Regulatory financial reporting: a review

Summary

The case for change

1.1 The current framework for BT's regulatory financial reporting dates from 2004 . Since then, both technology and the use of financial data have evolved significantly. Fibre-based networks are being rolled out and there has been a large growth in data traffic and in IP networks. In regulation, there has been increased focus on detailed costing data for the development and scrutiny of charge controls and in resolving disputes.

1.2 At the same time, communication providers' (CPs) confidence in the published financial statements has gradually been eroded. BT considers that it is required to publish unnecessary levels of detail, and we find that we have to make material adjustments to reported information in order to make regulatory decisions. Following publication of BT's most recent financial statements for 2012 on 31 July, it is a good time for us to set out proposals for our review. We seek stakeholders' views and suggestions as to how to make regulatory financial reporting better for the future.

The consultations

1.3 In November 2011, we published a Call for Inputs (CFI) seeking stakeholders' views on both regulatory financial reporting and cost orientation . This document is our first consultation on regulatory financial reporting and sets out our emerging thinking for improvement of the regulatory financial reporting framework. Informed by responses to this consultation, we plan to issue a second consultation, in early 2013, setting out more detailed proposals, together with draft legal instruments and other implementation details. The proposals set out in this consultation take into account the responses to the CFI, our own experience in using the accounts and the views that we have received from stakeholders since the current framework came into effect in 2004.

1.4 As anticipated in our CFI, we are also planning to publish a consultation on cost orientation. The implications of our review of cost orientation for regulatory reporting (if any) are therefore not dealt with further here. To the extent necessary, we will address this in our consultation on cost orientation and/or in our second consultation on regulatory financial reporting.

There is general agreement on the need for change

1.5 CPs and BT agree that the regulatory reporting framework needs to change, although the specifics of some of their concerns may differ. We also agree that changes are required to the current reporting framework.

1.6 CPs are concerned that BT has too much influence over how the accounts are prepared: the choice of principles, methodologies, and rules that are applied in deciding upon the treatment of costs and the valuation of assets in the Regulatory Financial Statements (RFS). They are also concerned by errors, restatements and changes in accounting treatment over recent years.

1.7 BT is concerned about the complexity and level of detailed information that it is required to report and what it considers to be the unrealistic demands this places on its reporting systems. It also argues that some of this disclosure is commercially confidential information the disclosure of which could harm competition and that it reports more information than its counterparts in most other European countries.

1.8 We recognise both CPs' and BT's concerns. In addition, we believe that the published RFS need to align more closely with the regulatory decisions made by Ofcom.

1.9 At the same time, there is a need for pragmatism and proportionality. We recognise that running a fully allocated costing system, across a business with a market capitalisation in the tens of billions of pounds and reporting publicly, to a high degree of granularity, is a challenging task, both conceptually and practically. Similarly, current cost accounting (CCA) is a complex process requiring a degree of judgement.

Establishing confidence in the published financial statements

1.10 It is important to establish greater stakeholder confidence in the published financial statements. A series of restatements, errors and changes in treatment, in recent years, have led to a loss of confidence in the regulatory accounts. CPs do not appear to take much comfort from the review of the statements by BT's auditors or, indeed, by Ofcom. This has led to demands for greater detail to be reported, so that CPs can check the results for themselves. In this context, however, greater detail does not necessarily mean greater accuracy or that the resulting data are more robust. The solution, we believe, is to restore confidence by ensuring that the framework for regulatory financial reporting is relevant, reliable and robust. The requirements must also be proportionate to the benefits.

1.11 The focus of this, the first consultation, is on the published financial statements, within the context of the wider regulatory financial reporting framework. However, views are also invited on the scope of the confidential information provided to Ofcom.

1.12 In this document we consider:

• the purpose of reporting;
  
• the current reporting requirements; and
  
• how the current framework might be improved.

The purpose of regulatory financial reporting

1.13 The regulatory financial reporting obligations imposed on SMP providers should provide information which allows us effectively to monitor compliance with other SMP conditions (including cost orientation, non-discrimination and charge controls) and to enable our timely intervention to ensure that those other SMP obligations continue to effectively address the underlying competition problems identified in our market analyses. We also need reliable information to inform our regulatory decisions, the market reviews we undertake and the setting of SMP obligations. In developing our thinking and detailed proposals, we intend in particular to assess whether any changes to the reporting framework are appropriate, effective and necessary to achieve that aim.

1.14 We also consider that other parties have a legitimate interest in the financial regulatory statements, compliance monitoring and what, if anything, the statements may suggest regarding the need for regulatory intervention. Transparency and the requirement that the SMP provider makes available certain regulatory accounting information in public form are, therefore, important elements of the overall framework. However, we do not consider in principle that the published financial statements can or should provide CPs with all the information necessary for them to determine whether an SMP provider has complied with its obligations. Rather, our view is that the level of information published, taken in conjunction with the underlying processes, systems and assurance framework, should be such as to provide confidence to CPs that an SMP provider is complying with its regulatory obligations.

1.15 In section 3, we discuss these objectives and the attributes of effective regulatory financial reporting. We also set out the specific questions that we consider need to be addressed by the regulatory financial statements, in order to provide confidence to stakeholders that BT has complied with its obligations. For the purpose of this consultation we have focused on the reporting requirements as they apply to BT, but will consider the requirements for Kingston Communications plc (KCOM) as part of the second consultation.

The current reporting requirements

1.16 In section 4, we set out our views on how well the current framework for regulatory financial reporting meets the purposes and attributes described in section 3. We conclude that the financial reporting requirements appear to answer most of the relevant questions identified in section 3 but do not appear to deliver the appropriate level of confidence to stakeholders that BT has complied with its SMP obligations.

Proposals for improved reporting

1.17 It appears that, under the current regime, stakeholders derive little confidence from the way the data are prepared by BT or are reviewed by BT's auditors or by Ofcom. As a result, stakeholders rely on the publication of detailed financial information to inform their own review. BT considers that these publication requirements represent an onerous and, potentially harmful level of disclosure.

1.18 We consider that an effective regime should enable stakeholders to draw more confidence from the way the financial information is prepared and reviewed and therefore rely less on the publication of detailed financial data.

1.19 On this basis, we consider that, if BT can deliver a robust and transparent reporting system, supported by a strong review process, stakeholders will be less reliant on the publication of detailed financial information to derive the necessary level of confidence. Therefore, it is possible that there will be scope to reduce the level of published information in the longer term, subject to the effective implementation of improved accounting systems and review processes.

1.20 Additionally, we make a range of other proposals for the shorter term, aimed at increasing stakeholder confidence in the way the numbers are generated, and making the financial data easier to understand and use. As explained in section 5, these include increasing Ofcom involvement in setting the bases of preparation and improved transparency for stakeholders of the way the financial statements are prepared. We are keen to get stakeholder views on these proposals to inform our more detailed proposals to be set out in our second consultation.

Next steps

1.21 Success in improving regulatory financial reporting will depend critically upon the positive and pragmatic engagement of all stakeholders. We are therefore keen to get your comments and suggestions in response to our proposals.

1.22 Responses to this consultation are requested by 2 November 2012.