Accounting separation is being implemented in Oman to regulate the telecom market. It requires dominant operators like Omantel to prepare separate financial statements for different business lines to increase transparency around costs, revenues, and internal transactions. This aims to prevent anti-competitive behavior by ensuring non-discriminatory treatment of competitors. Oman's telecom regulator TRA specifies parameters for the cost accounting model and uses results from regulatory accounting to conduct tests around margin squeeze, predatory pricing, and cross-subsidization. The Oman model provides a framework for implementing accounting separation as a regulatory tool.

1. Telecom Cost Accounting Conference
Dubai 26 Oct. 2009
Accounting Separation
Global Best Practices and Oman Model
Global Best Practices and Oman Model
Safda
Safdar Imam
a
Senior Costing Specialist
Omantel SAOG

2. Talking Points !
Talking Points !
What is Accounting Separation?
h i i S i ?
Why to have it as a Regulatory Mechanism in
y g y
Telecoms?
What do IFRS say about AS and Why do we need
What do IFRS say about AS and Why do we need
other Standards?
Wh AS P i i l dB P i ?
What are AS Principles, and Best Practices?
What are International Experiences?
p
How is Oman AS Framework emerging?

3. What is Accounting Separation?
What is Accounting Separation?
Depends on whom you ask!!!
“De‐consolidation of a holding company's accounts so
g p y
that the costs and revenues associated with each
subsidiary or unit can be individually identified and
y y
allocated.” (www.businessdictionary.com)
“Accounting Separation is a system of preparation of
Accounting Separation is a system of preparation of
separate accounts of economic results, on some pre‐
defined basis, for some specific functions or services.
defined basis for some specific functions or services ”
(OECD)

4. What is Accounting Separation?
Regulator’s Perspective
l ’ i
“The preparation of separate accounts for different
p p p
businesses and parts of the businesses run by the same
company or group of companies, so that the costs and
p y g p p ,
revenues associated with each (and the transfers
between them) can be separately identified and
) p y
properly allocated.” (OFCOM UK)
“Accounting Separation is a system of comprehensive
Accounting Separation is a system of comprehensive
set of accounting policies, procedures and techniques
for preparation of financial information to demonstrate
for preparation of financial information to demonstrate
compliance with ‘non‐discrimination’ obligations and
absence of anti‐competitive cross‐subsidies (ITU/EU‐NATP
absence of anti competitive cross subsidies” (ITU/EU NATP
Project Team)

5. What is Accounting Separation?
Operator’s Perspective
AS refers to the preparation of separate “sets of
AS refers to the preparation of separate “sets of
financial statements” for identified business lines of a
notified dominant operator under ex‐ante regulatory
notified dominant operator under ex ante regulatory
framework with the object to provide transparent
disclosures about internal transactions (Transfer
disclosures about internal transactions (Transfer
Pricing) between various business lines.

6. Real Life Perspective !!
Real Life Perspective !!
It is “Unscrambling of the Omelet”?
It is of the Omelet ?
(www.findlaw.com.au
(www findlaw com au )
Scramble Challenge

7. Why is AS used as Regulatory Tool in Telecoms?
Why is AS used as Regulatory Tool in Telecoms?
To provide higher level of operational and
T id hi h l l f ti l d
financial details than what is derived from
statutory financial statements
statutory financial statements
To reflect performance of the part of the business
as if they had operated as separate businesses
as if they had operated as separate businesses
In case of vertically integrated undertakings
providing ICT Networks and Services
providing ICT Networks and Services
– To prevent discrimination in favor of their own
activities
– To prevent unfair cross‐subsidy

8. Why Separation?
Why Separation?
Competition Problem – Vertically Connected Industry
Vertically New
integrated
integrated Anti
Anti‐ Entrants /
Entrants /
Strategic Possible
operator Competitive Competitors
WMD Effects
Behavior
Price Margin
Core Network Supply of Discrimination Squeeze
Wholesale Fore‐closures
Products
Cross‐ Raising Rivals’ M & A
Access
Network subsidization Costs
Supply of Bankruptcies
Retail Products
Restriction of
Predatory
Retail Services Competitors’
Pricing
Sales
l

9. Solution to Competition Problem?
Solution to Competition Problem?
SEPARATION
• Achieve ownership unbundling or Divestiture
Structural • Separate network infrastructure from units offering
Separate
S services using this infrastructure
i i hi i f
Separation Ownership
•Separate part of the operation with a bottleneck resource
Functional
F ti l Independent
•Provide access to competitors along with Incumbent retail
P id i l
divisions on non‐discriminatory basis
i hI b il
Governance &
Separation Operations
•Separate “set of accounts” for part of the operation with
p p p
bottleneck resource and business units of retail services
Accounting Rules •Provide transparency of transactions between internal
Accounting Separation for Regulatory
Controls
units to ensure equal treatment for external operators
But how much Separation?
p
Accounting Separation is a less intrusive and much less costly REMEDY to implement

10. Accounting Separation
Regulatory Objectives
l b
International Experiences highlight following safeguards against VIDOs
International Experiences highlight following safeguards against VIDOs*
• Monitoring cross subsidisation
• Comparison between internal transfer prices and external
wholesale service charges for vertically integrated operators
• Analysing potential anti‐competitive pricing behaviour, such
as margin squeeze or predatory pricing
• Determination and monitoring of interconnect charges
• Monitoring industry and service trends
Monitoring industry and service trends
• Tariff regulation
*Vertically Integrated Dominant Operator

11. Isn t IFRS sufficient for AS?
Isn't IFRS sufficient for AS?
International Financial Reporting Standard # 8 – Operating Segments
• On 30 Nov 2006, IASB issued IFRS 8 – Operating Segments to replace
IAS 14 Segment Reporting
14‐ Reporting.
• IFRS 8 is mandatory for annual financial statements of Listed Companies
for the period beginning on or after 01 Jan 2009
p g g
• Segmented financial information is required to be disclosed about an
“Operating Segment” defined as follows;
Engaged in business activities earning revenues and incurring expenses
(including transactions with other ROS’* of the same entity)
Whose operating results are reviewed regularly by the entity’s chief
entity s
operating decision makers to make decisions about resource allocation and
performance assessment.
For which discrete financial information is available
* Reportable Operating Segments

12. What do IFRS say?
What do IFRS say?
International Financial Reporting Standard # 8 – Operating Segments
Exceptions/ Thresholds;
p
Corporate HQ or Functional Units with no revenue
stream from operational activities of the entity
p y
Post retirement benefit plans
Segment with R
S t ith Revenue size < 10% of combined revenue
i f bi d
of all ROS’*
Segment with P fit or L
S t ith Profit Loss of < 10% of all combined
f f ll bi d
Profit or Loss of all ROS’
Segment with Assets value < 10% of all combined assets.
ih l % f ll bi d
* Reportable Operating Segments

13. Why do we need AS Framework on top of IFRS?
Why do we need AS Framework on top of IFRS?
IFRS does not define ROS revenue, expense, assets and
IFRS d d fi ROS d
liabilities nor any allocation rules/ methodology
Only requires an explanation as to how these are
measured for each ROS
Limited only by their internal reporting practices,
entities have discretion in determining the number of
ROS d h t i i l d d i th ROS P&L A
ROS and what is included in the ROS P&L Account. t
Scope is limited to Public Listed companies whose debt
or equity instruments are traded in a public market.
i i d di bli k

14. Postulates of AS Regulatory
Framework
Defining the markets and services
D fi i th k t d i
Analyzing the market structure
– Synthesizing the Market Study Results and available Remedies
Synthesizing the Market Study Results and available Remedies
– Determining the Dominant Position (SMP)
Defining objectives of Regulatory Accounting
Defining objectives of Regulatory Accounting
Specifying key parameters of Cost Accounting Model
Using Regulatory Cost Accounting results
g g y g
– Margin Squeeze/ Imputation Tests
– Predatory Pricing Tests
– Anti‐competitive Bundling Tests
– Cross‐subsidization Tests

15. Postulate 4: Specifying Key Parameters of
Costing Model
i d l
– Accounting principles
Accounting principles
– Disaggregation level – Products and Services
– Accounting period & production timeline
– Criteria of Assets Valuation
Criteria of Assets Valuation
– Cost Standards & Categorization (SAC, FDC, LRAIC,
MC))
– Types of Models (Top Down vs. Bottom Up, HCA,
yp ( p p, ,
CCA, BCA)

16. Postulate 4: Specifying Key Parameters of
Costing Model
i d l
– Internal Transfer Pricing
Internal Transfer Pricing
– Life Span of Assets
– Weighted Average Cost of Capital
– Activity costs attributable to network directly to
Activity costs attributable to network, directly to
services, indirectly to services
– Unattributable costs’ allocation principles
– Recommended CCA concepts (Excess Capacity,
p ( p y,
FCM, OCM)

17. Accounting Separation
OMAN MODEL

18. Sultanate of Oman
Market Overview
• Located south‐east of Arabian
Peninsula next to Saudi Arabia
and the UAE.
and the UAE
• Divided into three main
Governorates and five Regions
Governorates and five Regions
• 309,500 square kilometers
• GDP
GDP US $ 60 b
US $ 60 b
• Population 2.743 million *
• Teledensity
Teledensity
– Mobile: 130 %
– Fixed:
Fixed: 10%
10%
*Excluding Expats ; 0.6 M ( Oman TRA Market Statistics – June 2009)

19. Oman Telecom Liberalization
Oman Telecom Liberalization
Oman joined the WTO in Nov 2000
O j i d th WTO i N 2000
Committed to liberalize the market by Jan ‘05
TRA was established in Mar 2002
Second Mobile License issued in Mar 2005
Second Mobile License issued in Mar 2005
– Nawras; Jointly owned by Q Tel with local
–O M bil S b idi fG t dO t l
Oman Mobile; Subsidiary of Govt. owned Omantel
Second Fixed License issued in Nov 2008
– Nawras Plans to install IGE / MAN (www.nawras.om )
– Omantel 270 K Subs (10%) / NG Upgrade
( )/ pg

20. Regulatory Framework *
Regulatory Framework
Licensing Regime
Licensing Regime
– Class I License – Public Fixed and Public Mobile Networks
– Class II License – Public Value‐Added Service
Class II License Public Value Added Service
– Class III License – Private Telecommunications Service
Interconnection
I t ti
– LRIC based charges
• Omantel & Oman Mobile FDC / LRIC model
• Fixed and Mobile Termination determined annually
Fixed and Mobile Termination determined annually
– RIO and RAO
* www.tra.gov.om

21. Regulatory Framework
Regulatory Framework
Universal Service Obligation
Universal Service Obligation
– USF established to subsidize service for un‐served areas
– Part of royalties paid by operators to be dedicated for USF
f l db b d d df
– Underserved Areas selected by TRA; to be offered for bidding
SMP Remedies
– Accounting Separation
g p
– Transparency
– Access to Network
Access to Network

22. Current Oman Telecom Market
TRA Report 30 JUN 2009
Total Mobile Market: 3.562 M Total Fixed Market: 0.265 M
Market Share Market Share
Oman Mobile 50% Omantel 100%
Nawras 47% Nawras Preparing to Launch
Resellers 3%
Source: www.tra.gov.om

23. AS Framework Roll‐out in Oman ‐
AS Framework Roll out in Oman Update
Consultation Paper on Accounting Separation AUG 2008
Responses on AS Consultation Paper OCT 2008
Stakeholders Meeting
Stakeholders’ Meeting FEB 2009
FEB 2009
Consultation Paper on Market Dominance Criteria MAR 2009
TRA Position Statement JUL 2009
TRA Guideline / Determination
TRA Guideline / Determination NOV 2009
NOV 2009

24. Oman TRA Consultation Paper
SMP Remedies
All current Class I license holders are classified as Notified Operators
All current Class I license holders are classified as Notified Operators
– Omantel;
– Oman Mobile
– Nawras
Remedies
– Accounting Separation,
– Cost Accounting /Price Control
Cost Accounting /Price Control
– Transparency
– Non‐discrimination
– Access to Network
– Unbundling of Products

25. Oman TRA Consultation Paper
Objectives
• Remedies/ obligations of the Notified and other Licensees
/
• Market‐based level of Accounting Separation
• Overall reporting requirements, format of the SRAs* and
related issues
• A
Appropriate audit procedures and audit opinion
i di d d di i i
• Cost allocation process of costing models for SRAs
• Mandated Accounting/ Costing Methodologies and
d d / h d l d
principles for SRAs
• S
Suggested Transfer Charging and CCA methodologies
t dT f Ch i d CCA th d l i
• Long‐Run Incremental Costing (LRIC) modeling approach
• M k tD t R
Market Data Reporting Requirements and procedures
ti R i t d d

26. Market based Accounting Separation
Market definition Level of development
Retail Fixed •Access
Voice
•Local and/or national voice telephone services Market not Opened
Individual SMP
•International voice telephone services Competitive market
Retail Data •Retail leased lines
•Dial Up Internet
•Broadband Internet
Wholesale •Call origination
Fixed Voice •Call termination
Wholesale •Wholesale unbundled access
Wholesale Wholesale unbundled access
“infrastructu •Wholesale Line Rental (WLR)
re” •Wholesale broadband access (Bit stream Market)
•Wholesale terminating segments of leased lines
•Wholesale terminating segments of leased lines
•Wholesale trunk segments of leased lines
Mobile Market •Access and voice call origination
•Voice call termination on individual mobile networks
•Wholesale international roaming

27. OMAN TRA PRICE CONTROL REGIME
OMAN TRA PRICE CONTROL REGIME
SEPARATED REGULATORY
SEPARATED REGULATORY
Annual
ACCOUNTS
INVESTIGATIVE COSTING
INVESTIGATIVE COSTING
Rare Case
STUDIES
FDC / LRIC MODELING
/
Annual INTERCONNECT TARIFF
APPROVAL
TARIFF REBALANCING/ ADC
Annual APPROVALS
PRODUCTS PRICING
Each Product APPROVALS
Occasional DIRECTIVE

28. AS Obligation for SMP
TRA Position Statement Jul 2009
What to Submit? When to Submit?
Methodology document 3 months after TRA Decision Issuance
TD FDC/HCA FY 2009 One Year after the Decision
TD FDC/CCA FY 2010 6 month after Year-end
th ft Y d
TD LRIC Results FY 2010
TD FDC/CCA FY 2011 6 month after Year-end
TD LRIC Results FY 2011

29. Timeline – TRA Position Statement Jul 2009
Timeline TRA Position Statement Jul 2009
FY 2011
TRA FY 2009 FDC/CCA,
DECISION FDC/HCA LRIC
NOV FEB NOV JUL JUL
2009 2010 2010 2011 2012
METHODOLOGY FY 2010
DOCUMENT
DOCUMENT FDC/CCA,
FDC/CCA
LRIC

30. Omantel Response to AS Challenge
Omantel Response to AS Challenge
Omantel is one of the first Telcos of the Region to have
implemented ABC in the Region
Omantel Group is already providing fully segmented costing
analysis for Fixed Line (Omantel) and Cellular (Oman Mobile)
businesses to the TRA, annually, based on;
businesses to the TRA annually based on;
– Top‐down FDC
– LRIC Model
The Group is gearing up to meet AS obligations
p g g p g
Arguing with TRA to reduce arduousness of the obligations

31. OMANTEL – The Challenge is to Turn
Challenge into Opportunity
Cost
Management
/ Efficiency
Improvement
Leveraging “Effective”
Business
Business fulfillment of
fulfillment of
Information Regulatory
for Value Requirements
Creation Accounting
Separation
Separation
Model
Performance Budgeting
Management and Strategic
and Decision
dD i i Financial
Fi i l
Making Model

32. Important References
Important References*
Identification of Competition Problems and
Remedies by Mark Scanlan & Ulrich Stumpf
ITU Regulatory Accounting Guide – March 2009
ITU Costing Experts’ Training Documents – Nov
2008
Oman TRA Accounting Separation Consultation
Paper
Oman TRA Market Statistics – June 2009
You can download, these documents from IIR Telecom Costing website

33. Q & A
For any further query, please contact
For any further query please contact
Safdar Imam
Sr. Costing Specialist, Omantel
g p ,
safdar.syed@omantel.com or ssimam@gmail.com

34. ALQURAN ALHAKIM
Verse 284, Chapter 2,
Verse 284 Chapter 2
‫ﻟﻠﻪ َﺎ ِﻲ اﻟﺴ َﺎ َات و َﺎ ِﻲ اﻟْﺄرْض ۗ وِن ﺗﺒْ ُوا َﺎ ِﻲ َﻧﻔﺴﻜﻢْ أوْ ﺗﺨْ ُﻮﻩ ﻳ َﺎﺳﺒْ ُﻢ‬
‫ﱠﻤ و ِ َﻣ ﻓ َ ِ َإ ُ ﺪ ﻣ ﻓ أ ُ ِ ُ َ ُ ﻔ ُ ُﺤ ِ ﻜ‬ ‫ِﱠ ِ ﻣ ﻓ‬
ّ
‫ِﻪ ﱠ ُ َ َ ﻔ ُ ﻟ َﻦ ﻳﺸ ُ وﻳ َ ّ ُ ﻣﻦ ﻳﺸ ُ و ﱠ ُ ََ ُ ّ َ ْء َ ِﻳﺮ‬
‫ﺑ ِ اﻟﻠﻪ ۖ ﻓﻴﻐْ ِﺮ ِﻤﻦ َ َﺎء َ ُﻌ ِب َﻦ َ َﺎء ۗ َاﻟﻠﻪ ﻋﻠﻰٰ آ ِ ﺷﻲ ٍ ﻗ ِﻳﺮ‬
ٌ ‫ﺪ‬ ‫ﻞ‬ ‫وﻳ ِب‬
‫ﺬ‬ ‫ِﺮ‬
To Allah belongs all that is in the heavens and
all that is on the earth, and whether you
disclose what is inside you or conceal it Allah
it,
will call you to ACCOUNT for it. Then He
forgives whom He wills and punishes whom
He wills. And Allah commands everything.

35. Activity Based Costing
ABC Design at OmanTel
Resources Activities Cost Objects
Equipment
Equipment 1st Level
1st Level
Groups
Groups
Switching Network Blocks by Region
Network Blocks by Region
Switching
Transmission Eqmt
BTS’s
Fiber Optic Cable
Fiber Optic Cable
Cross‐connects
Cross‐connects
Etc.
Etc.
Resource Pools
Resource Pools 2nd Level
2nd Level
‐‐Personnel
Personnel Client Facing
Departments
Departments Client Facing
‐‐Fleet
Fleet Activities by International Routes by Carrier
International Routes by Carrier
‐‐Buildings OmanTel
Directorate HEM Activities by General
General
Buildings Organizational Business Unit /
‐‐Communications Directorate HEP Business Unit / Carrier’s
Carrier’s
Communications Cost Centers
Corp. Planning Global
‐‐Hardware/ Software
Hardware/ Software
/ Global Products & Services
Products & Services
Financial Serv.
Financial Serv
Regions
Customer Groups
Customer Serv. Network Activities
Network Activities Regions
Other Cost Objects
Support Serv.
by Business Unit / 3rd Level
3rd Level
Mobile C.U. by Business Unit / Other Cost Objects
Fixed C.U. Network Block
Network Block Basic Services b y Region
Basic Services b y Region
Other Costs
Other Costs Network Blocks
Network Blocks
International
‐‐Depreciation
Depreciation Administration Support Activities
Support Activities
‐‐Cost of Capital
Cost of Capital Hardware & Software
Hardware & Software Customer Groups
Regions
Cost of Capital
Cost of Capital Etc.
Etc by Business Units/
by Business Units/
by Business Units/
b B i U it /
‐‐Maintenance
Maintenance
Hardware &
Software Global
Global Regions
‐‐External Supplies
External Supplies
‐‐Etc.
Etc. Groups
Hardware &
Software
Billing Systems Hardware Groups
Hardware Groups
Payroll System
Groups 4th Level
4th Level
Etc.
TIMS
TABS Products / Services by Region
Products / Services by Region
Payroll Software Groups
Software Groups and Customer Group
Etc. Other Cost Objects
Other Cost Objects
Revenues
Revenues
Common Costs and Revenues
Common Costs and Revenues
Common Costs and Revenues
C C t dR

36. Segment Definitions for Dominant
FBO - Domestic/International
Network
Tandem Tandem
exchange/ exchange/
International
interconnect interconnect
gatew ay Local
gatew ay gatew ay
exchange
h exchange
h
sw itch sw itch
International Tandem - Local-tandem
Linecards/
transm ission tandem transm ission
ports
transm ission
International services D om estic netw ork Custom er A ccess
netw ork