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Communication NewsFlashno. 3/2011
Cloud Computing
In this issue
• CloudComputing
• Proposedoverhaulof accountingforleases- asignificantissueforthe telecommunications industry
•TaxUpdate
• TechnologyNeutralSpectrumLicensing
PwCIndonesia CommunicationNewsFlash1
Cloud computing is one of the latest technology trends to capture the attention of businesses, consumers, and investors alike.
One of the choices for the future
Cloud computing - a hot topic of the future
ITpractitionersbelievethatcloudcomputingoffersmanybenefitstoanorganisationandevenitmaysignificantlychangethewaycompanydeliversservicesandopensuproomsforinnovationandcostssaving.Yes,itispartlytrue,ascloudcomputingdeliverscomputingasaserviceratherthanaproductoverunlimitednetworks(typicallytheinternet).Asaresult,itprovidescomputation,software,dataaccessandstorageservicesthatdonotrequireend-userknowledgeofthephysicallocationandconfigurationofthesystemthatdeliverstheservices.Withthismodel,cloudcomputingisapromisingmethodtoincreaseflexibility,responsivenessandcostsavingsofITservicedeliverythroughbetterutilisationanddecreasedmaintenance.Intheend,anorganisationmayhaveabetterreturnontechnologyinvestments.The
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potentialbenefitsthatcloudcomputingcanbringtothebusinesses,consumersandinvestorsareperceivedtobehuge.AsurveybyPwCpredictsthatby2014,thetypicalITinfrastructurefortoday’scustomersofITOserviceswillrelyoncloudcomputingformorethanathirdoftheirITresourcebase,includingthepubliccloudasasmallpartofthat.
What is cloud computing anyway?
Cloudcomputing,accordingtomanypeople,isanothernameoranextensionofcomputingvirtualisation,atechnologyintroducedinthemainframecomputingera.It’ssomewhattrue:virtualisationisoneofthekeyunderlyingtechnologiesthatmakecloudcomputingpossible.VirtualisationconsistsofasetoftechnologiesthatenablesystemsandapplicationstoshareITresourcessuchasservers,storage,andnetworking.Itmasksthecomplexityoftheresourcesbeingsharedandtheirlocation,whicheffectivelysimplifiestheuseoftheITenvironment.Virtualisationtechnologyreducessignificantlythecoststoacquireservers,storage,network,desktopsorapplicationswhentheyareproperlyadopted.Therearethreetypicalmodelsofcloudcomputing:public, private and hybrid clouds.Eachgivesdifferentbenefitsandchallengestoanorganisation.
Privatecloudcomputingalreadystartedinthemainframeera,asthemainframedatacenterwastheoriginalinternalcloudwithintheenterprise.Italsowastheoriginalvirtualisedcomputingplatform.
Thatisprobablywhythemainframedatacenterveteranswonderwhytherearesuchhighlevelsofinterestinvirtualisation,softwareasaservice(SaaS)andinfrastructureasaservice(IaaS),orcloudcomputing,asitisnotanewthing.Certainly,thetechnologiesinvolvedtodayhaveevolvedconsiderably,butthesedatacenterveteransarecorrectfromahistoricalperspective.
Todaysomemightdescribetheenterprisedatacenter,theclassicglasshouse,asaprivatecloudsimplybecauseitisasingleresourcedeliveringITasservicesoverthenetworktoapplicationsandtousersbehindthecorporatefirewall.
Thisold-styleprivatecloudactuallyintroducedhugeamountsofunusedcapacityandincaseofanyproblems,ariskytransitionfromonemachinetotheotherduringwhichapplicationswouldbeunavailableforhoursordays. Abetterdefinitionofprivatecloudcomputingistheacquisition,provisioning,andmanagementofdatacenterresourcesinahyperefficientandagileway.
TheprivateclouddefinitionaboveemulatestheleadingpracticesofpubliccloudserviceproviderssuchasAmazon.com,Google,andMicrosoftwhileaddingtheneededsecurityandcontrolsappropriatetospecificenterprisesneeds.
ThepubliccloudexiststodayandmanyorganisationsalreadyuseitforSaaSsolutionsortoaugmenttheirexistingITcapabilitiesthroughIaaSofferings.Cloudcomputing,privateorpublic,producesahighlydynamictechnologyenvironmentthatcandrivemultiplevaluepropositions.
TheseincludegreenIT,continuousapplicationavailability,andinstantenvironmentscale-upandscale-downinaconsumption-basedcostmodel.
Private clouds
Public clouds
Three models: Private, Public or Hybrid Cloud Computing
PwCIndonesia CommunicationNewsFlash 3
Byextendingtheprivatecloudtoaccesspubliccloudresources,usuallyITinfrastructureresources,theorganisationcreatesahybridcloud,whichcombinesbothprivateandpubliccloudresources.Thiswillprovideplentyroomsforinnovativeservicesfromanorganisation.
Telcocompaniesareinaverygoodpositiontopromotecloudcomputingservices,andevenextendtheirbusiness,withthenetworkandinfrastructurecoveragetheyown.Withthesignificantexpansionoftheneedofdatacommunicationanddatastoragebythebusiness,Telcocompanieswillhaveadvantagesbyofferingprivate,publicorhybridcloudcomputingbasedservicestocompaniesinvariousindustries.
Hybrid clouds
What changes you need to consider?
Cloudcomputingismorethananadvanceintechnology.Itrepresentstransformationforyourentireorganisation—people,processes,andsystems,regardlessoftheindustry.
Finance —Identifyingcloudservicesandanalysingaccountingmodelswillhelpyourorganisationdeterminehowtoproceedmostefficientlyandeffectivelywithactivitiessuchasresearchanddevelopmentandrevenuerecognition.
Internal audit —Inordertoaccommodatethemovetocloudcomputing,cloudserviceproviderswillneedtomodify,upgrade,orreplacesystemstoprocess,measure,andcontroluse.Thiswillalsobecriticalforbilling.ProvidersshouldhavetherightSLAsinplace,andaprocesstomonitorthoseSLAs.Buyersofcloudservicesmustgivethemselvesthesamecontrolsandmonitoringenvironmentinthecloudthattheydooninternalnetworksandservers.Thisismuchmorechallenging,asyourorganisationnolongercontrolsthehardware.Methodsofapplicationsmanagementmaychangesignificantly.
Tax —Ifyou’rebuyingorsellingcloudcomputingservices,itiscriticaltodeterminewhatyou’rebuyingorselling.Youmaybeleasingequipment,makingservicepayments,orpayingalicenseforusingsoftware—thesedistinctionsareimportantandcanhaveanimpactonyourcompany’staxexposures.Currenttaxlawdoesnotnecessarilyreflecttherealitiesofcloudcomputing.Cloudcomputingtransactionsaren’tquiteleasesandaren’tquiteservices,buttaxlawrequiresthemtobeclassifiedinoneofthesetwocategories.Eventually,taxregulationswillbeupdatedandclarified.Now,thereisn’tenoughconsensus.
Risk and compliance —Cloudcomputingrepresentsarisk,asitmovesdataandinformationintothehandsofathird-partyproviderforstorage,processing,orsupport.Buyersofcloudserviceswillneedtosetthecriteriafortheevaluationofcloudcomputingproviders;whereasproviderswillneedtoconsiderwhichcloudservicestoprovide.Then,yourorganisationwillneedtobeabletoexplainthenextstepsthatarerequiredinordertomitigatetherisksofmovingintoacloudcomputingenvironment.
Marketing and sales —Newservicesandproductsleadtonewsalesmodelsandcustomerinterfaces.Torealizethefullpotentialofcloudcomputing,yourorganisationneedstounderstandthevalueoftheseproductsandservices,andthenpricethemcorrectly.
Managing the use of cloud computing technology
Greater agility, accelerate innovation, flexibility
Cloudcomputingcanhelpbusinessesmeetdemandsforgreateragilityasitischangingtheabilityforcompaniestodeliversolutionsatthenewspeedofbusiness.
Cloudcomputingsolutionshavethepotentialtoaccelerateinnovationandtime-to-market,enhancecustomerengagement,andimproveconnectionsacrossthenetworkofsuppliers,timezones,andcultures.
CloudcomputingcandeliverlowerITcostsandincreasedefficiencies,anditalsoprovidespowerfulnewopportunitiestodrivebusinessgrowth.Cloudcomputingallowscompaniestocreatenewandbroaderlinesofbusinessbypartneringwithexternalproviders.
It is critical to involve the CIO at the early stage
CIOsareuniquelyqualifiedtoleadacloudstrategy,thankstotheirintricateknowledgeofIT.Whilein-depthunderstandingoftechnologyiscritical,nolessimportantistheabilitytoarticulatethebusinessimpactsandopportunitiesofcloudcomputingtotheC-suite.
CIOsshouldprudentlyevaluateallITfunctionsascandidatesforcloudcomputingandbepreparedtoidentifynewbusinessopportunitiesthatwilldeliverthebestreturnoninvestment.
CIOscanalsoproactivelydesigngovernancemechanismstoevaluate,procure,implement,andconsumecloudservices.
AdoptionofclouddeliverymodelscandisruptIToperatingmodels,andtheCIOmustbepreparedtomanagetheimpactontheITworkforce.
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Vendor lock-in — Theviabilityandcapabilitiesofsmallandstartupcloudvendorscouldbeaconcernforlongtermcontinuityofservice.Enterprisesthatareusingproprietaryvendortechnologymayincurheavycostsiftheyaretomovetoanothercloudplatform.
Regulation—ManycountriesdemandonshoreITprocessingandstorage.Oneoftheobjectiveisforaninformationsecurityprotection.Asthecloudcomputingreducestheusers’knowledgeoftheITprocessinglocation,theinformationsecurityregulationinsomecountries,ontheother,protectstheinformationprocessedorstoredoutsidetheirjurisdiction.
The chief executives can set the tone for the cloud strategies
CEO
CloudcomputingsignifiesaneraofcomputingwhereflexibilityinITdrivesbusinessagilityandahigherlevelofinnovationandcustomerengagement
Criticalquestionstoconsider:• Howcanyoucommunicate
thetransformationalpotentialofcloudcomputingtoseniormanagementandtheboard?
• WhatbusinessvaluedoescloudbringbeyondtheITbenefitsandhowdoyouidentifyandgainthosebenefits?
• Howcanyouexploitstrategicopportunitieswhilemanagingrisktothebusiness(finance,tax,operationalandIT)?
CAE
Chief Audit Executives needtotakeaproactiveroleengagingtheC-suiteandbusinessleaderstounderstandwhatdataandapplicationsmaybemovedtothecloud.
Theythenshouldinvestigatespecificrisksandcontrolsfornear-termcloudadoption.Theyneedtore-evaluatetheirannualriskassessment,auditscope,andresourcestosupportitscompany’scloudstrategy.
CIO
AnITenvironmentbuiltwithcloudprinciples —on-demand,elasticandusage-basedpricing —deliversvaluetotheendcustomerbylinkingtheendcustomerexperiencetotheenablinglayersoftheITstackfrominfrastructuretoapplications.
Criticalquestionstoconsider:• Whichofthestrategic
imperativescancloudsolutionshelprightaway?
• Whatistheroadmapthatcreatesincrementalbenefitsonthewaytoadoptingcloudcomputing?
• HowcanITbetteralignwithproductdevelopmenttosupportyourchangingbusinessmodel?
• HowdoesyourtalentstrategyneedtochangetosupportanEvergreenITinfrastructure?
CFO
Cloudcomputingalsoshiftsspendfromcapitalexpendituretooperational,allowingenterprisestomakeinvestmentsclosertothetimeofactualreturns.
Criticalquestionstoconsider:• Howdoyoumanagethe
unpredictabilityofcostsinapayasyougomodel?
• Whataretheimplicationsofmovingtoaservicemodelfromanaccountingandtaxperspective?
• HowcanITcostsreflecttheneedsofindividualbusinessunits?
PwCIndonesia CommunicationNewsFlash 5
Identifying the right path for your company: Three scenarios
Whenitcomestotheenterpriseviewofthecloudcomputingopportunitytoday,PwChasdeterminedthatcompaniesfallonacontinuumfromnotconsideringcloudcomputingatalltofullyleveragingcloudcomputing.Forconceptualsimplification,however,PwChasdefinedthreecommonpathsthatreflectwheremostorganisationsaretoday.Seniorexecutivesshouldidentifywhichcloudpaththeirorganisationappearstobeon,determinewhichcloudpathismostappropriateforthefuture,determineifthereisasignificantgap,andsetastrategyforclosingthegap.
Path 1: Have strategy and pieces but need to connect the dots
• Starting point: Havesomecloudcomponentsdeployedandhaveastrategy
• Desired outcome: Transitiontoaninternalcloudenvironmentwiththeabilitytoconnecttotheexternalcloudasdesired
• Likely gaps: Confusinggovernance;conflictingstandards
• Obstacles/challenges: Fillingintheremainingcloudcomponentsinternally,connectinglegacyback-endsystems,andportingapplicationstotheinternalcloud
• Next steps: Continuetoaddcloudcomponents,simplifygovernance,andenforceasinglesetofstandards
Path 2: Have virtualisation and some cloud components but lack vision and strategy
• Starting point: Havedeployedmainlyvirtualisationcomponentsandafewcloudcomponents,andareimplementingpointsolutions
• Desired outcome: Transitiontoafullyvirtualizedenvironmentcapableoftransitioningtoaninternalcloudenvironment
• Likely gaps: Lackofvision;nocohesivestrategyforcloudcomputing
• Obstacles/challenges: EducatingbothITandmanagementontheopportunitiesandvalueofcloudcomputing;lackoftechnicalandbusinessleadershiponthisissue
• Next steps:Identifyamanagementleader,painttheorganisation’svisionforvirtualisationandcloud,andsecurebuy-infrommanagementandIT
Path 3—Have the interest and vision but unsure of getting started
• Starting point: Haveinterestandthebeginningsofacloudvision,butarenotsurewheretheystandinregardtovirtualisation,ITautomation,andcloudcomputing
• Desired outcome: TransitiontoanefficientITenvironmentthatusesvirtualisation,SOA,andcloudcomputingtoachieveanagileorganisation
• Likely gaps: Benchmarkingneededtoidentifywheretheyareandhowtoproceed
• Obstacles/challenges: Developingaworkablestrategyandbeginninganorderlyimplementationofcloudcomponents
• Next steps: DevelopabusinessandITstrategyandinitiatetheimplementationbasedontheresultsofbenchmarking
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Cloudcomputingcertainlygivespromisesandhopesincreatingnewmarketopportunitiesandmoreinnovativewaysofdeliveringservicesandnewbusinesses.InIndonesia,mobileoperatorswilldefinitelyplayakeyroleindeliveringthecloudcomputinginfrastructuresandservices,consideringtheextensivenetworkcoverage,infrastructuresandnumbersofsubscriberstheyhave.Although,someissuessuchasincreasingbandwidthcapacity,networkanddatastorage,informationanddatasecurity,andregulations,willbecomethefundamentalchallengesinthefuture.Theregulatorsontheotherhands,playsanimportantroletosetthetoneandbecomethe“driver”inembracingthecloudcomputingtechnology,bothinpublicandprivatesectors.
Telecommunications
Proposed overhaul of accounting for leases - a significant issue for the telecommunications industry
Application:Afinalstandardisexpectedinthefirsthalfof2012. The application date is yet to be determined.
What is the issue?
On17August2010theInternationalAccountingStandardsBoardandFinancialAccountingStandardsBoard(the“boards”)issuedtheExposureDraftLeases("ED"). Theproposalsdescribeanaccountingmodelthatwouldsignificantlytransformleaseaccounting.
TheEDproposesanewmodelforlesseeaccountingwherebyalessee’srightsandobligationsunderexistingandnewleaseswouldberecognisedonthebalancesheet.
Theproposalrequireslesseesandlessorstoestimatetheleasetermandcontingentpaymentsatthebeginningoftheleaseandre-assesstheestimatesthroughouttheleaseterm.Thisactivitywillrequiremoreeffortandjudgementthanunderexistingstandards.
The boards received over 770 comment letters in response to their ED (keythemesarediscussedinthefollowingpages).Thereisindicationthattheboardsarewillingtoaddresssomeoftheissuesraisedbyconstituents;however,formaldecisionsareyettobemade.
TheboardsareaimingtoissuethefinalstandardinH12012.Are-exposureorreviewdraftisexpectedinQ32011.
ThediscussioninthispaperisintendedforcompanieswhohaveadoptedfullIFRSissuedbytheIASB.Currently,IndonesianFinancialAccountingStandard(IFAS)no.30 (revised2007)– Leases,wasbasedon IAS19as at1 January2009.
Note. In this documentwe consider the proposed changes to accounting forleasesintheED.Anyconclusionsnotedherearesubjecttofurtherinterpretationandassessmentbasedonthefinalstandard.TalktoyourusualPwCcontactforthelatestupdates.
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Why is this significant for the telecommunications industry?
Consideringthediversityoftransactionsinthetelecommunicationsindustry,mostoperatorsfindthemselvesinleasecontractswheretheyarebothlessorsandlessees.Typicalagreementsinwhichtelecomcompaniesactasalesseeincludeleasesofland(forBaseTransceiverStation("BTS")sites),telecommunicationinfrastructure,officebuildingleases,storeleases,equipmentleases,vehiclesandotherday-to-dayoperationalassets.Therearealsoamultitudeofotheragreementsthatcouldqualifyasleases,dependingonwhethertheyfallwithinthescopeoftheED.Suchleasesincludecapacitycontracts,wayleavesandr ights ofaccess,satellitebroadcastingcontractsandIToutsourcingagreements.
Ifadopted,theproposalswillhavepervasivebusinessandaccountingimpacts.Inparticular,theimpactonfinancialreportingcouldbesubstantialinthetelecommunicationsindustry.Forexample:
• expenserecognitionpatternswillchange.Whilecashpaymentsremainunchanged,theprofitorlosswillhaveafront-loadingofexpense.Cashpaymentsversusexpenserecognitionwillfurtherdiverge,particularlyforlongtermleasessuchasleasesrelatedtoBTSsites.Whilecashpaymentsremainunchanged,theprofitorlosswillhaveafront-loadingofexpensewithhigherexpensesrecordedinearlieryears.Management’sjudgementconcerningrenewaloptionsandcontingentrents,suchasleasepaymentsbasedoncapacityusage,mayproducesignificantincomestatementvolatility;
• mostleaseswillgeneratealiabilityforlessees.Analystsandcreditagenciesareunderestimatingthesignificanceoftheliabilitywhenaddingback"debt-like"itemsforoperatingleases.Amaterialleaseliabilitycouldbeaddedtothebalancesheetforsignificant'capitalitemssuchasBTSsitesaswellasofficesandtelecomserviceproviderstores.Assuch,theliabilitiesmaybesubstantialandhaveasignificantimpactonthedebttoequityratiosoftelecommunicationscompanies,whichinturnmayhaveanimpactondebtcovenants;
• decisionpointsanddataneedswillchange.Structuringconsiderationwillchangetofocusonliabilityandvolatilityreductionasopposedtoobtainingoperatingleasetreatment.Dataneedsforongoingreportingwillchangesignificantly.BonusplansandperformancemeasuresunderEBITDAinthetelecommunicationsindustrywillneedtobereconsidered.Insomeinstances,companiesareconsideringanewmeasurementbasedonEBITDAR(earningsbeforeinteresttax,depreciationamortisationandrentalcosts);
• lease-versus-buydecisionsshouldberevisited.Withoutthedesiredaccountingtreatmentforoperatingleases,managementmayprefertopurchaseassetsratherthanenterintoleasearrangements,inparticularforleasesofsmallticketitemssuchascomputersorofficeequipment.Lessorsmaywanttoconsiderhowtheseproposalsmightaffecttheirbusinessstrategies;
• ITsystemsandinternalprocessesmayneedupdating.Additionally,currentleasingsoftwareandsystemswillbeincapableofhandlingthenewrequirementsnecessitatingupgradesandenhancementstothesourcecode.
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What are the overarching proposals?
Thekeyelementsoftheproposalsandtheireffectonfinancialstatementsareasfollows.
Lessee accounting
Theproposaleffectivelyeliminatesoff-balancesheetoroperatingleaseaccountingformostleases.Mostassetscurrentlyleasedunderoperatingleaseswouldbebroughtontothebalancesheet.Theboardiscurrentlyconsideringifleasesofapproximately12monthsorlessshouldcontinuebeingaccountedforasoperatingleases.Entitiesintheindustryhaveassumedthatleaseswillapplyaccountingsimilartothecurrentguidanceforfinanceleases;however,themeasurementoftheright-of-useassetandleaseliabilityissignificantlydifferenttoexistingfinanceleaseaccounting.Also,thebalancesheetimpacthasreceivedthemostpress,buttherearesignificantchangesfromoperatingleasestothetinningoftherecognitionofexpensesintheincomestatement.
Thesignificantimpactsoftheproposalsinclude:
• aright-of-useasset(representingtherighttousetheleaseditemfortheleaseterm)andanobligation(representingtheobligationtopayrentals)wouldberecognisedandcarriedatamortisedcost,basedonthepresentvalueofpaymentsoverthetermofthelease;
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• followingre-deliberations,theleasetermwouldincludeoptionalrenewalperiodsthathavea`significanteconomicincentive'.Duringre-deliberations,theboardstentativelydecidedthatextensionoptionsarethosethatprovide‘asignificanteconomicincentive’foranentitytoexerciseanoption.Inpractice,thismeansthatleasetermsmaybesimilartothosedeterminedundertheexistingstandards.However,determiningwhetherarenewaloptionisexpectedtobeexercisedisnotdependentonmanagementintentorpastpractice;ratheritisbasedonwhetherasignificanteconomicincentiveexistsatthetimeoftheassessment;
• undertheED,theuseofan`expectedoutcome’approachtoestimateleasepaymentswasproposedinordertomeasuretheinitialvalueoftheleaseassetandliability.Thisapproachwouldincludeconsiderationofcertaincontingentamounts,suchasrentslinkedtovariablessuchastheConsumerPriceIndex("CPI").However,inrecentre-deliberations,theboardshavetentativelydecidedthattheestimateshouldonlyincludecontingenciesthatare:i)basedonarateorindex;ii)are'disguised'asafixedleasepayment;andiii)haveresidualvalueguaranteeswhichareexpectedtobepaid.ThiswouldmeanthatestimatedleasepaymentswillnotbeassubjecttojudgementasoriginallyproposedintheED;
• undertheED,leaserenewalsandcontingentrentswouldneedtobecontinuallyreassessedbyentities,andtherelatedestimatesadjustedasfactsandcircumstanceschange.However,inrecentre-deliberations,theboardshavedecidedthatreassessmentoftheleasetermshouldbeperformedonlyundercertaincircumstances.Thiswouldsubstantiallyreducethetimeentitieswouldneedtoinvestinreviewingestimatesandupdatingcorrelatingnumbers;itwasacommonissueraisedbyentitiesinresponsetotheproposals;
• theboardshadtentativelydecidedthatleaseswouldbeallowedto(butnotrequired)toaccountforshort-termleasessimilartocurrentoperatingleaseaccounting.Howeverthereisclearindicationthatboardmembersareuncomfortablewiththisearlierdecisionandwouldprefermaterialitytobeusedtodeterminewhetheraleaseisrecognisedbyalessee.Adecisionisyettobemade;and
• atentativedecisionhasbeenmadethat,wherethereisamodificationtoaleasecontract,themodifiedleaseshouldbeaccountedforasanewlease.Wherethereisachangeincircumstancesthatwouldaffecttheassessmentofwhetheracontractisorcontainsalease,bothlesseeandlessorshouldperformareassessment.Ifthischangestheconclusionastowhetheracontractdoesordoesnotcontainalease,theleaseshouldeitherberecognisedorderecognisedaccordingly.
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Presentation and disclosure
Duetothesignificantlyexpandeduseofestimatesandjudgementsintheproposedleasestandard,disclosurerequirementswillgowellbeyondthoserequiredunderthecurrentleasingstandard.Thismayinclude:quantitativeandqualitativefinancialinformationthatidentifiesandexplainstheamountsrecognisedinfinancialstatementsarisingfromleasecontractsandadescriptionofhowleasesmayaffecttheamount,timing;anduncertaintyoftheentity’sfuturecashflows.
Specificdisclosureswouldalsoberequired.Forexample,adescriptionofthenatureofanentity’sleasingarrangements,theexistenceandtermsofoptionalrenewalperiodsandcontingentrentals,andinformationaboutassumptionsandjudgements.Inaddition,anyrestrictionsimposedbyleasearrangements,suchasdividends,additionaldebt,andfurtherleasingshouldalsobedisclosed.
Thefollowingdisclosureswouldalsoberequiredundertheproposals.• Informationabouttheprincipaltermsofanyleasethathasnotyet
commencediftheleasecreatessignificantrightsandobligations(suchassignificantleasesoflandwithaviewtoerectBTSsites).
• Areconciliationbetweentheopeningandclosingbalancesofright-of-useassetsandobligationstopayrentals,disaggregatedbyclassofunderlyingasset.
• Anarrativedisclosureofsignificantassumptionsandjudgementsrelatingtorenewaloptions,contingentcashflows,andthediscountrateused.Forexample,therenewaloptionsincludedinmanyleasesoflandforBTSsites.Inthepastsuchcontractsmayhavegiventheoperatoranoptiontorenewindefinitely.Theassumptionsusedtodeterminetheleasetermarecriticalandwouldneedtobedisclosed.
• Amaturityanalysisofthegrossobligationtopayrentalsshowing:(a)undiscountedcashflowsonanannualbasisforthefirstfiveyearsandatotaloftheamountsfortheremainingyears;and(b)amountsattributabletotheminimumamountsspecifiedintheleaseandtheamountsrecognisedinthebalancesheet.
• Additionaldisclosureswouldapplyif:(a)thesimplifiedoptionforshort-termleasesiselected;(b)significantsubleasesexist;or(c)thereisasale-leasebacktransaction(whichisoftenthecasewhereSRSsharingtakesplace).
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How would typical terms & conditions in the telecommunications industry be affected?
Terms Example Existing accounting New accounting Potential impact on the telecommunication industry
CPIescalations Inmanycasescertainassetsusedbytelecomsareleasedratherthanowned.Thesecontractshavebuilt-inrentescalationclausesforeachanniversarydatebasedonthechangeinthepublishedCPI.
Treatedascontingentrentwhichisnotincludedin'minimumleasepayments'usedforstraightlinerentpurposes;rathertheexpenseisrecognisedineachannualperiodbasedonactualincreaseinthatperiod.
ThenewstandardwouldrequirethelesseetoincludeCPIescalationsusingthespotratetomeasureitsleaseliabilityundertheseprovisionsforwhateverleasetermisutilised(includingpotentialextensionoptions)andincludetheminthecalculations.
ManagementwouldneedtodeterminetheCPIescalationsbasedonCPIcurvesobtainedfromthemarket.Alternativelymanagementwillneedtoapplyjudgementsandestimates.Thismayinfutureprecludetheuseofsuchclauses.
Optionallongtermrenewalperiods(optionstoextend)
Atelecomcompanyentersintoaleaseoflandfortenyearsforthepurposesoferectinga$'I'Ssite.Theprovisionsofthecontractstatethattheleasecanberenewedforanadditional20yearsattheendofthecurrenttenyearlease.
Thecurrentleasemodelwouldincludeonlythoseoptionalrenewalperiodsthatare‘reasonablycertain’tobeexercised.Theleaseoflandmaybeconsideredanoperatingleaseandthus"straightlining"wouldresultinaconstantperiodicexpenseovertheleaseterm.
Thenewleasingmodelwouldrequiretheleasetermtoincludetheoptionrenewalperiodswherethereisa‘significanteconomicincentive’.Thisrequirementisadifferenthurdlethan‘reasonablecertainty'andcouldfeasiblyresultindifferenttermsbeingincludedintheleaseterm.Considerationof'significanteconomicincentives’mayincludefactorssuchasrentpaymentsinsubsequenttermsorthecosttoreplacetheleasedasset.
Telecomcompaniessignificantlyaffectedbythesechangesshouldconsiderthetermsofarenewaloption.Managementmayinfuturenotinclude‘optionforrenew’clausesinordertoavoidtheaccountingthereof.
Capacity-usagerent
Atelecomcompanyentersintoacapacitycontractthatmeetsthedefinitionofalease.Asalesseetothearrangement,thetelecomcompanywillpayafixedfeepermonthforaspecifiedlevelofcapacity.Shouldthisbeexceeded,anadditionalchargewillbeleviedonaper-unit-of-capacitybasis.
Theseleasepaymentsaretreatedascontingentrentalarrangementswhicharenotincludedin‘minimumleasepayments’usedforstraight-linerentpurposes;rather,theexpenseisrecognisedbasedonactualcapacitywhenitbecomesprobablethatcapacityusagewillexceedthespecifiedlevelofcapacity.
Theboardsneedtofinalisethe'definitionofalease'inthenewleasemodel.Thereisconsiderationwhetheraleasefora‘non-physicallydistinct’portionofassets(suchascapacityinafibreopticcable)wouldmeetthedefinitionofalease.Ifthearrangementmeetsthedefinitionofalease,theboardstentativelydecidedthatvariablerentsbasedonperformanceorusageareexcludedfromtheestimateofleasepayments.Asaresult,percentagerentmaycontinuetobetreatedthesameasundertheexistingrules.
Managementmayneedtoconsiderthespecificityoftheassetbeingleased.Onlyspecifiedassetsareinthescopeofthenewleasemodel.Thecapacityusagerentisnotexpectedtohaveanimpactonbusinessstrategy.
Debtcovenan Atelecomcompanyhasdebtcovenantswhichareclosetobeingexceeded.Thetelecomcompanyentersintoleasesforthemajorityofitsassetsandtheseareclassifiedasoperatingleases.
Noadditionalliabilitieswillberaisedastheseleasesareclassifiedasoperatingleases.
Liabilitieswouldneedtoberaisedforallleasesregardlessofclassification.Thedebtcovenantswillbeexceededasthesewerenotpreviouslyexcludedfromdeterminingthedebtcovenants.
Managementmayneedtoconsiderdebtcovenantsandleasetermswhennegotiatingwithbankstoobtainadditionalcredit.Theimplicationswillalsoneedtobeconsideredoncurrentfinancearrangements.
Foreignexchange
AtelecomhasafunctionalcurrencyofRussianRubleandsignsaleasecontractinEurosforanofficeinMoscow.
Currently,theEuroiscloselyrelatedtoaRussiancompanyasthecurrencyiscommonlyusedinRussia.Noembeddedderivativewouldberequired.
TheliabilitywillneedtobedeterminedinEurosandtranslatedeveryreportingperiodintoRussianRuble.Thiswillintroducesignificantvolatilityintotheprofitandlossduetoforeignexchangerisk.
Leaseagreementsshouldbeenteredintothefunctionalcurrencyoftheentitytoavoidvolatilityintheprofitandloss.
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How will this affect the financial metrics of telecommunication companies?
PwChasperformedabenchmarkstudytoassesstheimpactoftheleasingproposalsonthefinancialstatementsandkeyfinancialratiosofasampleof125listedtelecommunicationcompaniesfrom32countries.
Thestudyidentifiestheminimumimpactofcapitalisingtheoperatingleasecommitmentsdisclosedinthepublishedfinancialstatements.Inviewoftheproposedinclusionoflikelyleaserenewals,contingentrentalsandresidualvalueobligations,theeventualimpactmaybemuchgreaterandmayalsohaveanimpactontheamountscurrentlyrecognisedforfinanceleases.Inaddition,thestudytakesnoaccountofanytransitionalreliefsthatwillbeavailableonfirst-timeadoptionofthenewstandard.Nevertheless,itprovidesanindicationoftheimpactthattheproposedleaseaccountingmodelmayhave.
TheeffectsonfinancialmetricscaneasilybeseenwhenconsideringEBITDA,akeyperformancemeasurewithinthetelecommunicationsindustry.EBITDAisexpectedtoincreaseduetothereplacementoftheleaseexpensebyamortisationandinterest.Outofthetelecommunicationcompaniessurveyed,morethanathirdareexpectedtoseeanincreaseinEBITDAofmorethan10%(refertoChart1).
Ifweconsiderthedebttoequityratio,ourstudyconcludesthattheratioisexpectedtoincreasebymorethan10%formorethanhalfofthetelecommunicationcompanies,andbymorethan25%fornearlyaquarterofthosesurveyed(seeChart2).
Thecombinedeffectofincreasingdebtandinterestexpense,combinedwithanincreaseinEBITDAonatelecommunicationcompany'sEBITDA/interestratio,isuncertain.For28%ofthecompaniesinourstudy,thecombinedimpactispositive.For45%,however,theimpactismorethan5%negative,for18%ofthesetheimpactismorethan20%(seeChart3).
Chart 1RelativeincreaseinEBITDA
Chart 2Relativeincreaseindebt/equityratio
Chart 3ImpactonEBITDA/Interestcoverage
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Staying relevant in a mobile data world
The timing of issuing VAT invoices – new guidance
Recently,theDirectorGeneralofTaxes(DGT)finallyissuedguidanceregardingVATinvoicesintheformofCircularLetterNo.SE-50/PJ/2011(SE-50),whichprovidesclarificationandcertaintyonthetimesatwhichValueAddedTax(VAT)invoicesmustbeissued.
Ingeneral,VATcollectionisbasedontheaccrualprinciple,wherebyVATmustbecollectedatthetimeofdeliveryoftaxablegoodsorservices.Thetermdelivery,inthiscase,isdefinedasthetimewhenriskandownershipofgoodshavebeentransferredorwhenincomefromaservicedeliverycanbereliablyestimatedormeasured.Intheaccrualsystem,incomeorreceivablesareacknowledgedwhenatransactiontakesplace,regardlessofwhetherthetransactionhasbeenpaidforornot.Therecognitionofrevenueorreceivablesisindicatedbytheissueofacommercialinvoice,whichisasourcedocumentforthisrecognitionandabasisforrecordingit.
SE-50specificallylaiddownexamplesofthetimeofdeliveryforeachtypeoftaxablegoodsandservices,i.e.thedeliveryofmovableandimmovabletangiblegoods,thedeliveryofintangiblegoodsandthedeliveryoftaxableservices.ExamplesofthetimeatwhichacombinedVATinvoicemustbeissuedinrelationtodeliveriesmadetothesamerecipientduringonecalendarmontharealsoprovidedinthisregulation,assetoutbelow.
No. Period of usage/delivery oftaxable services
Period ofrevenuerecognition
Timing ofrevenuerecognition
Issue ofcommercialinvoice
Deadline toissue VATinvoice
1a 1 – 30 June 2011 1 – 30 June 2011 June2011 30 June 2011 30 June 2011
1b 1 – 30 June 2011 1 – 30 June 2011 June 2011 5 July 2011 5 July 2011
1c 1 – 30 June 2011 1 – 30 June 2011 June2011 31 July 2011 31 July 2011
2 26 May – 25 June 2011 26 May – 25 June 2011 June2011 6 July 2011 6 July 2011
3 16 May – 15 June 2011 16 May – 15 June 2011 May 2011 20 June 2011 20 June 2011
4 16 May – 15 June 2011 16 May – 15 June 2011 June 2011 20 June 2011 20 June 2011
5 16 May – 15 June 201116 – 31 May 2011 May 2011 31 May 2011 31 May 2011
1 – 15 June 2011 June 2011 15 June 2011 15 June 2011
AVATinvoicedoesnothavetobeseparatefromthecommercialinvoice.TheVATinvoicemaybeintheformofacommercialinvoiceoraparticulardocumentdesignatedasaVATinvoicebytheDGT.
SE-50alsoconfirmsthataVATinvoiceshallbeissuedatthetimeof:a. thereceiptofatermpaymentofadeliveryofpartialwork,inrelation
tothedeliveryoftaxablegoodsorservicesthatarefinishedwithinaparticularperiod;and
b. whenataxableentrepreneursendsaninvoice,inrelationtothedeliveryoftaxablegoodsorservicestoagovernmenttreasuryasVATCollector.
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TaxUpdate
PwCIndonesia CommunicationNewsFlash 15
BeforetheissuanceoftheSE-50,therewasariskthattheIndonesianTaxOfficemayimposeataxpenaltyof2%fromtheinvoicevalue(taximpositionbase)forthelateissuanceofinvoice(undertheVATlaw,theinvoicemustbeissuedatthelatestbythemonthendofthetelecommunicationservicesrendered).Inpractice,theTelcoCompaniesissueacommercialandVATinvoiceinthefollowingdaysafterthemonthend.
TheclarificationandcertaintyontheissuancedateofVATinvoicesasoutlinedintheSE-50isveryessentialfortheTelcoOperatorsinordertomitigatethesignificantpenaltyof2%fromtheinvoicevalue.
Type of export services that attract zero-rated VAT
On3August2011,theDGTissuedaCircularLetterNo.SE-49/PJ/2011(SE-49)whichprovidesguidancetotaxofficersregardingVATonexportofservices.SE-49confirmsthatzero-ratedVATisonlyapplicabletothethreetypesofservicesstatedintheMinistryofFinanceRegulationNo.PMK-70:a. tollmanufacturingservices;b. repairandmaintenanceserviceswhichareattachedtoservicesor
movablegoodsutilizedoutsidetheCustomsArea;andc. constructionserviceswhichareattachedtoservicesorimmovable
goodslocatedoutsidetheCustomsArea.
OtherthantheserviceslistedinPMK-70,servicesprovidedtocustomersoutsideoftheCustomsAreaare:a. consideredaslocallydelivered,ifperformedwithintheCustoms
Area,andarethereforesubjecttotheregularVATrateof10%;andb. consideredbeyondthescopeoftheVATLaw,andhencenot
subjecttoVAT,ifperformedoutsideoftheCustomsArea.
Therefore,IDDcallincomeearnedbytheIndonesianTelcoCompaniesisarguablynotsubjecttoIndonesianVATbecausetheservicesisperformedoutsideoftheIndonesianCustomsarea.WhilsttheinterconnectionincomeearnedbytheIndonesianTelcoCompaniesfromoffshoreTelcoOperatorswillbesubjectto10%VATbecausetheserviceisperformedwithinIndonesianCustomsArea.Despiteofthis,thereareseveraltaxrulingsconfirmingthattheinterconnectionincomeearnedfromtheoffshoreTelcoCompaniesisnotsubjecttoVAT.
Indonesia’sradiospectrumregulatorplanstoadaptatechnologyneutralapproachwhenlicensing(throughanauctionprocess)partofthe2.3GHZspectrumnextyear.Theplanalsoincludesgivingtheoption–withanadditionallicensefee–forIndonesia’sexistingWiMaxspectrumlicenseholdersin2.3GHztodoin-bandmigrationfromWiMax802.16dto802.16e.
But,whatdoes“technologyneutral”meaninthecontextofspectrumlicensing?Atechnologyneutralspectrumlicensegivestherighttousethespectrumwithoutregardtothetypeoftechnologybeingusedwithinthespecifiedspectrumand,insomecases,theuseofspectrumcanbealteredduringthelicenseperiod.Essentially,regulatorsarereducingmarket-entryrequirementsfornewtechnologiesbyintroducingasimplerspectrumlicensingregime.
Why a technology neutral approach?
Economistshavelongarguedthatmarketmechanismsshouldbeappliedtoradiospectrum.SeminalpapersinthisareastartwithCoasein1959[R.H.Coase,“TheFederalCommunicationsCommission”,JournalofLawandEconomics,2,1–40,1959].Theessentialideahereistoallowpricingmechanismstoactasanincentiveforholdersofspectrumtooptimizetheiruse–buyingmoreiftheirbusinesscasecanjustifyit,sellingspectrumiftheyhaveexcess,andincludingadoptingnewtechnologiesthatcanusespectrummoreefficientlywhereeconomicallyviable;hencethetechnologyneutralapproach.Economictheorysuggeststhatinamarketwhichisperformingwell,thiswillleadtoadivisionofspectrumthatmaximizeseconomicvalue.Undersuchanapproachtheregulatorsetsoutrulesthatenablemarketstofunctionwhileensuringthatinterferenceiscontrolledandthentakesabackseat,leavingittothemarkettodeterminetheuseandusersofthespectrum.
Technology Neutral Spectrum Licensing
16 CommunicationNewsFlash PwCIndonesia
Duetotherapiddevelopmentofnewtechnologyandthespeedofmarketwillingnessinadoptingit,regulatorsarehavingdifficulttimeplayingcatchup.Theonlyviableoptionfortheregulatoristoletthemarketdecidewhichtechnologytoapplythroughacarefulandwellthoughtallocationmechanism.(SeeBOXforcases)
Flexiblepropertyrightsresultedinincreasedspectrumeconomicvalues.Spectrumvaluediffersforeachspectrumlicenseholderandisdeterminedbythefuturecashflowsthataspectrumlicenseholderexpectstogeneratebyutilizingthespectrumcomparedtothenextbestalternative(acquiringnospectrum).Althoughtherearemanyfactorsinvolvedduringspectrumallocationprocess(e.g.auction)thatwillinfluencethespectrumvalues,thefreedominchoosingthebesttechnologywhenutilizingthespectrumwillincreasetheeconomicvalueofthespectrumitself.Fromtheregulatorspointofview,itistheirmainobjectivetocreateandgetthemaximumeconomicvaluefromthespectrumwhichisconsideredasoneofthescarcenationalresources.
Limitation/restriction in applying a technology neutral approach
Inpracticalterms,atruetechnologyneutralapproachcannotbeachieved.Thereareseveralrestrictionsinherentintechnologyneutrallicensing.Firstistheinterferenceproblemandsecondisrestrictionintechnologychoice.ChoiceoftechnologyisinfluencedbyfactorsuchaseconomiesofscaleandinternationalstandardssetbyITU.
Interference problem
AdjacentspectrumblocksuseforFDDandTDDwillinterferewitheachotherandhavetobemanaged,forexamplebyapplyingaguard-bandinbetween.Applyingaguard-bandresultsintechnicalinefficiency–wastedspectrumforguard-bandandthismayalsocreateeconomicinefficiencyduetohigherpriceofthespectrum,sincetheguard-bandspectrumpricehastobetakenintoaccount.
Choice of technology
- Economies of scale. Althoughdifferenttechnologiesandstandardscanbedeployedinthesamespectrumband,spectrumlicenseholdershavetotakeintoaccountthatefficienteconomiesofscale-decreasesinthecostofequipmentandtechnologydevelopment–arekey.Economiesofscalecanbeachieved,intheshortandmediumterm,bystandarddetermina-tion.Inthelongerterm,standardhastobeimproved,enhancedandifnecessaryreplaced.
- International coordination.ITUradioregulationistheregulationsappliedbyITUmembersindeterminingthespectrumusagewithinitsjurisdiction.TheITUregulationsbasicallylimittheextentoftechnologyneutralimple-mentation.
For (future) technology neutral license holders
Atechnologyneutralapproachisinterestingbutdonotforgetthebasicswhenplanningtowinatechnologyneutralspectrumlicense:- Diligentlyestimatetheexpectedrevenueandexpectedcostforutilizing
thespectrumtocomeoutwiththefuturecashflowinordertodeterminethespectrum/licensevalue.
PwCIndonesia CommunicationNewsFlash 17
- Reviewthespectrumlicensemechanism(e.g.auction)andspectrumpropertyrightssetbytheregulators.Factorssuchasroll-outobligation,reserveprice,networksharing,spectrumnaturalcharacteristics(lowerspectrumfrequencyvaluedhigherthanhigherfrequencyspectrum)areimportantandhavetobetakenintoaccountwhendeterminingthespec-trum/licensevalue.
Source:PwC(2009),“Timingiseverything-releasingthevalueofspectrum”
Spectrum/LicenseValue
FutureCashFlows
Expected
Revenues
ExpectedCosts
Determinedby:
•Opportunity
tolaunchnew
products/services
•Customerbase
•Continuanceof
existingservices
•Improve
performanceof
existingservices
Determinedby:
CAPEX/OPEXthat
arelargelydeter-
minedbynetwork
androll-outcosts
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WiMax adoption in Indonesia
In2009,theGovernmentofIndonesia(GOI)awardedaWiMaxlicensetoseveraloperators.Thespectrumallocatedwas2.3GHz.TheGOIspecificallystatedinthelicensethatonlyWiMax802.16dwasallowedtoberolledout.Unfortunately,WiMaxadoptionintheworldhasshiftedtoanewstandard,whichis802.16e.Duetothisfact,theeconomicalcriticalmassforWiMax802.16dadoptioninIndonesiahasneverbeenreachedandthisforcedtheGOItoallowforin-bandmigrationtoWiMax802.16ewhichisplannedtotakeplacein2012.
WiMax802.16disessentiallyafixedwirelessbroadbandanditcanbeseenasacompetitorforDSLbutnotascompetitorformobilewirelessbroadbandtechnologysuchas3GorLTE.Forexample,itisnotpossibletohaveaUSBdongleforWiMax802.16d.
Ontheotherhand,WiMax802.16eisaportableformofwirelessbroadbandanditprovidestheabilityforuserstoconnecttoaWiMAXcellfromavarietyoflocationsandperformcellhandover.
Move to LTE
Whilethemovefrom2Gto3Gbroughtamassiveincreaseinspeedandcapacity,theadvantagesofLTEoverthelatestversionof3G(HSPA+)aresurprisinglylimited,withoverallspectralefficiencydifferenceonlyaround30%to50%,andsubstantialspeedimprovementsdependentonlargeamountofcontiguousspectrumbeingavailable.GiventhemainpurposeofLTEistoservesmartphones,anditmaybesometimebeforeall(orevenmost)newsmartphoneshaveLTEbuiltin,someoperatorsmaychoosetostickwith3Gforthetimebeing(REF:EndersAnalysis–“UK4Gspectrumconsultation:preservingthebig4”–March2011).
Thiscasebringsupthequestionthatcurrently(orinthenearfuture)facedbyregulators:shouldregulatorsallocatespectrumspecificallyforLTEorallocateusingatechnologyneutralapproach?
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Market knows best – cases:
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