Commission Recommendation of 19 September 2005 on accounting separation and cost accounting systems under the regulatory framework for electronic communications   (Text with EEA relevance)
Date: 2005-09-19
Institutions: European Commission
Subjects: cost analysis, electronic mail, management accounting, provision of services, publication of accounts, regulation of telecommunications, telecommunications

L 266/64

EN

Official Journal of the European Union

11.10.2005

COMMISSION RECOMMENDATION

of 19 September 2005

on accounting separation and cost accounting systems under the regulatory framework for
electronic communications

(Text with EEA relevance)

(2005/698/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

the European
Having regard to Directive 2002/21/EC of
Parliament and of
the Council of 7 March 2002 on a
common regulatory framework for electronic communications
and in
networks
and services
particular to Article 19(1) thereof,

(Framework Directive) (1),

After consulting the Communications Committee,

Whereas:

and

cost

separation

This Recommendation updates Commission Recommen-
dation 98/322/EC of 8 April 1998 on interconnection in
(Part 2 —
a liberalised telecommunications market
accounting) (4),
Accounting
following the application of the regulatory framework
for electronic communications
(25 July 2003). This
revision is necessary since the regulatory framework of
2002 brought about some important changes to the
regulatory package of 1998 such as the enlarged scope
of application of the framework; a different approach to
the imposition of ex ante obligations; a different scope of
application of
the specific provisions concerning cost
accounting and accounting separation; and the appli-
cation of the principle of technology neutrality.

(1)

(2)

Certain provisions of the regulatory framework for elec-
tronic communications networks and services require
necessary and appropriate cost accounting mechanisms
to be implemented, namely Articles 9, 11, 13 and 6(1) in
connection with Annex I, of Directive 2002/19/EC of the
European Parliament and of
the Council of 7 March
2002 on access to, and interconnection of, electronic
communications
facilities
(Access Directive) (2); Articles 17 and 18(1) of and
Annex VII(2) to Directive 2002/22/EC of the European
Parliament and of the Council of 7 March 2002 on
universal service and users’ rights relating to electronic
communications networks and services (Universal Service
Directive) (3); and Article 13 of Directive 2002/21/EC.

associated

networks

and

the preparation of

Operators designated as having significant market power
(SMP) on a relevant market (hereinafter referred to as
notified operators), as a result of a market analysis
carried out in accordance with Article 16 of Directive
inter alia, to obligations
2002/21/EC, may be subject,
separated accounts
concerning
and/or
implementation of a cost accounting system.
The purpose of imposing such obligations is to make
transactions between operators more transparent and/or
services provided.
to determine the actual cost of
Furthermore, accounting separation and the implemen-
tation of cost accounting systems may be used by
national regulatory authorities to complement the appli-
cation of other regulatory measures (e.g. transparency,
on notified
non
operators.

discrimination,

orientation)

cost

(1) OJ L 108, 24.4.2002, p. 33.
(2) OJ L 108, 24.4.2002, p. 7.
(3) OJ L 108, 24.4.2002, p. 51.

(4)

(5)

(6)

The overall objectives of this Recommendation are to
foster the application of consistent accounting principles
and methodologies at EU level, taking into account the
experience gained by the national regulatory authorities
in the domain of cost accounting and accounting
separation; improve the transparency of the accounting
systems,
the
auditing and reporting process to the benefit of all
involved parties.

the data elaborated,

the methodologies,

Operators may operate in markets in which they have
been designated as having significant market power, as
well as in competitive markets where they are not so
designated. In order to carry out its regulatory tasks, a
national
regulatory authority may need information
about markets where operators do not have SMP.
When an obligation for
accounting separation is
imposed on a notified operator with SMP on one or
more markets, the imposition of accounting separation
may cover markets where the operator does not have
SMP, e.g. to ensure the coherence of data.

Any mandated cost accounting or accounting separation
methodology used in particular as a basis for price
control decisions should be specified in a way that
encourages efficient investment, identifies potential anti-
competitive behaviour, notably margin squeezes, and
should be in accordance with the national regulatory
authority’s policy objectives as set out in Article 8 of
Directive 2002/21/EC.

(4) OJ L 141, 13.5.1998, p. 6.

11.10.2005

EN

Official Journal of the European Union

L 266/65

(7)

The implementation of a new or revised costing metho-
dology may indicate that current
levels of regulated
charges and/or price mechanisms are inappropriate or
misaligned in some way.
regulatory
authority believed corrective action is required then due
regard should be taken of the commercial and economic
to minimise risk and uncertainty in the
environment
for
relevant markets. This
action could
example,
a
reasonable period of time.

adjustment over

a national

any price

spreading

include,

If

(8) When implementing an accounting system that uses a
forward-looking approach (such as long run incremental
cost) based not on historic costs but on current costs, e.g.
where assets are revalued based on the cost of using a
modern equivalent
infrastructure built with the most
efficient technology available, national regulatory autho-
rities may need to adjust
the cost
methodology in order to achieve these objectives. The
coordinated use of top-down and bottom-up approaches
should be
applicable. Accounting
should be based on the principle of cost
systems
causation, such as activity based costing.

the parameters of

envisaged, where

(9) When current cost accounting (CCA)

the

such as

is applied to
network assets,
loop which is
considered to be less replicable in the medium term,
consistent application of costing methodologies requires
parameters (such as cost of capital, depreciation profiles,
mark-ups, time varying components) to be adjusted by
the national regulatory authorities accordingly.

local

(10) When the implementation of a cost accounting system is
mandated in accordance with Article 13(4) of Directive
2002/19/EC, rules used for the allocation of costs should
be displayed at a level of detail that makes clear the
relationship between costs and charges of networks
components and services; the basis on which directly
and indirectly attributable costs have been allocated
between different accounts also needs to be provided.

(11)

This Recommendation provides guidance on how to
implement cost accounting and accounting separation
under the new regulatory framework of 2002. Recom-
mendation 98/322/EC provides guidance on the imple-
mentation of cost accounting and accounting separation
under the regulatory framework of 1998. The Recom-
mendation of 1998 continues to apply in situations
where Member States have not completed the review of
existing obligations concerning cost accounting and
accounting separation in accordance with Article 16 of
Directive 2002/21/EC.

(12) Where

a

compensation mechanism which involves
financial
transfers is implemented by Member States,
Annex IV, part B to the Universal Service Directive

these transfers are undertaken in an
that
requires
objective,
transparent, non-discriminatory and propor-
tionate manner. In order to meet these purposes, any
compensation received for the provision of universal
should be duly reported in the
service obligations
systems for accounting separation.

(13) As regards the funding of universal service obligations,
the Recommendation does not prejudice Commission
Directive 80/723/EEC of 25 June 1980 on transparency
of financial relations between Member States and public
undertakings as well as on financial transparency within
certain undertakings (1).

(14)

(15)

(16)

The application of the principles of this Recommend-
ation is without prejudice to the duty of the Member
States and of undertakings to comply fully with the
Community competition rules.

Commission Recommendation 2002/590/EC of 16 May
2002 on ‘Statutory Auditor’s Independence in the EU: A
Set of Fundamental Principles’ (2), establishes a sound
framework against which the auditor’s
independence
can be tested, where relevant.

The European Regulators Group (ERG) (3) has provided
an opinion on the revision of Commission Recommend-
ation on accounting separation and cost accounting of
1998 which includes a detailed annex on aspects of cost
accounting and accounting separation,

HEREBY RECOMMENDS:

1. This Recommendation concerns

the implementation of
accounting separation and cost accounting systems by
operators designated by their national regulatory authority
as having significant market power on relevant markets as a
result of a market analysis carried out in accordance with
Article 16 of Directive 2002/21/EC. Operators with such
obligations are hereinafter referred to as ‘notified operators’.

The purpose of imposing an obligation to implement a cost
accounting system is to ensure that fair, objective and trans-
parent criteria are followed by notified operators in allo-
cating their costs to services in situations where they are
subject
to obligations for price controls or cost-oriented
prices.

(1) OJ L 195, 29.7.1980, p. 35. Directive as last amended by Directive

2000/52/EC (OJ L 193, 29.7.2000, p. 75).

(2) OJ L 191, 19.7.2002, p. 22.
(3) The ERG was established by Commission Decision 2002/627/EC (OJ
L 200, 30.7.2002, p. 38) as amended by Decision 2004/641/EC (OJ
L 293, 16.9.2004, p. 30).

L 266/66

EN

Official Journal of the European Union

11.10.2005

The purpose of imposing an obligation regarding accounting
separation is to provide a higher level of detail of inform-
ation than that derived from the
statutory financial
statements of the notified operator, to reflect as closely as
possible the performance of parts of the notified operator’s
business as if they had operated as separate businesses, and
in the case of vertically integrated undertakings, to prevent
discrimination in favour of
their own activities and to
prevent unfair cross-subsidy.

2. It

is

recommended that national

regulatory authorities
require from the notified operators the disaggregation of
their operating costs, capital employed and revenues to the
level required to be consistent with the principles of propor-
tionality, transparency and regulatory objectives mandated
by national or Community law.

is recommended that

It
the allocation of costs, capital
employed and revenue be undertaken in accordance with
the principle of cost causation (such as activity-based
costing, ‘ABC’).

The cost accounting and accounting separation systems of
the notified operators need to be capable of reporting regu-
latory financial information to demonstrate full compliance
is recommended that
with regulatory obligations.
this
It
the qualitative criteria of
capability be measured against
relevance, reliability, comparability and materiality.

It is recommended that national regulatory authorities satisfy
themselves as to the adequacy and effectiveness of the cost
accounting and accounting separation systems; such systems
may be subject to public consultation.

the

features

and specification of

3. It is recommended that a national regulatory authority, when
cost
assessing
accounting system, reviews the capability of
the notified
operator’s cost accounting system to analyse and present
cost data in a way that supports regulatory objectives. In
particular,
the notified
capable of differentiating between
operator
direct costs (1), and indirect costs (2).

the cost accounting system of

should be

the

is

recommended that national

It
regulatory authorities,
having adopted a decision on a cost accounting system
based on current costs set clear deadlines and a base year
for their notified operators’
implementation of new cost
accounting systems based on current costs.

Evaluation of network assets at forward-looking or current
value of an efficient operator, that is, estimating the costs
faced by equivalent operators if the market were vigorously
competitive, is a key element of the ‘current cost accounting’
the depreciation
(CCA) methodology. This requires that
charges included in the operating costs be calculated on
the basis of current valuations of modern equivalent assets.
Consequently, reporting on the capital employed also needs
to be on a current cost basis. Other cost adjustments may be
required to reflect the current purchase cost of an asset and
its operating cost base. Evaluation of network assets at
forward-looking or current value may be complemented by
the use of a cost accounting methodology such as long run
incremental costs (LRIC), where appropriate.

It is recommended that national regulatory authorities have
due regard to price and competition issues that might be
raised when implementing CCA, such as in the case of local
loop unbundling.

It is recommended that national regulatory authorities take
due regard to further adjustments to financial information in
respect of efficiency factors, particularly when using cost
data to inform pricing decisions since the use of cost
accounting systems (even applying CCA) may not
fully
reflect efficiently incurred or relevant costs (3). Efficiency
factors may consist of evaluations of different network
topology and architecture, of depreciation techniques, of
technology used or planned for use in the network.

4. It is recommended that notified operators required to report
accounting separation provide a profit and loss statement
and statement of capital employed for each of the regulatory
(based on the relevant markets and
reporting entities
services). Transfer charges or purchases between markets
and services need to be clearly identified in sufficient detail
to justify compliance with non discrimination obligations.
These accounting separation reporting obligations may
require the preparation and disclosure of information for
markets where an operator does not have SMP.

For consistency and data integrity, it is recommended that
the financial reports of the regulatory accounts be conso-
lidated into a profit and loss statement and a statement of
capital employed for the undertaking as a whole. A reconci-
liation of the separate regulatory accounts to the statutory
accounts of the operator is also required. These statements
should be subject to an independent audit opinion or a
national regulatory authority compliance audit (subject to
the availability of suitably qualified staff).

(1) Direct costs are those costs wholly and unambiguously incurred

against specified activities.

(2) Indirect costs are those costs that require apportionment using a fair

and objective attribution methodology.

(3) Some of the assets may be in excess of requirements or network
architecture may be suboptimal.
Implementation of a bottom-up
economic/engineering model helps providing information about
inefficient and unnecessary incurred costs, which should be removed.

11.10.2005

EN

Official Journal of the European Union

L 266/67

5. It is recommended that national regulatory authorities make
relevant accounting information from notified operators
available to interested parties at a sufficient level of detail.
The detail of information provided should serve to ensure
that there has been no undue discrimination between the
provision of services internally and those provided externally
and allow identification of the average cost of services and
the method by which costs have been calculated.
In
providing information for these purposes, national regulatory
authorities should have due regard for commercial confiden-
tiality.

In this respect, the publication by the notified operator of
sufficiently detailed cost statements showing, for example,
the average cost of network components will increase trans-
parency and raise confidence on the part of competitors that
there
is
considered to be particularly important
for wholesale
services. Implementing guidelines on reporting requirements
and publication of information are set out in the Annex.

are no anti-competitive

cross-subsidies. This

the universal service Directive. For those Member
17 of
States that operate schemes to finance universal service obli-
gations,
recommended that any contribution that
designated undertaking(s) receive as part of a compensation
for accounting
identified in the systems
mechanism is
separation.

is

it

7. These accounting guidelines are concerned with regulatory
reporting and they are not intended as a replacement for any
statutory financial reporting that may be required in the
Member State.

8. This Recommendation will be reviewed not later than three

years after the date of application.

9. This Recommendation is addressed to the Member States.

Done at Brussels, 19 September 2005.

6. Certain undertakings may be designated as universal service
the Universal
providers in accordance with Article 8 of
Service Directive and may be subject to regulatory control
on retail tariffs in accordance with the provisions of Article

For the Commission

Viviane REDING
Member of the Commission

L 266/68

EN

Official Journal of the European Union

11.10.2005

ANNEX

GUIDELINES ON REPORTING REQUIREMENTS AND PUBLICATION OF INFORMATION

This Annex outlines the periodic reporting framework, publication issues and the statement of compliance.

Pursuant to the principles recommended at point 2 of the Recommendation, cost accounting and accounting separation
systems must produce financial information at a level of detail which demonstrates compliance with the principles of
non-discrimination and transparency, adequately identifying and attributing revenues, costs, capital employed and
volumes for the various activities performed by the operator. Such accounting information should be made available
promptly to the national regulatory authority.

Good presentation of regulatory accounts ensures that the essential messages of the financial statements are commu-
nicated clearly and effectively and in as simple and straightforward a manner as possible. The presentation of information
in financial statements involves some degree of abstraction and aggregation. If this process is carried out in an orderly
manner, greater knowledge will result because such a presentation will satisfy the various regulatory objectives such as
demonstrating that charges are cost-orientated or that there is no undue discrimination.

Accounting reports comprise supporting notes and supplementary schedules that amplify and explain the financial
statements. Both the financial statements and the supporting notes form an integrated whole.

Regulatory accounting information serves national regulatory authorities and other parties that may be affected by
regulatory decisions based on that information, such as competitors, investors and consumers. In this context, publication
of information may contribute to an open and competitive market and also add credibility to the regulatory accounting
system.

However, full disclosure may be restricted by national and Community rules regarding business confidentially. Therefore,
it is recommended that national regulatory authorities, having taken the opinion of operators, define what information
can be considered as confidential and should not be made available.

1. Preparation and publication of information

The following financial information should be prepared and published (subject to confidentiality and national law
obligations) for the relevant market/service:

— profit and loss statements,

— capital employed statement (detailed calculation methodology and value of parameters used),

— consolidation and reconciliation with statutory accounts or other source of costing information,

— a description of the costing methodologies including reference to cost base and standards, allocation and valuation

methodologies, identification and treatment of indirect costs,

— non-discrimination notes (detailed transfer charges),

— audit opinion (if required by the national regulatory authority),

— a description of accounting policies and regulatory accounting principles,

— a statement of compliance with Community and national rules,

— other supplementary schedules as required.

Reporting formats, which may follow standard statutory accounting design, should be defined in advance by the
national regulatory authority,
in consultation with operators. The statement of compliance with Community and
national legislation, audit opinion and description of accounting principles, policies, methodologies and procedures
used, namely the cost allocation methodologies, cannot be considered confidential. Without prejudice to national and
Community laws on business confidentiality, the audit results should be made publicly available.

11.10.2005

EN

Official Journal of the European Union

L 266/69

2. The statement of compliance

The annual statement of compliance should at least include:

— the conclusions of the auditor,

— all identified irregularities,

— recommendations made by the auditor (with a description of the corresponding effects),

— the full description of the verification methodology followed, and

— some aggregate financial and accounting data (such as CCA adjustments, main assumptions made on attribution

methodologies, level of costs allocated and the level of granularity of the model).

Publication of the statement of compliance and of the audit results should be presented in a form easily accessible by
interested parties, such as a paper or electronic version, or published on the operator’s or national regulatory
authority’s website.

3. Reporting period

Publication of regulatory accounts should take place annually and as soon as possible after the end of the accounting
(reporting) year. Publication of the statement must take place no later than two months after the completion of the
regulatory audit or no later than the current practice as specified by regulatory obligations.