> July 8, 2003

TO: All Telecommunications Borrowers

Certified Public Accountants Auditing RUS Borrowers

FROM: KENNETH M. ACKERMAN

Assistant Administrator

Program Accounting and regulatory Analysis

SUBJECT: RUS Treatment of Part 32 Accounting Changes

In an Order [^1] released June 24, 2003, the Federal Communications
Commission (FCC) extended from July 1, 2003, to January 1, 2004, the
current suspension of the implementation of four accounting and
reporting requirement rule modifications previously adopted by the
Commission[^2]. The purpose of this extension is to avoid undue burdens
on the affected carriers, the Commission, the state regulatory
commissions, the public in general, and to allow the Federal-State Joint
Conference on Accounting Issues more time to formulate its
recommendations to the Commission[^3]

In a letter to our telecommunications borrowers and public accounting
firms, dated December 20, 2002, the Rural Utilities Service (RUS)
requested that RUS telecommunications borrowers not adopt any of the
FCC's Part 32 changes until RUS issued its revised accounting
requirements. RUS has evaluated Part 32 changes and determined their
relevance and applicability to our borrowers and will adopt the
following Part 32 changes:

> \(1\) Inventories -- Sections 32.1220(h) and 32.2311(f) were revised
> to eliminate the annual inventory requirement for materials and
> supplies, and all station apparatus in stock.
>
> \(2\) Expense limits -- Section 32.2000(a) (4) was revised to include
> tools and test equipment located in the central office in the \$2,000
> expense limit. However, the expense limit for personal computers
> classifiable to Account 2124, General support computers, will remain
> at \$500.
>
> \(3\) Incidental activities -- Section 32.4999(L) was revised to
> eliminate the "Treated Traditionally" requirement from incidental
> activities, but retained the other three requirements.
>
> \(4\) Implementing new accounting standards -- Section 32.16 requires
> notification and approval to implement new accounting standards
> prescribed by the Financial Accounting Standards Board (FASB). The FCC
> retained the requirement for carriers to notify them of their
> intentions to adopt a FASB change and how the carrier intends to
> implement this change. However, The FCC eliminated the requirement to
> provide a revenue requirement study.
>
> \(5\) Classification of companies -- Section 32.11 was revised so that
> its requirements pertain to only incumbent local exchange carriers
> (LEC). The FCC replaced the word "companies" with "incumbent LEC". RUS
> adopted this rule but modified its requirements so that they pertain
> to RUS borrowers, and replaced the word "companies" with "borrowers".

The following changes to Part 32 will not be adopted:

> \(1\) Affiliate transaction rules under Section 32.27 where the
> Commission addressed five distinct areas:
>
> \(a\) Eliminate requirement for FMV comparison for asset transfers
> under \$500,000
>
> \(b\) Establish floor and ceiling for recording transactions
>
> \(c\) Prevailing price treatment
>
> \(d\) Centralized services exception to estimated fair market value
> rule
>
> \(e\) Exempt nonregulated to nonregulated transactions from the
> affiliate transaction rules
>
> \(2\) Subsidiary record requirement under section 32.5280 (c) allowing
> LECs to group their nonregulated revenues into two groups: one
> subsidiary record for all the revenues from regulated services treated
> as nonregulated for federal accounting purposes pursuant to Commission
> order, and the second for all other nonregulated revenues.
>
> \(3\) Elimination of the requirement for borrowers to obtain prior
> approval before recording extraordinary items, contingent liabilities
> and prior period adjustments.
>
> \(4\) Elimination of the expense matrix requirement found in section
> 32.5999.

In addition the FCC reduced the number of Class A and B accounts
significantly, and created some new accounts. The 296 Class A accounts
were reduced to 164 accounts, while the 113 Class B accounts were
reduced to 89 accounts. The FCC created new accounts for circuit and
packet digital electronic switching, electronic and optical circuit
equipment, and wholesale and retail services.

RUS is continuing to revise 7 CFR Part 1770, Accounting Requirements for
RUS Telecommunications Borrowers and evaluating the changes in the USOA
to determine their relevance and applicability to our borrowers. Until
RUS issues its revised accounting requirements we request that our
borrowers not adopt the reduction in the number of accounts outlined in
the previous paragraph. However, if RUS telecommunications borrowers
wish to add the newly created accounts referenced in the above
paragraph, this letter will serve as authority to do so.

This letter serves to adopt some of the Part 32 changes, adopt some
changes with modification, reject some changes, and postpone
implementation of other Part 32 changes pending further review by RUS.
Any questions regarding the accounting and recordkeeping requirements
for RUS telecommunications borrowers should be addressed to the
Technical Accounting and Auditing Staff, Mail Stop 1523, 1400
Independence Avenue SW, Washington, D.C. 20250-1523.

\###

[^1]: Federal-State Joint Conference On Accounting Issues, WC Docket No.
    02-269; 2000 Biennial Regulatory Review -- Comprehensive Review of
    the Accounting Requirements and ARMIS Reporting Requirements for
    Incumbent Local Exchange Carriers: Phase 2, CC Docket No. 00-199;
    Jurisdictional Separations Reform and Referral to the Federal-State
    Joint Board, CC Docket No. 80-286; and Local Competition and
    Broadband Reporting, CC Docket No. 99-301.

[^2]: The FCC deferred implementation of the following accounting and
    reporting requirement rule changes for six additional months (until
    January 1, 2004): (1) the consolidation of Accounts 6621 through
    6623 into Account 6620, with subaccounts for wholesale and retail;
    (2) the consolidation of Account 5230, Directory revenue, into
    Account 5200, Miscellaneous revenue; (3) the consolidation of the
    depreciation and amortization expense accounts (Accounts 6561
    through 6565) into Account 6562, Depreciation and amortization
    expense, and; (4) the revised "Loop Sheath Kilometers" data
    collection in Table II of ARMIS Report 43-07.

[^3]: Federal-State Joint Conference on Accounting Issues, Order, 17 FCC
    Rcd 17025 (2002) (Conversion Order); Federal-State Joint Conference
    on Accounting Issues, Order, WC Docket No. 02-269, FCC 02-291
    (October 17, 2002) (Order establishing membership of Joint
    Conference)