Key highlights from Managing for changeA survey into the management of fixed assets by global telecommunications operators

2 Managing for change

Managing for change 3

With the telecommunications industry standardizing its accounting practices, operators need to be more robust in applying standards consistently. While the industry was relatively unscathed by the global financial crisis compared to other sectors, it has not been immune to its impacts. Looking ahead, the current economic uncertainty is likely to increase shareholder and market scrutiny.

Against this backdrop, and with continued pressure from new players entering the market, operators are looking at transformation to stay ahead of the game. Strategies include investment in next-generation technologies and alternative network sourcing arrangements.

All of these changes bring new challenges to the task of strategically managing telecom fixed assets to remain competitive.

To find out how organizations are responding to these challenges, in 2011 Ernst & Young conducted our fourth online global study into how global reporting and regulatory frameworks affect a telecom company’s ability to manage its assets. The findings were combined with secondary research and Ernst & Young’s own insights and analysis.

This report summarizes the findings of Ernst & Young’s biennial online survey about how telecom companies are responding to the current challenges of fixed assets management.

Foreword

4 Managing for change

Participating companiesThe companies represented in the study, have more than US$450 billion in combined annual revenues and US$400 billion in combined total fixed assets.

America Movil Mexico

AT&T Inc. United States

Bharti Airtel India

BT Group United Kingdom

European Integrated Operator x 5* Europe

France Telecom Group France

Globe Telecom, Inc. Philippines

Hrvatski Telekom d.d. Croatia

Idea Cellular Ltd. India

JazzTel Spain

Large Asian Mobile Operator* Asia

*Consent to disclose name of participant was not available at the time of publishing this report.

01

Managing for change 5

Ernst & Young thanks the 27 participating telecom companies and telecom

company executives whose contributions made this

report possible.

Europe Large European Integrated Operator x 2*

Philippines Philippines Long Distance Telephony

South Korea SK Telecom Co., Ltd.

United Kingdom Talk Talk

New Zealand Telecom Corporation of New Zealand Ltd.

Pakistan Telenor Pakistan (Private) Limited

South Africa Telkom SA Limited

Australia Telstra Corporation Ltd.

Guatemala TIGO

United Kingdom Virgin Media

United Kingdom Vodafone Group

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 this survey, please contact your local Ernst & Young representative. Alternatively, submit your enquiry to Ernst & Young’s Global Telecommunications Center at globaltelecommunicationscenter@uk.ey.com.

6 Managing for change

Overview

However, despite this industry-wide commitment to effective fixed assets management, many operators are failing to employ a sufficiently broad skill set in the function, or ensure its reporting lines extend beyond finance to operations. We are also seeing a continued reliance on historical indicators, which is unrealistic given the industry’s accelerating investment in new technologies.

With the move to IFRS requiring considerable change, customer preferences and loyalties shifting quickly, and the adoption of alternative network resourcing options creating new accounting challenges, fixed assets management leading practice has never been more important.

The risk of not paying attention to fixed assets management can be great. Operators could lose market share through poor network quality of service and an inability to meet consumer needs. In addition, they could suffer shareholder reputation risk through the ongoing write-down of assets and lower profits. Furthermore, dynamic management of assets: through, outsourcing, sharing etc., can help to sustain or increase operating margins and be a real differentiating factor.

Fixed assets management remains an important competitive differentiator as it presents significant operational and internal control challenges. It was therefore pleasing to find the vast majority of telecom operators resourcing a dedicated team to manage their fixed assets. For those with fixed assets worth more than US$41 billion, we are now seeing teams of more than 200. Operators are also becoming increasingly diligent in reviewing asset services lives annually, as well as in a more sophisticated manner with the use of integrated ERP systems.

02

Managing for change 7

Study highlights The study revealed the following challenges for telecommunications operators.

• For more than 70% of respondents, accounting, control and reporting are the primary tasks and responsibility of fixed assets functions.

• Almost 75% report to finance rather than operations. • 31% have a combined team covering network planning,

reporting, control, capex management, technical data management and accounting.

• Where assets are less than US$40 billion, there is no correlation between assets level and the number of management resources.

• To be effective, fixed assets management functions will increasingly require diverse skills, with a mix of accounting, finance, IT and network engineers.

• It should report to both finance and operations, including information technology (IT).

• The number of people in fixed assets management teams appears to correlate with the size and maturity of the operator, as well as the diversity of responsibilities within the function.

• Operators with fewer assets should review fixed assets management resourcing to match function capability with asset levels, with the aim of improving efficiency and reducing the risk of mismanagement.

Larger operators appear to be better resourcing their fixed assets management functions, with the right number of people in place. However, the skills balance within these functions is heavily skewed toward accounting, control and reporting. Operators should consider increasing skills diversity within the function and broadening its reporting responsibilities.

Integrating the fixed assets management function 1.

Data points Implications

8 Managing for change

• 83% of respondents capitalize the costs for access to the network to the customer premises, up from 57% of respondents in 2009 survey.

• Despite this generally more consistent approach, some areas remain non-standard; e.g., different treatments for costs associated with converting old data to a new system.

• 19% of respondents capitalize customer acquisition costs, with these operators generally including either installation costs, commissions paid to distributors or equipment subsidies.

• As more countries converge to IFRS, capitalization policies are becoming more standardized and in line with international frameworks.

• Better financial conditions since 2009 have led to operators being under less pressure to capitalize their costs with the aim of offsetting loss positions.

• In a change from 2009, operators have moved to amortize customer acquisition costs over the average customer relationship based on churn rates, at the expense of period of customer contract.

As more countries converge to IFRS, capitalization policies are becoming more standardized and in line with international frameworks. However, judgment should be exercised when it comes to interpreting standards for specific assets or transactions.

Standardizing capitalization policies2.

Data points Implications

• More than 75% are currently rolling out — or plan to roll out — FTTN or FTTP, compared with 58% in 2009.

• 89% review their asset service lives annually, up from 73% in 2009.

• Despite the increased number of network build-outs and the increased number of operators reviewing their asset service lives annually, only one respondent claimed that the rollout of its new network had reduced the service lives of its traditional network assets.

• 30% of respondents recorded an impairment charge over the past year, compared with 19% in 2009.

• Respondents ranked past experience, company policy, industry practices and accounting guidelines as the most important factors in determining their asset service lives, consistent with 2009 findings.

• The increased rollout of FTTP and FTTN networks reflects the push to invest in evolving technologies to keep up with consumer needs, and capacity requirements.

• The increased number of operators conducting an annual review of their asset service lives reflects the widespread adoption of IFRS.

• These events were accompanied by a greater number of impairment charges. This may reflect the willingness of operators to ensure consistency between asset values and current outlook.

Operators are increasingly rolling out fiber-to-the-premises (FTTP) and fiber-to-the-node (FTTN) networks, along with new mobile technologies, to ensure their services keep up with consumer expectations. A greater number of respondents are also reviewing fixed assets at least annually. However, when determining useful service lives, we continue to see heavy reliance on historical factors. Given the speed of technology change within the industry, operators would get more accurate assessments by placing more reliance on forward-looking indicators, such as vendor estimates and practices. To avoid future impairment risks as they invest in evolving technologies, operators need to pay attention to setting realistic asset service lives.

Adapting asset service values 3.

Data points Implications

Managing for change 9

• 93% of respondents have a dedicated team in place to manage their fixed assets.

• 81% use ERP systems for tracking and monitoring assets and their service lives.

• 58% still rely on physical verification. However, more operators combine this with automated checks, saving time and resources.

• 77% use partial automation in their fixed assets process, with only one respondent having no automation at all.

• 73% perform verification internally, with 17% opting to outsource. A few have no verification process at all.

• Only 30% use utilization as a KPI (key performance indicator) for fixed assets effectiveness and efficiency, down from 47% in 2009.

• Operators clearly recognize the need for rigorous fixed assets management practices, with nearly all respondents using a dedicated team.

• Physical verification, while detailed, is resource- and time-intensive. To improve efficiency, operators are beginning to also use automated checks.

• Previous cost reduction programs have led to a reliance on internally resourced verification programs. Operators must dedicate sufficient resources into properly verifying their assets.

• Given fierce competition and a tougher economic environment, the more strategic approach to performance metrics is likely to continue, with operators focusing more on ensuring that their fixed assets support business plan objectives.

Operators are taking fixed assets management seriously, and more are using a dedicated team for this purpose. In addition, sophistication is increasing as the use of automated systems such as ERP to track and monitor fixed assets becomes common practice as compared to in-house specialized IT systems. The challenge will be to find the right mix between automating the fixed assets management process and mitigating risk. Some physical verification, such as annual physical count, may always be required to maintain robust internal control environment. Risk management will also be better served if the fixed assets management function encompasses a broader palette of skills and communicates more effectively with both finance and operations.

Improving risk management 4.

Data points Implications

• 64% of respondents have entered into, or are planning to enter into, network sharing or network managed services transactions.

• 57% have offloaded, or are planning to offload, their passive infrastructure.

• 75% rated lease accounting as their top accounting challenge, followed by cost recognition.

• Operators are looking at cost-effective strategies to remain competitive. Network sharing, network sourcing or managed services transactions aim to decrease the weight of non-critical assets in the balance sheet, maximizing ROI for assets held.

• Given these transactions require lease considerations, lease accounting will continue to be a challenge, particularly with the International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB) are jointly proposing major changes to lease accounting and reporting. Operators should closely examine the potential impact of these proposed changes, mainly on key metrics such as EBITDA and debt-to-equity ratios.

Operators are increasingly adopting alternative network sharing agreements, as they continue to explore alternative deployment methods to keep costs down and sustain margins, while meeting consumer demand. These operational challenges should not overshadow accounting oversight. Given the pending changes to lease accounting standards, the changing shape of network sourcing arrangements will lead to new management and accounting challenges.

Adapting to new network sourcing arrangements5.

Data points Implications

This year’s survey revealed a number of continuing themes from previous survey findings. On a positive note, the survey found that operators are taking further steps to manage their fixed assets strategically. For example:• More operators now have dedicated

teams in place to manage their fixed assets.

• Larger operators appear to be better resourcing their fixed assets management functions with the right number of people in place.

• Integrated ERP systems are being used more to track and monitor fixed assets.

• There is further compliance with prevailing rules and regulatory frameworks.

While these factors are important, further improvements can be made by telecom companies. To manage fixed assets strategically, operators could focus on the following factors: • Increasing the diversity of skills within their fixed assets

functions to ensure their teams consist of a mix of accountants, finance specialists, IT professionals and network engineers

• Broadening the reporting responsibilities of fixed assets functions, ensuring communication and cooperation between finance and operational departments

• Reporting to finance as well as operational departments

• Reviewing resourcing strategies, particularly for medium to smaller operators, to ensure the right level of resources are in place

• Setting realistic service lives to mitigate the risk of impairment, especially for those assets that underpin growth segments

• Ensuring the right controls are in place to mitigate risks associated with using automated systems and third parties

Managing fixed assets strategically

By paying attention to these factors, telecom companies will be better-placed to strategically manage their fixed assets into the future.

Managing for change 11

About Ernst & YoungErnst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of 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 www.ey.com.

How the Ernst & Young Global Telecommunications Center can help your businessTelecommunications operators are facing a rapidly transforming business model. Competition from technology companies is creating fierce challenges over the ownership of customers and service innovation, and 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 an industry-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, to help you address your global, regional and local challenges. These may include next-generation services and product profitability, customer life cycles and revenue assurance, working capital management, risk, regulatory strategies and compliance, potential cost reductions, mergers and acquisitions, financial and operational improvements, accounting and tax strategies. Whatever your need, we can help you improve the performance of your business. Learn more about our approaches and services by visiting our website: www.ey.com/telecommunications

© 2011 EYGM Limited. All Rights Reserved.

EYG no. EF0098

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

Ernst & Young

Assurance | Tax | Transactions | Advisory