subscribe: Daily Newsletter

 

Regulation, reporting a challenge for telcos

0 comments

Regulation and asset recording have emerged as the biggest challenges for telecommunications providers, according to PricewaterhouseCoopers' 2006 Wireless Industry Survey for the EMEA (Europe, Middle East and Africa) and Asia-Pacific regions. 

 

The survey, last performed in 2003, aims to achieve a better understanding of the comparability of annual financial statements and industry performance measurements in the wireless telecoms sector and benchmarks itself against the 2006 North American survey equivalent.
Johan van Huyssteen, PwC partner and InfoComs Leader for Southern Africa, says that one of the most significant areas of change for EMEA and Asia-Pacific companies in 2006, compared with 2003, has been the significantly increased level of regulation, along with an accompanying increase in compliance costs.
The main contributors to this were the introduction of International Financial Reporting Standards (IFRS) and Sarbanes Oxley which companies listed in the US, including certain South African operators, now have to comply with. The survey indicates that EMEA and Asia-Pacific companies reported the largest number of significant deficiencies to be in the revenue cycle (55%), while North American respondents identified the fixed assets area (63%).
The US Securities and Exchange Commission has also highlighted in their comment letters that EMEA and Asia-Pacific carriers are grappling with revenue recognition, segmental reporting and accounting for goodwill and other intangible assets. For North American carriers, trouble spots are the impairment or disposal of assets, asset retirement obligations and accounting for goodwill and other intangibles.
A second key issue revealed by the survey, and consistent with 2003, is the focus on accounting for property, plant and equipment, specifically the impairment of assets. Van Huyssteen says that telcos have historically grappled with this aspect of financial reporting.
“The numbers involved are significant as these industries are highly capital intensive and network installations and rollouts are ongoing.”
The survey shows that 69% of EMEA and Asia-Pacific respondents (60% of North American respondents) recorded an impairment of fixed assets or accelerated depreciation, mainly due to technological replacements and updates.
Only 38% of the surveyed EMEA and Asia-Pacific companies have revised fixed asset useful lives in contrast with 89% of North American counterparts, with these revisions generally leading to a decrease to annual depreciation thereafter.
Van Huyssteen says that the African continent is seeing unprecedented expansion and subscriber growth, and technology is first-class, so as a result of these “new” networks and exponential growth, specific asset impairment charges have historically not been an issue. But one problem is that fixed asset recordkeeping may not be as accurate as it should be as companies are highly focused on growing revenues and rolling out their networks.
Asset lives were not significantly different in EMEA and Asia-Pacific compared with those in the US and Van Huyssteen says that interestingly, there were no notable differences between the useful lives being allocated to 3G network assets and those typically ascribed to 2G and 2.5G network assets.
With regard to performance measures used by respondents, the same indicators are still being used. These include ARPU (average revenue per user), MOU (minutes of use), CPGA (cost per gross addition), customer numbers and customer churn. Van Huyssteen says that although industry operators all use more or less the same indicators, their bases of calculation are company-specific and do differ.
“But as long as they are clearly defined and communicated, this should not be an issue.”
The survey notes that areas of difference in performance measurements include the basis of defining inactive customers. In addition, some operators include inactive customers within the calculation of the denominator for customer churn, others exclude it.
Costs included in CPGA varied significantly, with most operators including sales commission and handset costs, and some even incorporating retail store overheads and marketing expenses. An overall trend noted is that customer retention costs are increasing.
Although data services revenue is less than 10% of total revenue for all respondents, companies view it as an important driver of overall revenue and ARPU increases, with short message service (SMS), phone / BlackBerry-based e-mail and Web applications being the strongest data revenue streams.
Van Huyssteen says that, based on the results of the survey, data stream revenue growth over the next year could be as high as 15%. He adds that in South Africa, this number could be exceeded.
The survey indicates that many operators have now adopted IFRS 2 on share-based payments, as required in accordance with IFRS, (which is applicable to all listed entities). The majority of respondents (63%) had not made changes to executive compensation strategies as a result of the new requirement to record compensation expenses in the income statement. This contrasts with US companies which decreased the issuance of stock-based compensation after adopting the IFRS 2 equivalent.