps in service
214
• Web Hosting & Design • Pros
o Already providing the broadband so another touchpoint o Another
reason for customers to look to your company
for solutions o Can lead to other services
• Cons o Requires skilled staff o Constant maintenance to meet
consumer needs o Marketing
215
the equipment • Managed Services – providing device
management
including firewalls, anti-virus, software provisioning, backups,
logical access controls, cloud computing, etc.
216
o Ability to sell additional broadband/circuits so customers &
providers can access the facility
o Use existing fiber networks to provide connectivity o Marketplace
need continues to grow o Opportunities to market backup solutions
to existing
customers • Cons
o Very large cap-ex investment o Skilled staff needed for operation
o Significant marketing needs to enter the market
217
• Edge Data Centers – Supplement 5G Networks
• Data center facilities away from the centralized core network to
offer additional computing power
• Generally smaller facilities • 5G while powerful is very distance
sensitive &
requires a very dense network to support it
218
• Edge Data Centers – Supplement 5G Networks
• Pros o Colocation option for equipment for 5G providers o Ability
to sell additional circuits using existing fiber
networks to provide connectivity • Cons
o Providing network for a competitor (cellular) o Possible large
CapEx investment o Possible upgrades needed to existing
network
219
• Critical (key) indicators of progress toward an intended
result
• Provide a focus for strategic & operational improvement
• Help create an analytical basis for decision making • Focus
attention on what matters most
220
• Provide objective evidence of progress towards achieving a
desired result
• Measure what is intended to be measured to help inform better
decision making
• Offer a comparison that gauges the degree of performance change
over time
• Can track efficiency, effectiveness, quality, timeliness,
governance, compliance, behaviors, economics, project performance,
personnel performance or resource utilization
• Are balanced between leading & lagging indicators
221
Key Performance Indicators (KPIs) • KPIs can be very different from
company to
company • Need to determine specific outcomes trying to be
achieved in order to understand what measurements will be useful to
determine success
• Decide what matters most to you & what do you feel indicates
success or progress towards your goal
222
Key Performance Indicators (KPIs) • Strategic Measures
• Track progress toward strategic goals, focusing on
intended/desired results of the End Outcome or Intermediate
Outcome. When using a balanced scorecard, these strategic measures
are used to evaluate the organization’s progress in achieving its
Strategic Objectives depicted in each of the following four
balanced scorecard perspectives o Customer/Stakeholder o Financial
o Internal Processes o Organizational Capacity
• Operational Measures • Focus on operations & tactics, &
designed to inform
better decisions around day-to-day product/service delivery or
other operational functions
223
• Focus on project progress & effectiveness • Risk
Measures
• Focus on the risk factors that can threaten our success •
Employee Measures
• Focus on the human behavior, skills or performance needed to
execute strategy
• Likely need some of each to achieve an overall goal
224
Key Performance Indicators (KPIs) • KPI Examples
• Desired Outcome – Increase broadband customers from 1,500 to
2,500 in the next 18 months o How many potential customers are
there & who are
they? o What is the timeline for number of new customer
increases within the 18 months, e.g. 60 customers per month
o What is the backhaul requirement if we bring that many customers
on the network?
o What specific network upgrades are needed to accommodate? • Set a
timeline for network upgrades that falls in line with
your strategic goals set above
225
Key Performance Indicators (KPIs) • KPI Example
• How many competitors do we have in our market? • How many
customers are we losing to competitors?
o If we lose a customer, are we asking & tracking why they
leave?
• How many ads per month are we running & in what media? o Are
we tracking how customers heard of us when they
sign up? • How many CSR sales of new broadband services
have we made each month?
226
Contribution Margin
• How much of a specific customer rate/plan price (e.g. broadband)
falls to the bottom line after expenses
• Consider o Revenue o Fixed direct costs o Variable direct costs o
Overhead costs
227
• Benefits • Focus marketing efforts on plans/rates with
highest
contribution margin to achieve best profit • Better design pricing
in the future
• Hurdles • Fairly complicated process to dig out all the
specific
costs for each rate or plan • Time consuming
228
229
EXAMPLE #1 10/1 MBPS 25/1.5 MBPS 75/2 MBPS 150/5 MBPS Package Price
54.95$ 64.95$ 74.95$ 84.95$
Direct Costs Per user charges 7.50$ 7.50$ 7.50$ 7.50$
Indirect Costs Backhaul 5.00$ 10.00$ 15.00$ 30.00$
Overhead Network 15.00$ 15.00$ 15.00$ 15.00$ Customer Service 3.00$
3.00$ 3.00$ 3.00$ Corporate Operations 5.00$ 5.00$ 5.00$
5.00$
Total Cost per customer 35.50$ 40.50$ 45.50$ 60.50$
Net margin per customer 19.45$ 24.45$ 29.45$ 24.45$
Users (850 total) 100 250 325 175
Profit 1,945.00$ 6,112.50$ 9,571.25$ 4,278.75$
Total Margins 21,907.50$
230
EXAMPLE #2 10/1 MBPS 25/1.5 MBPS 75/2 MBPS 150/5 MBPS Package Price
54.95$ 64.95$ 74.95$ 84.95$
Direct Costs Per user charges 7.50$ 7.50$ 7.50$ 7.50$
Indirect Costs Backhaul 5.00$ 10.00$ 15.00$ 30.00$
Overhead Network 15.00$ 15.00$ 15.00$ 15.00$ Customer Service 3.00$
3.00$ 3.00$ 3.00$ Corporate Operations 5.00$ 5.00$ 5.00$
5.00$
Total Cost per customer 35.50$ 40.50$ 45.50$ 60.50$
Net margin per customer 19.45$ 24.45$ 29.45$ 24.45$
Users (850 total) 50 250 375 175
Profit 972.50$ 6,112.50$ 11,043.75$ 4,278.75$
Total Margins 22,407.50$
Summary
• Many ways to diversify without letting go of the roots of the
company
• Many options help bolster core service revenue • Flexibility will
be important with constantly
changing technology
233
Continuing Professional Education (CPE) Credit
• Webinars, seminars & articles • Many are CPE-eligible • FCC
Removes Local Rate Floor Requirement
Placed on Rural Independent Telephone Companies
BKD Thoughtware®
bkd.com | @bkdllp
The information contained in these slides is presented by
professionals for your information only & is not to be
considered as legal advice. Applying specific information to your
situation requires careful consideration of facts &
circumstances. Consult your BKD advisor or legal counsel before
acting on any matters covered.
Thank You!
Why A-CAM in the First Place
General Overview of A-CAM
Revised A-CAM I Deployment Obligations
Offer Overview for A-CAM II
Offer Extension for A-CAM II
Location Clarification for A-CAMA-CAM II Public Notice DA
19-650
Example with an A-CAM II Offer
A-CAM Support Pros
A-CAM Support Cons
Legacy Support Pros
Legacy Support Cons
Legacy Support Unknowns
Business Data Services (BDS)
Business Data Services (BDS)
Consumer Broadband -Only Loop (CBOL)
CBOL Pros & Cons
CBOL Pros & Cons
LECs Now Provide Better Service Despite Heightened Regulation
Slide Number 31
Slide Number 32
Five-Step Model
Performance Obligations - Identification
Performance Obligations - Identification
Performance Obligations - Identification
Performance Obligations - Identification
Commission Expenses
Commission Expenses
Implementation & Documentation Considerations
Slide Number 61
Implementation & Documentation Considerations
Example Contracts that Could be Leases
Contracts not Under ASC 842
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?
What is a Lease?