Description
This report would not have been possible without the time and input of executives from the participating companies around the world. We thank all our respondents and hope that they, and our other readers, find the report's insights helpful in developing fixed assets management strategies to support their corporate goals.
Survey into the management of fxed assets
by global telecommunications operators
Navigating through the complexities of
the fxed asset management function
2
Navigating through the complexities of the fxed asset management function
Telecoms companies worldwide are under enormous pressure
to deliver new, data-rich products to customers while meeting
shareholder demands for proftability.
The global fnancial turmoil has driven
down the confdence of investors,
businesses and consumers alike. Although
the telecoms market has proven fairly
resilient to recessionary impacts, it has not
been immune. In an environment where
fnancing opportunities are limited and
household income restrained, maximizing
returns on capex programs has never been
more important.
With fxed assets comprising the bulk
of a telecoms company’s capital base,
operators must capitalize on them to drive
competitive advantage. Yet the near-
universal global compliance with IFRS is
creating a standardized approach to fxed
assets management, leaving little room for
differentiation.
To fnd out how organizations are
responding to these challenges, in 2013
EY conducted its ffth online global study
into the impact of global reporting and
regulatory frameworks on a telecoms
company’s ability to manage its assets.
The fndings were combined with
secondary research and EY’s own insights
and analysis.
The following report discusses the
accounting practices, capitalization policies
and strategies and risk management
approaches being taken across the
industry — and the implications for
operators.
This report would not have been possible without the
time and input of executives from the participating
companies around the world. We thank all our
respondents and hope that they, and our other
readers, fnd the report’s insights helpful in developing
fxed assets management strategies to support their
corporate goals.
Foreword
3
Navigating through the complexities of the fxed asset management function
01
Methodology
and how to use
this report
About the survey
This report summarizes the findings of EY’s biennial
online survey about how telecoms companies are
responding to the current challenges of fixed assets
management. The survey was available for companies
to participate between June and October 2013.
Of the 16 responding telecoms companies, 50%
are returning participants from the 2011 survey,
representing a mix of global and smaller players. Over
80% prepare their financial statements in accordance
with International Financial Reporting Standards (IFRS).
Objective
Telecommunications is a very capital-intensive industry, with
the fxed assets of network infrastructure forming a large part
of a telecoms company’s balance sheet whether it is a fxed line,
mobile or fber network, backbone or last mile. Given the constant
evolution and emergence of new technologies, managing fxed
assets has become extremely complex also from an accounting
perspective. Moreover, the global move to IFRS is leaving less
room for differentiation.
To determine how the industry is responding to these issues,
telecoms companies were asked detailed questions about their
network rollout plans and physical assets management, as well as
the impact of regulatory requirements, specifcally:
• The importance of fxed assets accounting
• Their current fxed assets practices, policies, procedures
and systems
• The impact, if any, that transition to IFRS has had on their
fxed assets accounting
• Their current treatment of specifc asset categories
4
Navigating through the complexities of the fxed asset management function
5
Navigating through the complexities of the fxed asset management function
02
Participating
companies
The companies represented have more than
US$230 billion in combined annual revenues and
US$180 billion in combined total fixed assets.
EY thanks the 16 participating
telecoms companies and
telecoms company executives
whose contributions made this
report possible.
6
Navigating through the complexities of the fxed asset management function
Information was current at the time of the study. Material
is presented in aggregate form, because participants
were promised anonymity. Only participating companies
are entitled to the full survey results. To register your
interest in participating in the next survey, please contact
your local EY representative. Alternatively, submit your
inquiry to EY’s Global Telecommunications Center at
[email protected]
AT&T European Integrated
Operator x 2*
Tigo El Salvador
Algar Telecom Hrvatski Telekom d.d. UK Integrated Operator*
Asia-Pacifc Integrated
Operator x 2*
Large European Integrated
Operator*
US Integrated Operator*
BT Telekom Deutschland GmbH Vodafone
Econet Wireless Zimbabwe
Limited
Telkom SA SOC Limited
*Consent to disclose name of participant was not available at the time of publishing this report.
7
Navigating through the complexities of the fxed asset management function
03
Overview
As the complexities surrounding telecoms operators’
fixed asset management function evolve, a deep
understanding of this function is becoming ever more
important for operators to succeed in differentiating
themselves from the competition.
Today, navigating successfully through the associated
operational and internal control challenges is essential
to meet customer needs through an efficient network
and consistent quality of service.
In line with the 2011 survey, we witnessed a strong
willingness at operator level to dedicate significant
attention to their fixed assets management function,
with all surveyed companies having a dedicated team
serving this purpose. Fixed assets management is not
only important for balance sheet purposes but also to
measure performance with key performance indicators
(KPIs) such as EBIT, which include depreciation and
amortization of assets. Fixed assets management is
also of primary importance for accurate information on
investment activities as part of cash flow analysis. The
“capex over revenue” ratio remains a major metric for
investors and analysts.
8
Navigating through the complexities of the fxed asset management function
• Every participant has a dedicated team for fxed asset
management.
• For 88% of fxed asset management functions, accounting
remains the primary task.
• However, control (75%) and reporting (69%) are also now
important responsibilities, almost double their 2011
levels.
• While most fxed assets team report to either Finance or
Operations, this year 19% of departments now report to both
Finance and Operations.
• In 2013, 38% had capex management and 31% technical
data management responsibilities, up from 15% and 12%,
respectively, in 2011.
• The number of functions performing all tasks fell to 13%,
down from 16% in 2011.
• Function size does not align with total fxed asset values or
breadth of responsibilities.
• Just 19% of respondents have more than 200 people
working in the function, compared with 39% in 2011.
• Teams of 100–200 people jumped from 4% to 19%.
• One in fve uses fewer than 10 people to manage their fxed
assets, comparable with 2011 fndings.
• Telecoms companies are expanding the responsibilities of
their fxed asset functions beyond accounting, to include a
focus on control and reporting.
• However, many operators have yet to integrate all the
technical aspects required for effcient fxed assets
management.
• Operators require a broader team, with a mix of accounting,
fnance, IT and network engineers, to perform the diversity
of tasks required to manage their fxed assets.
• Those starting to diversify are either adding capex
management or technical data management responsibilities
to the function — but not both.
• Reporting to both Finance and Operations would be more
effective, driving synergies and ensuring decision-making
clarity and consistency.
• Some fxed asset functions are extremely thinly resourced,
creating a worrying potential for ineffective asset
management.
• Others are continuing the risky model of having fragmented
responsibilities across multiple silos.
Data points Implications
Nonetheless, we still found a lack of new business metrics based
on forward-looking data to provide enough granularity to improve
the customer experience and present more accurate fnancial
statements. This is an area that operators should be working to
address.
Furthermore, for the fxed assets management function to be
able to respond effciently to investor expectations and the
tough competitive environment, the function needs to integrate
a broad set of skills, beyond just accounting. We are seeing
operators include a better blend of tasks and responsibilities in
the fxed asset management function. This trend will need to be
sustained, given the increasing complexity of the overall business
value chain.
Study highlights
The study revealed the following challenges for telecommunications executives.
1 | Revisiting the fixed assets management function
Although every respondent has a dedicated team to manage fxed assets, resourcing levels, responsibilities and reporting lines differ
quite substantially across the sector. The fndings suggest that many operators need to: review resourcing effciency or adequacy,
assess whether skill sets should be broadened to include technical data management or capex management, and consider adding
new reporting linkages to operational parts of the business.
9
Navigating through the complexities of the fxed asset management function
• 65% of respondents capitalize the costs for access to the
network at the customer premise.
• 23% of respondents capitalize the costs for access at the frst
cross-connect point, up from 4% of respondents in 2011.
• 62% of respondents use timesheets to identify employee
time spent on capital projects, similar to 2011.
• 2013 saw 100% of participants capitalizing capacity
enhancements or upgrades – up from 87% in 2011.
• The number of participants capitalizing customer acquisition
costs fell from 22% to 13%.
• The previous trend to amortize the cost over the average
customer relationship based on churn rates dropped from
57% to 28%.
• Operators are just as likely to amortize based on the period
of customer contract.
• The increasing number of participants capitalizing costs
at the frst cross-connect point highlights the fact that the
boundaries for capitalizing costs for access to the network
are shifting.
• Although the conversion to IFRS is leading to standardized
accounting policies, several areas remain where judgment
applies, for example useful life, granularity of asset
identifcation or impairment.
• Participants are increasingly relying on other means
to amortize customer acquisition costs than average
customer relationship, which dropped from 57% to 28%.
This implies that operators have to consider new concepts
of connectivity, service adoption and usage, as well as new
customer defnitions and patterns of behavior.
Implications Data points
2 | Differentiating strategies in capitalization policies
Although capitalization policies are becoming more and more standardized, as expected with increased conversion toward IFRS, they
still incorporate aspects requiring judgment from the operator, such as asset boundaries and their treatment of functional changes
to management information systems and spare parts. Policies also have to include metrics transformation led by fast-changing
technological and external forces, such as web services and ongoing device innovation.
3 | Managing impairment more effectively
In 2013, with the industry standardizing under IFRS, the study found annual reviews of impairment as standard practice, with some
operators testing even more regularly. Approaches to impairment tests are diverging, with increasing numbers of operators focusing
more on product and geography. When it comes to calculating fxed asset service lives, telecoms companies are continuing to rely on
past experience to determine service asset lives, rather than considering forward-looking indicators. Operators now need to focus on
industry practices and pay more attention to guidance from vendors, who generally are best placed to estimate an appropriate useful life
for newer assets.
• 69% have rolled out FTTN or FTTP, or plan to, down from
76% in 2011.
• 81% review their asset service lives at least annually, down
from 87% in 2011.
• The number of respondents viewing their network as
separate cash-generating units (CGUs) fell from 56% to 33%.
• 20% of respondents are making their network impairment
assessment on the basis of product/service obsolescence,
and another 20% is making their assessment based on the
geography of their equipment.
• Respondents stated that the rollout of FTTN or FTTP did
not have any impact on the service life of their traditional
network assets.
• In coming years, we expect FTTN will continue to develop at
a slower pace, with a growing focus on developing 4G LTE
networks.
• At least an annual review of asset service lives is now an
industry standard as required by IFRS.
• Divergent practices are emerging when evaluating networks
for impairment purposes.
• When calculating fxed asset service lives, telecoms
companies are continuing to rely on past experience to
determine service asset lives, rather than considering
forward-looking indicators
Implications Data points
10
Navigating through the complexities of the fxed asset management function
• 100% have specifc risk management processes for
acquisitions and 94% for disposal.
• Proftability and utilization are the main KPIs for fxed asset
effectiveness and effciency.
• 88% use ERP systems for tracking and monitoring assets and
their service lives.
• 50% still rely on physical verifcation, with the other 50%
using a mix of automation and physical verifcation.
• No respondents have full automation, compared with 32%
in 2011.
• 56% verify their fxed assets register at least once a year,
while 13% had not verifed the register in the past fve years.
• In 2013, unit-level record-keeping increased from
47% to 57%, while frame-level fell from 37% to 29%.
• 74% perform verifcation internally, with only 10% opting to
outsource – a fall from 17% in 2011. A few outsource just a
few elements of the process.
• Given the ferce competition and an increasingly
sophisticated and demanding customer base, operators may
need to consider a wider range of KPIs, covering additional
fnancial and technical aspects of network performance.
• Integrated ERP systems are close to being standard across
the industry, improving data quality and process.
• Operators need to fnd the right balance between automating
fxed assets management processes and mitigating risk with
physical verifcation.
• Physical verifcation will continue to be necessary to back up
book values; however, companies need to use it in the most
effcient way possible.
• Operators may need to sample only one location out of a
group of sites that are the same type and size.
• If operators are obtaining data from multiple databases,
they may discover inconsistent or duplicative information.
Databases must interface effectively and present an
adequate level of detail to meet IFRS requirements.
• Verifcation is likely to continue to be resourced internally,
ensuring knowledge retention.
Implications Data points
• 33% of respondents recorded an impairment charge over the
past 12 months compared with 30% in 2011 and 19%
in 2009.
• Respondents ranked company policy and past experience
as most important in determining asset service life. Vendor
estimates and practices were seen as largely irrelevant.
• Just one operator recorded an impairment charge on its
UMTS/3G license and/or assets due to less-than-anticipated
growth in 3G services.
• Changing strategies and technology choices have affected
radio access and transmission/core network assets the most.
• Although some operators are paying attention to industry
practices, this needs to become more widespread.
• All operators need to focus more on guidance from vendors,
who generally are best placed to estimate an appropriate
useful life for newer assets.
• As the current shift toward 4G LTE continues, more
operators may record 3G impairments.
• In coming years, as telecoms companies capitalize on growth
opportunities in IP and data, operators will also have to
constantly monitor asset categories that help to deliver rich
content.
• Operators need to fnd the right balance between
determining realistic assets service lives and performing
accurate impairment tests.
4 | Getting the risk balance right
Managing risk in fxed assets continues to be a high priority, with IFRS compliance galvanizing considerable investment in risk
management processes around all the critical fxed assets sub processes, such as acquisition and disposal. At the same time,
operators are standardizing around partial automation, integrated ERP and internal resourcing. That said, most are still trying to fnd
the balance between cost and adequate control. The study found: considerable variations in verifcation frequency: different ideas
about how much physical verifcation is necessary; and diverse interpretations of the level of detail required to comply with the IFRS
component approach.
11
Navigating through the complexities of the fxed asset management function
• In 2013, half (up from 29%) are investing more than 40% of
capex in their networks, and only 19% (down from 48%) are
under the 20% mark.
• Almost two-thirds of participants now transfer WIP projects
into fxed assets within three to six months, up from 41%
in 2011.
• 50% of respondents have entered into, or are planning to
enter into network sharing and/or network managed services
transactions.
• 31% have entered into agreements to offoad their passive
infrastructure, or are planning to.
• 73% rated ‘lease accounting’ as their top accounting
challenge, followed by cost recognition.
• Participants are split 50:50 between managing their shared
assets via a holding company or through a joint venture
agreement.
• We expect to see even greater proportional investment in
the future, as operators seek competitive advantage by
keeping pace with technological evolution and continuing to
deliver service quality.
• Increased investment is an important trend, correlated
with the fast-moving pace of the telecoms industry and the
experience curve effect.
• The industry trend to maximize the return on investment
of fxed assets continues and network sharing/network
managed services transactions are still seen as means to
improve the return on invested capital.
• Given that these transactions require lease considerations,
lease accounting will continue to be a challenge.
• The nature and volume of assets shared should drive
operators’ decisions when it comes to setting up a legal
structure for shared assets management.
• Capex ratio over revenue remains a major KPI that investors
and analysts are looking for.
Implications Data points
5 | Growth in network investment
2013 saw a rise in the proportion of capex budgets being dedicated to IT and network related WIP. Interestingly, IT and network projects
are spending less time in WIP before the completed project is transferred into fxed assets.
The new shape of network sourcing arrangements (network sharing, managed services, passive infrastructure offoading, etc.) is making
lease accounting a particular challenge.
About EY
EY is a global leader in assurance, tax, transaction and advisory
services. The insights and quality services we deliver help build trust and
confidence in the capital markets and in economies the world over. We
develop outstanding leaders who team to deliver on our promises to all
of our stakeholders. In so doing, we play a critical role in building a better
working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of
the member firms of Ernst & Young Global Limited, each of which is a
separate legal entity. Ernst & Young Global Limited, a UK company limited
by guarantee, does not provide services to clients. For more information
about our organization, please visit ey.com.
How EY’s Global Telecommunications Center can help your business
Telecommunications operators are facing a rapidly transforming business
model. Competition from technology companies is creating challenges
around customer ownership. Service innovation, pricing pressures and
network capacity are intensifying scrutiny on return on investment.
Additionally, regulatory pressures and shareholder expectations require
agility and cost efficiency. If you are facing these challenges, we can
provide a sector-based perspective to addressing your assurance,
advisory, transaction and tax needs. Our Global Telecommunications
Center is a virtual hub that brings together people, cultures and leading
ideas from across the world. Whatever your need, we can help you
improve the performance of your business.
© 2014 EYGM Limited.
All Rights Reserved.
EYG no. EF0133
CSG/GSC2014/1343239
ED None
In line with EY’s commitment to minimize its impact on the environment, this document
has been printed on paper with a high recycled content.
This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax or other professional advice. Please refer to your advisors for
specific advice.
ey.com/telecommunications
EY | Assurance | Tax | Transactions | Advisory
Contacts
Jonathan Dharmapalan
Global Telecommunications Leader
[email protected]
Holger Forst
Global Telecommunications Assurance Leader
[email protected]
Staffan Ekström
Global Telecommunications TAS Leader
[email protected]
Amit Sachdeva
Global Telecommunications Advisory Leader
[email protected]
Bart van Droogenbroek
Global Telecommunications Tax Leader
[email protected]
Fixed assets contact:
Olivier Lemaire
Partner
[email protected]
doc_179057723.pdf
This report would not have been possible without the time and input of executives from the participating companies around the world. We thank all our respondents and hope that they, and our other readers, find the report's insights helpful in developing fixed assets management strategies to support their corporate goals.
Survey into the management of fxed assets
by global telecommunications operators
Navigating through the complexities of
the fxed asset management function
2
Navigating through the complexities of the fxed asset management function
Telecoms companies worldwide are under enormous pressure
to deliver new, data-rich products to customers while meeting
shareholder demands for proftability.
The global fnancial turmoil has driven
down the confdence of investors,
businesses and consumers alike. Although
the telecoms market has proven fairly
resilient to recessionary impacts, it has not
been immune. In an environment where
fnancing opportunities are limited and
household income restrained, maximizing
returns on capex programs has never been
more important.
With fxed assets comprising the bulk
of a telecoms company’s capital base,
operators must capitalize on them to drive
competitive advantage. Yet the near-
universal global compliance with IFRS is
creating a standardized approach to fxed
assets management, leaving little room for
differentiation.
To fnd out how organizations are
responding to these challenges, in 2013
EY conducted its ffth online global study
into the impact of global reporting and
regulatory frameworks on a telecoms
company’s ability to manage its assets.
The fndings were combined with
secondary research and EY’s own insights
and analysis.
The following report discusses the
accounting practices, capitalization policies
and strategies and risk management
approaches being taken across the
industry — and the implications for
operators.
This report would not have been possible without the
time and input of executives from the participating
companies around the world. We thank all our
respondents and hope that they, and our other
readers, fnd the report’s insights helpful in developing
fxed assets management strategies to support their
corporate goals.
Foreword
3
Navigating through the complexities of the fxed asset management function
01
Methodology
and how to use
this report
About the survey
This report summarizes the findings of EY’s biennial
online survey about how telecoms companies are
responding to the current challenges of fixed assets
management. The survey was available for companies
to participate between June and October 2013.
Of the 16 responding telecoms companies, 50%
are returning participants from the 2011 survey,
representing a mix of global and smaller players. Over
80% prepare their financial statements in accordance
with International Financial Reporting Standards (IFRS).
Objective
Telecommunications is a very capital-intensive industry, with
the fxed assets of network infrastructure forming a large part
of a telecoms company’s balance sheet whether it is a fxed line,
mobile or fber network, backbone or last mile. Given the constant
evolution and emergence of new technologies, managing fxed
assets has become extremely complex also from an accounting
perspective. Moreover, the global move to IFRS is leaving less
room for differentiation.
To determine how the industry is responding to these issues,
telecoms companies were asked detailed questions about their
network rollout plans and physical assets management, as well as
the impact of regulatory requirements, specifcally:
• The importance of fxed assets accounting
• Their current fxed assets practices, policies, procedures
and systems
• The impact, if any, that transition to IFRS has had on their
fxed assets accounting
• Their current treatment of specifc asset categories
4
Navigating through the complexities of the fxed asset management function
5
Navigating through the complexities of the fxed asset management function
02
Participating
companies
The companies represented have more than
US$230 billion in combined annual revenues and
US$180 billion in combined total fixed assets.
EY thanks the 16 participating
telecoms companies and
telecoms company executives
whose contributions made this
report possible.
6
Navigating through the complexities of the fxed asset management function
Information was current at the time of the study. Material
is presented in aggregate form, because participants
were promised anonymity. Only participating companies
are entitled to the full survey results. To register your
interest in participating in the next survey, please contact
your local EY representative. Alternatively, submit your
inquiry to EY’s Global Telecommunications Center at
[email protected]
AT&T European Integrated
Operator x 2*
Tigo El Salvador
Algar Telecom Hrvatski Telekom d.d. UK Integrated Operator*
Asia-Pacifc Integrated
Operator x 2*
Large European Integrated
Operator*
US Integrated Operator*
BT Telekom Deutschland GmbH Vodafone
Econet Wireless Zimbabwe
Limited
Telkom SA SOC Limited
*Consent to disclose name of participant was not available at the time of publishing this report.
7
Navigating through the complexities of the fxed asset management function
03
Overview
As the complexities surrounding telecoms operators’
fixed asset management function evolve, a deep
understanding of this function is becoming ever more
important for operators to succeed in differentiating
themselves from the competition.
Today, navigating successfully through the associated
operational and internal control challenges is essential
to meet customer needs through an efficient network
and consistent quality of service.
In line with the 2011 survey, we witnessed a strong
willingness at operator level to dedicate significant
attention to their fixed assets management function,
with all surveyed companies having a dedicated team
serving this purpose. Fixed assets management is not
only important for balance sheet purposes but also to
measure performance with key performance indicators
(KPIs) such as EBIT, which include depreciation and
amortization of assets. Fixed assets management is
also of primary importance for accurate information on
investment activities as part of cash flow analysis. The
“capex over revenue” ratio remains a major metric for
investors and analysts.
8
Navigating through the complexities of the fxed asset management function
• Every participant has a dedicated team for fxed asset
management.
• For 88% of fxed asset management functions, accounting
remains the primary task.
• However, control (75%) and reporting (69%) are also now
important responsibilities, almost double their 2011
levels.
• While most fxed assets team report to either Finance or
Operations, this year 19% of departments now report to both
Finance and Operations.
• In 2013, 38% had capex management and 31% technical
data management responsibilities, up from 15% and 12%,
respectively, in 2011.
• The number of functions performing all tasks fell to 13%,
down from 16% in 2011.
• Function size does not align with total fxed asset values or
breadth of responsibilities.
• Just 19% of respondents have more than 200 people
working in the function, compared with 39% in 2011.
• Teams of 100–200 people jumped from 4% to 19%.
• One in fve uses fewer than 10 people to manage their fxed
assets, comparable with 2011 fndings.
• Telecoms companies are expanding the responsibilities of
their fxed asset functions beyond accounting, to include a
focus on control and reporting.
• However, many operators have yet to integrate all the
technical aspects required for effcient fxed assets
management.
• Operators require a broader team, with a mix of accounting,
fnance, IT and network engineers, to perform the diversity
of tasks required to manage their fxed assets.
• Those starting to diversify are either adding capex
management or technical data management responsibilities
to the function — but not both.
• Reporting to both Finance and Operations would be more
effective, driving synergies and ensuring decision-making
clarity and consistency.
• Some fxed asset functions are extremely thinly resourced,
creating a worrying potential for ineffective asset
management.
• Others are continuing the risky model of having fragmented
responsibilities across multiple silos.
Data points Implications
Nonetheless, we still found a lack of new business metrics based
on forward-looking data to provide enough granularity to improve
the customer experience and present more accurate fnancial
statements. This is an area that operators should be working to
address.
Furthermore, for the fxed assets management function to be
able to respond effciently to investor expectations and the
tough competitive environment, the function needs to integrate
a broad set of skills, beyond just accounting. We are seeing
operators include a better blend of tasks and responsibilities in
the fxed asset management function. This trend will need to be
sustained, given the increasing complexity of the overall business
value chain.
Study highlights
The study revealed the following challenges for telecommunications executives.
1 | Revisiting the fixed assets management function
Although every respondent has a dedicated team to manage fxed assets, resourcing levels, responsibilities and reporting lines differ
quite substantially across the sector. The fndings suggest that many operators need to: review resourcing effciency or adequacy,
assess whether skill sets should be broadened to include technical data management or capex management, and consider adding
new reporting linkages to operational parts of the business.
9
Navigating through the complexities of the fxed asset management function
• 65% of respondents capitalize the costs for access to the
network at the customer premise.
• 23% of respondents capitalize the costs for access at the frst
cross-connect point, up from 4% of respondents in 2011.
• 62% of respondents use timesheets to identify employee
time spent on capital projects, similar to 2011.
• 2013 saw 100% of participants capitalizing capacity
enhancements or upgrades – up from 87% in 2011.
• The number of participants capitalizing customer acquisition
costs fell from 22% to 13%.
• The previous trend to amortize the cost over the average
customer relationship based on churn rates dropped from
57% to 28%.
• Operators are just as likely to amortize based on the period
of customer contract.
• The increasing number of participants capitalizing costs
at the frst cross-connect point highlights the fact that the
boundaries for capitalizing costs for access to the network
are shifting.
• Although the conversion to IFRS is leading to standardized
accounting policies, several areas remain where judgment
applies, for example useful life, granularity of asset
identifcation or impairment.
• Participants are increasingly relying on other means
to amortize customer acquisition costs than average
customer relationship, which dropped from 57% to 28%.
This implies that operators have to consider new concepts
of connectivity, service adoption and usage, as well as new
customer defnitions and patterns of behavior.
Implications Data points
2 | Differentiating strategies in capitalization policies
Although capitalization policies are becoming more and more standardized, as expected with increased conversion toward IFRS, they
still incorporate aspects requiring judgment from the operator, such as asset boundaries and their treatment of functional changes
to management information systems and spare parts. Policies also have to include metrics transformation led by fast-changing
technological and external forces, such as web services and ongoing device innovation.
3 | Managing impairment more effectively
In 2013, with the industry standardizing under IFRS, the study found annual reviews of impairment as standard practice, with some
operators testing even more regularly. Approaches to impairment tests are diverging, with increasing numbers of operators focusing
more on product and geography. When it comes to calculating fxed asset service lives, telecoms companies are continuing to rely on
past experience to determine service asset lives, rather than considering forward-looking indicators. Operators now need to focus on
industry practices and pay more attention to guidance from vendors, who generally are best placed to estimate an appropriate useful life
for newer assets.
• 69% have rolled out FTTN or FTTP, or plan to, down from
76% in 2011.
• 81% review their asset service lives at least annually, down
from 87% in 2011.
• The number of respondents viewing their network as
separate cash-generating units (CGUs) fell from 56% to 33%.
• 20% of respondents are making their network impairment
assessment on the basis of product/service obsolescence,
and another 20% is making their assessment based on the
geography of their equipment.
• Respondents stated that the rollout of FTTN or FTTP did
not have any impact on the service life of their traditional
network assets.
• In coming years, we expect FTTN will continue to develop at
a slower pace, with a growing focus on developing 4G LTE
networks.
• At least an annual review of asset service lives is now an
industry standard as required by IFRS.
• Divergent practices are emerging when evaluating networks
for impairment purposes.
• When calculating fxed asset service lives, telecoms
companies are continuing to rely on past experience to
determine service asset lives, rather than considering
forward-looking indicators
Implications Data points
10
Navigating through the complexities of the fxed asset management function
• 100% have specifc risk management processes for
acquisitions and 94% for disposal.
• Proftability and utilization are the main KPIs for fxed asset
effectiveness and effciency.
• 88% use ERP systems for tracking and monitoring assets and
their service lives.
• 50% still rely on physical verifcation, with the other 50%
using a mix of automation and physical verifcation.
• No respondents have full automation, compared with 32%
in 2011.
• 56% verify their fxed assets register at least once a year,
while 13% had not verifed the register in the past fve years.
• In 2013, unit-level record-keeping increased from
47% to 57%, while frame-level fell from 37% to 29%.
• 74% perform verifcation internally, with only 10% opting to
outsource – a fall from 17% in 2011. A few outsource just a
few elements of the process.
• Given the ferce competition and an increasingly
sophisticated and demanding customer base, operators may
need to consider a wider range of KPIs, covering additional
fnancial and technical aspects of network performance.
• Integrated ERP systems are close to being standard across
the industry, improving data quality and process.
• Operators need to fnd the right balance between automating
fxed assets management processes and mitigating risk with
physical verifcation.
• Physical verifcation will continue to be necessary to back up
book values; however, companies need to use it in the most
effcient way possible.
• Operators may need to sample only one location out of a
group of sites that are the same type and size.
• If operators are obtaining data from multiple databases,
they may discover inconsistent or duplicative information.
Databases must interface effectively and present an
adequate level of detail to meet IFRS requirements.
• Verifcation is likely to continue to be resourced internally,
ensuring knowledge retention.
Implications Data points
• 33% of respondents recorded an impairment charge over the
past 12 months compared with 30% in 2011 and 19%
in 2009.
• Respondents ranked company policy and past experience
as most important in determining asset service life. Vendor
estimates and practices were seen as largely irrelevant.
• Just one operator recorded an impairment charge on its
UMTS/3G license and/or assets due to less-than-anticipated
growth in 3G services.
• Changing strategies and technology choices have affected
radio access and transmission/core network assets the most.
• Although some operators are paying attention to industry
practices, this needs to become more widespread.
• All operators need to focus more on guidance from vendors,
who generally are best placed to estimate an appropriate
useful life for newer assets.
• As the current shift toward 4G LTE continues, more
operators may record 3G impairments.
• In coming years, as telecoms companies capitalize on growth
opportunities in IP and data, operators will also have to
constantly monitor asset categories that help to deliver rich
content.
• Operators need to fnd the right balance between
determining realistic assets service lives and performing
accurate impairment tests.
4 | Getting the risk balance right
Managing risk in fxed assets continues to be a high priority, with IFRS compliance galvanizing considerable investment in risk
management processes around all the critical fxed assets sub processes, such as acquisition and disposal. At the same time,
operators are standardizing around partial automation, integrated ERP and internal resourcing. That said, most are still trying to fnd
the balance between cost and adequate control. The study found: considerable variations in verifcation frequency: different ideas
about how much physical verifcation is necessary; and diverse interpretations of the level of detail required to comply with the IFRS
component approach.
11
Navigating through the complexities of the fxed asset management function
• In 2013, half (up from 29%) are investing more than 40% of
capex in their networks, and only 19% (down from 48%) are
under the 20% mark.
• Almost two-thirds of participants now transfer WIP projects
into fxed assets within three to six months, up from 41%
in 2011.
• 50% of respondents have entered into, or are planning to
enter into network sharing and/or network managed services
transactions.
• 31% have entered into agreements to offoad their passive
infrastructure, or are planning to.
• 73% rated ‘lease accounting’ as their top accounting
challenge, followed by cost recognition.
• Participants are split 50:50 between managing their shared
assets via a holding company or through a joint venture
agreement.
• We expect to see even greater proportional investment in
the future, as operators seek competitive advantage by
keeping pace with technological evolution and continuing to
deliver service quality.
• Increased investment is an important trend, correlated
with the fast-moving pace of the telecoms industry and the
experience curve effect.
• The industry trend to maximize the return on investment
of fxed assets continues and network sharing/network
managed services transactions are still seen as means to
improve the return on invested capital.
• Given that these transactions require lease considerations,
lease accounting will continue to be a challenge.
• The nature and volume of assets shared should drive
operators’ decisions when it comes to setting up a legal
structure for shared assets management.
• Capex ratio over revenue remains a major KPI that investors
and analysts are looking for.
Implications Data points
5 | Growth in network investment
2013 saw a rise in the proportion of capex budgets being dedicated to IT and network related WIP. Interestingly, IT and network projects
are spending less time in WIP before the completed project is transferred into fxed assets.
The new shape of network sourcing arrangements (network sharing, managed services, passive infrastructure offoading, etc.) is making
lease accounting a particular challenge.
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How EY’s Global Telecommunications Center can help your business
Telecommunications operators are facing a rapidly transforming business
model. Competition from technology companies is creating challenges
around customer ownership. Service innovation, pricing pressures and
network capacity are intensifying scrutiny on return on investment.
Additionally, regulatory pressures and shareholder expectations require
agility and cost efficiency. If you are facing these challenges, we can
provide a sector-based perspective to addressing your assurance,
advisory, transaction and tax needs. Our Global Telecommunications
Center is a virtual hub that brings together people, cultures and leading
ideas from across the world. Whatever your need, we can help you
improve the performance of your business.
© 2014 EYGM Limited.
All Rights Reserved.
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This material has been prepared for general informational purposes only and is not intended to
be relied upon as accounting, tax or other professional advice. Please refer to your advisors for
specific advice.
ey.com/telecommunications
EY | Assurance | Tax | Transactions | Advisory
Contacts
Jonathan Dharmapalan
Global Telecommunications Leader
[email protected]
Holger Forst
Global Telecommunications Assurance Leader
[email protected]
Staffan Ekström
Global Telecommunications TAS Leader
[email protected]
Amit Sachdeva
Global Telecommunications Advisory Leader
[email protected]
Bart van Droogenbroek
Global Telecommunications Tax Leader
[email protected]
Fixed assets contact:
Olivier Lemaire
Partner
[email protected]
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