1998 Biennial Regulatory ReviewReview of Accounting and Cost Allocation Requirements

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Parts 43 and 64

[CC Docket No. 98-81, ASD File No. 98-64, CC Docket No. 96-150, RM-

9341, FCC 99-106]

1998 Biennial Regulatory Review--Review of Accounting and Cost

Allocation Requirements

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This document streamlines the accounting requirements for mid-

sized incumbent local exchange carriers (LECs) whose aggregate annual

revenues are less than $7 billion by allowing these companies,

currently required to use Class A accounts, to use the more streamlined

Class B accounts. The Commission also permits the mid-sized incumbent

LECs to submit their cost allocation manuals (CAMs) based on the Class

B system of accounts. In addition, mid-sized incumbent LECs will now

only be required to obtain an attestation every two years, instead of

an annual financial audit requiring a positive opinion. The Commission

also eliminates several accounting requirements for all incumbent LECs.

The Commission's objective in modifying the accounting and cost

allocation rules is to minimize the reporting burden on incumbent LECs

and improve the quality of the reported information.

DATES: This rule is effective November 15, 1999, except Sec. 32.2000(b)

which contains information collection requirements and will not become

effective until approved by the Office of Management and Budget. The

Commission will publish a document announcing the effective date of

this section.

ADDRESSES: Federal Communications Commission, 445-12th Street, SW, TW-

A325, Washington, D.C. 20554.

FOR FURTHER INFORMATION CONTACT:

Mika Savir, Legal Branch, Accounting Safeguards Division, Common

Carrier Bureau at (202) 418-0384 or Andy Mulitz, Chief, Legal Branch,

Accounting Safeguards Division, Common Carrier Bureau at (202) 418-

0827.

SUPPLEMENTARY INFORMATION: This Report and Order in CC Docket No. 98-

81, ASD File No. 98-64, CC Docket No. 96-150, RM-9341, adopted on May

18, 1999 and released on June 10, 1999, is available for inspection and

copying during normal business hours in the FCC Reference Information

Center (RIC), 445 12th Street, SW, TW-A325, Washington, D.C. 20554. The

complete text may be purchased from the Commission's copy contractor,

International Transcription Service, Inc., 1231 20th Street, N.W.,

Washington, D.C. 20036, (202) 857-3800.

Synopsis of Report and Order

I. Background

1. As part of the biennial review under section 11 of the

Communications Act, the Commission proposed to raise the threshold

significantly for required Class A accounting, allowing mid-sized

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incumbent LECs currently required to use Class A accounts to use the

more streamlined Class B accounts. In addition, the Commission proposed

to establish less burdensome CAM procedures for the mid-sized incumbent

LECs and to reduce the frequency with which independent audits of the

cost allocations based upon the CAMs are required. The Commission also

proposed several changes to the Uniform System of Accounts (USOA) to

reduce accounting requirements and to eliminate or consolidate accounts

for all carriers. Finally, the Commission sought proposals for other

accounts or filing requirements that could be reduced or eliminated.

II. Report and Order

A. Revenue Threshold for Determining Level of Reporting for Mid-Sized

Incumbent LECs

2. Under the Commission's rules there are two classes of incumbent

LECs for accounting purposes: Class A and Class B. Carriers with annual

operating revenues from regulated telecommunications operations equal

to or above a designated indexed revenue threshold, currently $112

million, are classified as Class A; those with annual operating

revenues below the threshold are considered Class B. Generally, Class A

accounts provide more detailed records of investment, expense, and

revenue than the Class B accounts. In the Notice of Proposed Rulemaking

(NPRM), 63 FR 45208 (Aug. 25, 1998), the Commission proposed to

streamline accounting requirements for certain mid-sized incumbent LECs

based on the aggregate revenues of the LEC and any LEC that it

controls, is controlled by, or with which it is under common control.

The Commission proposed that if the aggregate revenues of these

affiliated incumbent LECs are less than $7 billion, then each incumbent

LEC within that group would be eligible for Class B accounting, even if

the annual operating revenue of any individual incumbent LEC equals or

exceeds $112 million. The Commission adopts the proposal in the NPRM.

Among incumbent LECs, this revision would limit Class A accounting to

the Bell operating companies (BOCs) and GTE. All other incumbent LECs

may use the Class B system of accounts. Carriers that qualify for Class

B accounting may, at their discretion, maintain a Class A accounting

structure upon the submission of written notification to the

Commission. See 47 CFR 32.11.

3. Pole Attachment Fees. In reviewing the rates charged by

incumbent LEC owners of poles, ducts, conduits and rights-of-way, the

Commission applies data taken from the Automated Reporting Management

Information Systems (ARMIS) reports. Under the Class B accounting

structure adopted for mid-sized incumbent LECs, detailed accounts

needed to calculate pole attachment fees using the pole attachment

formulas would no longer be reported in their ARMIS reports. Mid-sized

incumbent LECs are therefore required to maintain subsidiary record

categories to provide the pole attachment data currently provided in

the Class A accounts, and must report the information necessary for the

Commission to calculate pole attachment rates based on their ARMIS

reports.

4. Application of Threshold. In the NPRM, the Commission proposed

eliminating the difference between the application of the indexed

revenue threshold for Parts 32 and 64 because the difference provided

unnecessary complexity. The Commission adopts the proposal and

eliminates the difference between the application of the indexed

revenue threshold for Part 32 and 64 cost allocation purposes. Carriers

will be classified as Class A or Class B at the start of the calendar

year following the first time their annual operating revenues equal or

exceed the indexed revenue threshold. The $7 billion threshold will not

be indexed for inflation annually, but instead will be a fixed

threshold that the Commission will monitor on a regular basis. If the

Commission determines that the $7 billion threshold is no longer

appropriate due to inflation or any other change in market conditions,

it will revise the threshold to reflect those changes.

B. Reduced Cost Allocation Manual Procedures for Mid-Sized Incumbent

LECs

5. In the NPRM, the Commission proposed to reduce CAM requirements

for mid-sized incumbent LECs. The proposal would allow these companies

to submit their CAMs based upon the Class B system of accounts and

would relax the current annual audit requirements for cost allocations

related to the CAM by permitting mid-sized incumbent LECs to obtain an

attestation every two years. Each such attestation would cover the

previous two years. The Commission adopts this proposal. Mid-sized

incumbent LECs may submit their CAMs based upon the Class B system of

accounts. The Commission also concludes that mid-sized incumbent LECs

may obtain an audit every two years, instead of an annual financial

audit requiring a positive opinion.

C. Revising the Uniform System of Accounts for All Carriers

6. Combining Accounts 2114, 2115, and 2116, 47 CFR 32.2114-32.2116.

In the Notice, the Commission proposed combining Account 2114, Special

purpose vehicles, Account 2115, Garage work equipment, and Account

2116, Other work equipment, into a single new account. The assets

recorded in these accounts are similar in nature, have similar

prescribed depreciation rates, and are treated identically under the

jurisdictional separations rules set forth in Part 36 of the

Commission's rules. The Commission adopts this proposal and combines

these accounts into a single account entitled Account 2114, Tools and

other work equipment.

7. Combining Accounts 6114, 6115, and 6116, 47 CFR 32.6114-32.6116.

In the Notice, the Commission proposed combining Account 6114, Special

purpose vehicles expense, Account 6115, Garage work equipment expense,

and Account 6116, Other work equipment expense, into a single new

account entitled Account 6114, Tools and other work equipment expense.

The Commission concludes that these accounts should be combined into a

single account because combining these accounts would reduce the

carriers' accounting and reporting burdens, would not affect the

amounts separated between the interstate and intrastate jurisdictions,

and would not affect our ability to protect the public interest. The

Commission adopts this proposal and combines these accounts into a

single account entitled Account 6114, Tools and other work equipment

expense.

8. Accounting for Nonregulated Revenues. In the Notice, the

Commission proposed amending Secs. 32.23(c) and 32.5280, 47 CFR

32.23(c) and 32.5280, to allow carriers to record revenues from all

nonregulated activities in Account 5280, Nonregulated operating

revenue. Such an amendment would modify the current rule that instructs

carriers to record revenue from nonregulated activities in Account 5280

only if there is no other operating revenue account to which the

revenue relates. The Commission concludes that combining revenues for

all nonregulated activities into one account would continue to protect

the public interest by ensuring that nonregulated revenues are

segregated from the carriers' regulated revenues. Therefore, the

Commission eliminates Account 5010 and revises the language in sections

32.23(c) and 32.5280(a), to require that all

[[Page 50004]]

nonregulated revenues be recorded in Account 5280.

9. Revision to Section 32.16, Changes in Accounting Standards.

Section 32.16 of the Commission's rules, 47 CFR 32.16, requires

carriers to revise their records and accounts to reflect new accounting

standards prescribed by the Financial Accounting Standards Board

(FASB). This section provides that Commission approval of a change in

an accounting standard shall automatically take effect 90 days after a

carrier notifies the Commission of its intention to follow a new

standard. In the notification to the Commission, carriers are required

to provide a revenue requirement study that analyzes the effects of the

accounting change for the current year and a projection for three years

into the future. In the Notice, the Commission proposed to relieve

carriers of the requirement to file the projected future effects of an

accounting change in their notifications. The Commission adopts this

proposal. If projections are needed in the future, the Commission will

obtain them on an ad hoc basis.

10. Revision to Section 32.2000(b), Telecommunications Plant

Acquired. Section 32.2000(b)(4) of the Commission's rules, 47 CFR

32.2000(b)(4), requires carriers to submit for Commission approval the

journal entries made to record acquisitions from other entities of

telecommunications plant that cost more than $1 million for Class A

carriers and $250,000 for Class B carriers. In the NPRM, the Commission

proposed to eliminate this filing requirement. The Commission concludes

that this requirement, which was established to ensure that plant

acquired from other carriers is recorded at original cost as required

in section 32.2000(b), is no longer necessary. The Commission adopts

the proposal in the NPRM and eliminates the requirement for routine

filing of these journal entries.

D. Order on Reconsideration in CC Docket No. 96-150--Section 274(f)

Reporting Requirements

11. In the Accounting Safeguards Order, the Commission addressed

the accounting safeguards necessary to satisfy the requirements of

sections 260 and 271 through 276 of the Communications Act. Section

274(a) prohibits any ``Bell operating company or any affiliate [from]

engag[ing] in the provision of electronic publishing that is

disseminated by means of such Bell operating company's or any of its

affiliates' basic telephone service,'' other than through ``a separated

affiliate or electronic publishing joint venture.'' 47 U.S.C. 274(a).

Section 274(f) establishes a reporting requirement for separate

electronic publishing affiliates created pursuant to section 274. 47

U.S.C. 274(f). In the Accounting Safeguards Order, the Commission

concluded that those section 274 affiliates that already file an SEC

Form 10-K must file a copy with this Commission and section 274

affiliates that were not required to file a Form 10-K with the SEC,

must file an identical form with this Commission. SBC Communications,

Inc. (SBC) filed a Petition for Reconsideration of the Accounting

Safeguards Order, asserting, among other things, that a simplified

report for ``separated entities'' not already subject to the SEC's Form

10-K requirements will satisfy the intent of section 274(f) because the

phrase ``substantially equivalent,'' as used in the statute, does not

mean ``identical.''

12. The SEC Form 10-K is a voluminous report that contains a

description of the company filing the report and its operations,

financial statements with supporting financial data and major legal and

financial disclosures concerning the company. The SEC Form 10-K is

comprised of the following items: Item 1, Business; Item 2, Properties;

Item 3, Legal Proceedings; Item 4, Submission of Matters to a Vote of

Security Holders; Item 5, Market for Registrant's Common Equity and

Related Stockholder Matters; Item 6, Selected Financial Data; Item 7,

Management's Discussion and Analysis of Financial Condition and Results

of Operations; Item 8, Financial Statements and Supplementary Data;

Item 9, Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure; Item 10, Directors and Executive Officers of the

Registrant; Item 11, Executive Compensation; Item 12, Security

Ownership of Certain Beneficial Owners and Management; Item 13, Certain

Relationships and Related Transactions; and Item 14, Exhibits,

Financial Statement Schedules and Reports on Form 8-K. The SEC also has

a limited version of the Form 10-K for wholly owned subsidiaries. The

limited version of the Form 10-K omits Items 4, 10, 11, 12, and 13. The

limited version also streamlines Items 6 and 7.

13. The Commission concludes that the information contained in the

limited version of SEC Form 10-K, with certain modifications, is

sufficient to monitor the electronic publishing affiliate's compliance

with the section 274 requirements. The Commission modifies the limited

Form 10-K filing requirements to exclude Item 5 and include Item 10.

Item 5 is related to stockholder matters that are not relevant to

section 274. The Commission retains Item 10 for section 274 affiliates

because Item 10 contains information on directors and officers that

would assist in monitoring the prohibition against sharing directors

and officers.

E. Accounting for Computer Software Costs

14. Generally accepted accounting principles (GAAP). Since 1985,

the Commission has followed a policy of conforming regulatory

accounting for carriers to GAAP, unless the principle or practice

conflicts with the Commission's regulatory objectives. Accordingly,

several parties have taken the Commission up on its request for the

submission of additional proposals for accounting changes by suggesting

the adoption of GAAP accounting in lieu of current Commission

accounting for various purposes. While a wholesale replacement of the

Commission's accounting rules with GAAP is not warranted at this time,

the Commission modifies the accounting rules relating to the use of

GAAP in one respect in this Report and Order. On March 4, 1998, the

American Institute of Certified Public Accountants issued Statement of

Position 98-1 (``SOP 98-1'') to provide authoritative guidance on

accounting for the costs of computer software effective for financial

statements for fiscal years beginning after December 15, 1998. See

American Institute of Certified Public Accountants (AICPA) Statement of

Position 98-1, Accounting for the Costs of Computer Software Developed

or Obtained for Internal Use, Issued by the Accounting Standards

Executive Committee, March 4, 1998, at Summary. SOP 98-1 generally

requires the capitalization of software costs. SOP 98-1 also requires

the cost of upgrades and enhancements to be capitalized if they result

in additional functionality. Petitioners requested that the Commission

amend the existing Part 32 rules in order to accommodate this recent

change in GAAP and change its rules governing the treatment of software

costs to conform with SOP 98-1. The Commission concludes that the facts

and circumstances differ in each situation regarding types of software,

and thus, it would not be appropriate to adopt a rule strictly

requiring all software costs to be capitalized to a plant account or an

intangible account. Instead, the Commission finds that SOP 98-1 and

current authoritative accounting guidance (i.e., GAAP) are sufficient

to determine whether capitalizable software costs should be treated as

an intangible asset recorded in the intangible asset account or treated

as a tangible asset classified to the same account as the associated

hardware. Accordingly, the Commission holds that all carriers must now

account for

[[Page 50005]]

computer software costs in accordance with GAAP.

15. In order to monitor the recording and reporting of

capitalizable software costs in the intangible asset account for

regulatory purposes, the Commission requires that carriers establish

and maintain subsidiary record categories for general purpose computer

(``GPC'') software and network software within the intangible asset

account. The cost of software upgrades and enhancements will continue

to be expensed or capitalized in accordance with GAAP. The Commission

will also allow non-price cap carriers to capitalize software upgrades

and enhancements that may cause large one-time expense ``spikes''

regardless of whether such upgrades or enhancements result in

additional functionality required for capitalization under SOP 98-1.

III. Conclusion

16. In this Report and Order, the Commission streamlines the

accounting requirements for mid-sized incumbent LECs whose aggregate

revenues are less than $7 billion. The Commission also permits mid-

sized incumbent LECs to submit their CAMs based on the Class B system

of accounts. Mid-sized incumbent LECs will also be required to obtain

an attestation every two years instead of an annual financial audit

requiring a positive opinion. The Commission reduces or eliminates a

number of accounting requirements for all carriers subject to the

Commission's accounting rules. In addition, the Commission modifies the

holding in the Accounting Safeguards Order and concludes that the

information contained in the limited version of the SEC Form 10-K, with

certain modifications, is sufficient to monitor electronic publishing

affiliates' compliance with the section 274 requirements. Finally, the

Commission amends the requirements regarding the accounting for

computer software costs: the cost of all software must be recorded in

conformance with GAAP.

IV. Procedural Issues

A. Regulatory Flexibility Act

17. Final Regulatory Flexibility Certification--Report and Order in

CC Docket No. 98-81, RM-9341. The Regulatory Flexibility Act (RFA), 5

U.S.C. 601 et seq., amended by the Contract With America Advancement

Act of 1996, Public Law 104-121, 110 Stat. 847 (1996) (CWAAA), requires

that an agency prepare a regulatory flexibility analysis for notice-

and-comment rulemaking proceedings, unless the agency certifies that

``the rule will not, if promulgated, have a significant economic impact

on a substantial number of small entities.'' 5 U.S.C. 605(b). In the

NPRM, 1998 Biennial Regulatory Review--Review of Accounting and Cost

Allocation Requirements, CC Docket No. 98-81, Notice of Proposed

Rulemaking, 63 FR 45208 (Aug. 25, 1998) (NPRM), the Commission

certified that the proposed rules would not have a significant economic

impact on a substantial number of small entities because such rules

would reduce certain reporting requirements for mid-sized incumbent

local exchange carriers (ILECs) and the changes would be easy and

inexpensive for mid-sized ILECs to implement. With respect to the

Petition for Rulemaking filed by Bell Atlantic and BellSouth to amend

the Commission's existing part 32 rules in order to accommodate recent

changes in generally accepted accounting principles (GAAP), see

Petition for Rulemaking to Amend Part 32 of the Commission's Rules,

Uniform System of Accounts for Class A and Class B Telephone Companies,

to Adopt the Accounting for Software Required by Statement of Position

98-1, filed August 3, 1998, the Commission concluded in the Report and

Order that all carriers must account for computer software costs in

accordance with GAAP. See 47 CFR 32.12(a), requiring financial records

to be ``kept in accordance with generally accepted accounting

principles to the extent permitted by this system of accounts.'' This

rule modification does not impose any additional compliance burden on

small entities. No comments were received concerning this

certification. The Commission now reaffirms this certification with

respect to the rules adopted in this Report and Order. The Commission

anticipates that the rule changes adopted here will reduce regulatory

and procedural burdens on small entities. The rule modifications do not

impose any additional compliance burden on persons dealing with the

Commission, including small entities. Accordingly, the Commission

certifies, pursuant to section 605(b) of the RFA, that the rules

adopted herein will not have a significant economic impact on a

substantial number of small business entities, as defined by the RFA.

18. Supplemental Final Regulatory Flexibility Analysis--Order on

Reconsideration in CC Docket No. 96-150. As required by the Regulatory

Flexibility Act (RFA), as amended, 47 U.S.C. 603, a Final Regulatory

Flexibility Analysis (FRFA) was incorporated into Accounting Safeguards

under the Telecommunications Act of 1996, CC Docket No. 96-150, Report

and Order, 62 FR 02918 (Jan. 21, 1997) (Accounting Safeguards Order).

19. In the RFA, the Commission certified that the rules adopted in

the Accounting Safeguards Order would not have a significant economic

impact on a substantial number of small entities. For the reasons

stated below, the Commission certifies that the rule adopted herein in

this Order on Reconsideration will not have a significant economic

impact on a substantial number of small entities. This Supplemental

Final Regulatory Flexibility Analysis (Supplemental FRFA) conforms to

the RFA, as amended by the Small Business Regulatory Enforcement

Fairness Act of 1996 (SBREFA). 5 U.S.C. 601-611.

20. Need for, and Objectives of, this Order on Reconsideration: In

this Order on Reconsideration the Commission grants, in part, a

petition for reconsideration regarding filing a ``substantially

equivalent'' report for electronic publishing affiliates not already

subject to Security and Exchange Commission (SEC) Form 10-K

requirements. The Commission finds that the reporting requirements can

be streamlined for such entities, and concludes that the information

contained in the limited version of SEC Form 10-K, with certain

modifications, will enable monitoring of electronic publishing

affiliate's compliance with section 274 of the Communications Act. The

Commission therefore permits the limited SEC Form 10-K, with the

exclusion of Item 5 and inclusion of Item 10, to satisfy the section

274 requirements for electronic publishing affiliates not already

subject to SEC Form 10-K requirements.

21. Summary of Significant Issues Raised by Reconsideration

Petitions. No petitions were received in direct response to the FRFA in

the Accounting Safeguards Order, nor were small business issues raised.

22. Description and Estimate of the Number of Small Entities to

which the Rules Will Apply. The RFA generally defines ``small entity''

as having the same meaning as the terms ``small business,'' ``small

organization,'' and ``small governmental jurisdiction.'' 5 U.S.C.

Sec. 601(6). In addition, the term ``small business'' has the same

meaning as the term ``small business concern'' under the Small Business

Act. 5 U.S.C. 601(3) (incorporating by reference the definition of

``small business concern'' in Small Business Act, 15 U.S.C. 632). A

small business concern is one which: (1) is independently owned and

operated; (2) is not dominant in its field

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of operation; and (3) satisfies any additional criteria established by

the Small Business Administration (SBA). Small Business Act, 15 U.S.C.

632. Section 121.201 of the SBA regulations defines a small

telecommunications entity in SIC code 4812 (Telephone Companies Except

Radio Telephone) as any entity with 1,500 or fewer employees at the

holding company level. 13 CFR 121.201. As explained below, the terms

``small entities'' and ``small businesses'' do not encompass the Bell

operating companies (BOCs), the parties affected by this Order in

Reconsideration.

23. As noted in the associated Final Regulatory Flexibility

Certification in CC Docket No. 96-150, the RFA directs agencies to

provide a Regulatory Flexibility Analysis in notice-and-comment

rulemaking proceedings, unless the agency certifies that ``the rule

will not, if promulgated, have a significant economic impact on a

substantial number of small entities.'' The Commission's action on

reconsideration in CC Docket No. 96-150 affects only BOCs' affiliate

entities engaged in electronic publishing. These rules do not apply to

small entities because all entities subject to this rule are BOCs or

entities associated or affiliated with BOCs. None of the BOCs is a

small entity, since each BOC is an affiliate of a Regional Holding

Company (RHC), and all the BOCs or their RHCs have more than 1,500

employees. Moreover, the entities affected by this rule that are

associated or affiliated with the BOCs are not independently owned and

operated, and therefore do not meet the definition of small entities.

The Commission therefore certifies that the SEC Form 10-K filing

requirement adopted in this Order on Reconsideration will not have a

significant economic impact on a substantial number of small entities.

24. Description of Projected Reporting, Recordkeeping, and Other

Compliance Requirements. As discussed above, in this Order on

Reconsideration the Commission concludes that the information contained

in the limited version of SEC Form 10-K, with the exclusion of Item 5

and inclusion of Item 10, will satisfy the section 274 requirements for

electronic publishing affiliates not already subject to SEC Form 10-K

requirements. This reduces the reporting burden for BOC affiliates

while providing sufficient information to the Commission to satisfy

section 274 of the Communications Act.

25. Report to Congress. The Commission's Office of Public Affairs,

Reference Operations Division, shall provide a copy of this

certification and Supplemental Final Regulatory Flexibility Analysis to

the Chief Counsel for Advocacy of the SBA, and include it in the report

to Congress. The certification and Supplemental Final Regulatory

Flexibility Analysis will also be published in the Federal Register.

B. Paperwork Reduction Act

26. Final Paperwork Reduction Act Analysis.

C. Authority

This action is authorized under sections 1, 4, 11, 201-205, 215,

218, 228, and 403 of the Communications Act of 1934, as amended, 47

U.S.C. 151, 154, 161, 201-205, 215, 218, 219, 220 and 403.

D. Ordering Clauses

27. Accordingly, It is Ordered that, pursuant to Sections 1, 2, 4,

11, 201-205, and 218-220 of the Communications Act of 1934, as amended,

47 U.S.C. 151, 152, 154, 161, 201-205, and 218-220, Parts 32 and 64 of

the Commission's rules, 47 CFR Parts 32 and 64, is Amended, as shown

below. With the exception of 47 CFR 32.2000(b), these rule changes are

effective six months after date of publication in the Federal Register.

Affected parties may elect to implement the changes with respect to

accounting for computer software costs effective January 1, 1999.

28. It is further ordered that, pursuant to Sections 1, 4, and 220

of the Communications Act of 1934, as amended, 47 U.S.C. 151, 154, and

220, and Section 1.401 of the Commission's rules, 47 CFR 1.401, the

Petition for Rulemaking of the United States Telephone Association is

Granted to the extent indicated herein.

29. It is further ordered that, pursuant to Sections 1, 4, and 220

of the Communications Act of 1934, as amended, 47 U.S.C. 151, 154, and

220, and Section 1.401 of the Commission's rules, 47 CFR 1.401, the

Petition for Reconsideration of the Accounting Safeguards Order of SBC

Communications, Inc. is granted in part and denied in part. This rule

change regarding compliance with 47 U.S.C. 274 Electronic publishing by

Bell Operating Companies is effective November 15, 1999.

30. It is further ordered that, pursuant to Sections 1, 4, and 220

of the Communications Act of 1934, as amended, 47 U.S.C. 151, 154, and

220, and Section 1.401 of the Commission's rules, 47 CFR 1.401, the

Petition for Rulemaking of Bell Atlantic and BellSouth is granted in

part, to the extent indicated herein, and denied in part.

31. It is further ordered that the Office of Public Affairs,

Reference Operations Division, shall send a copy of this Report and

Order, including this Final Regulatory Flexibility Certification and

supplemental Final Regulatory Flexibility Analysis, to the Chief

Counsel for Advocacy of the Small Business Administration.

List of Subjects

47 CFR Part 32

Communications common carriers, Reporting and recordkeeping

requirements, Telephone, Uniform system of accounts.

47 CFR Part 64

Communications common carriers, Reporting and recordkeeping

requirements, Telephone.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

Rule Changes

Parts 32 and 64 of Title 47 of the CFR are amended to read as

follows:

PART 32--UNIFORM SYSTEM OF ACCOUNTS FOR TELECOMMUNICATIONS

COMPANIES

1. The authority citation for Part 32 continues to read as follows:

Authority: 47 U.S.C. 154(i), 154(j) and 220 as amended, unless

otherwise noted.

2. Section 32.11 is amended by revising paragraphs (b), (c), (d),

and (e) to read as follows:

Sec. 32.11 Classification of companies.

* * * * *

(b) Class A companies, except mid-sized incumbent local exchange

carriers, as defined by Sec. 32.9000, shall keep all the accounts of

this system of accounts which are applicable to their affairs and are

designated as Class A accounts. Class A companies which include mid-

sized incumbent local exchange carriers shall keep Basic Property

Records in compliance with the requirements of Secs. 32.2000(e) and (f)

of this part.

(c) Class B companies shall keep all accounts of this system of

accounts which are applicable to their affairs and are designated as

Class B accounts. Class B companies shall keep Continuing Property

Records in compliance with the requirements of Secs. 32.2000(e)(7)(A)

and 32.2000(f) of this part.

(d) Class B companies and mid-sized incumbent local exchange

carriers, as defined by Sec. 32.9000 of this part, that

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desire more detailed accounting may adopt the accounts prescribed for

Class A companies upon the submission of a written notification to the

Commission. Mid-sized incumbent local exchange carriers shall maintain

subsidiary record categories necessary to provide the pole attachment

data currently provided in the Class A accounts.

(e) The classification of a company shall be determined at the

start of the calendar year following the first time its annual

operating revenue from regulated operations equals, exceeds, or falls

below the indexed revenue threshold.

3. Section 32.16 is amended by revising paragraph (a) to read as

follows:

Sec. 32.16 Changes in accounting standards.

(a) The company's records and accounts shall be adjusted to apply

new accounting standards prescribed by the Financial Accounting

Standards Board or successor authoritative accounting standard-setting

groups, in a manner consistent with generally accepted accounting

principles. The change in an accounting standard will automatically

take effect 90 days after the company informs this Commission of its

intention to follow the new standard, unless the Commission notifies

the company to the contrary. Concurrent with informing this Commission

of its intent to adopt an accounting standards change, the company

shall also file a revenue requirement study for the current year

analyzing the effects of the accounting standards change. Furthermore,

any change subsequently adopted shall be disclosed in annual reports to

this Commission.

* * * * *

4. Section 32.23 is amended by revising paragraph (c) to read as

follows:

Sec. 32.23 Nonregulated activities.

* * * * *

(c) When a nonregulated activity does involve the joint or common

use of assets and resources in the provision of regulated and

nonregulated products and services, carriers shall account for these

activities within accounts prescribed in this system for telephone

company operations. Assets and expenses shall be subdivided in

subsidiary records among amounts solely assignable to nonregulated

activities, amounts solely assignable to regulated activities, and

amounts related to assets and expenses incurred jointly or in common,

which will be allocated between regulated and nonregulated activities.

Carriers shall submit reports identifying regulated and nonregulated

amounts in the manner and at the times prescribed by this Commission.

Nonregulated revenue items not qualifying for incidental treatment as

provided in Sec. 32.4999(l) of this part, shall be recorded in separate

subsidiary record categories of Account 5280, Nonregulated operating

revenue. Amounts assigned or allocated to regulated products or

services shall be subject to part 36 of this chapter.

5. Section 32.2000 is amended by revising paragraph (a)(4) and

removing and reserving paragraph (i) to read as follows:

Sec. 32.2000 Instructions for telecommunications plant accounts.

(a) * * *

(4) The cost of the individual items of equipment, classifiable to

Accounts 2112, Motor vehicles; 2113, Aircraft; 2114, Special purpose

vehicles; 2115, Garage work equipment; 2116, Other work equipment;

2122, Furniture; 2123, Office equipment; 2124, General purpose

computers, costing $2,000 or less or having a life of less than one

year shall be charged to the applicable expense accounts, except for

personal computers falling within Account 2124. Personal computers

classifiable to Account 2124, with a total cost for all components of

$500 or less, shall be charged to the applicable Plant Specific

Operations Expense accounts. If the aggregate investment in the items

is relatively large at the time of acquisition, such amounts shall be

maintained in an applicable material and supplies account until items

are used.

Sec. 32.2000 [Amended]

6. Section 32.2000(b)(4) is removed.

7. Section 32.2000(j) is amended by revising the table entry

``Special Purpose vehicles'' to read ``Tools and other work equipment''

under the heading of Telecommunications Plant In Service (TPIS) and by

removing the entries ``Garage work equipment 2115 and other work

equipment 2116.''

8. Section 32.2003(a) is revised to read as follows:

Sec. 32.2003 Telecommunications plant under construction.

(a) This account shall include the original cost of construction

projects (note also Sec. 32.2000(c)) of this part and the cost of

software development projects that are not yet ready for their intended

use.

* * * * *

9. Section 32.2114 is revised to read as follows:

Sec. 32.2114 Tools and other work equipment.

This account shall include the original cost of special purpose

vehicles and the original cost of tools and equipment used to maintain

special purpose vehicles and items included in Accounts 2112 and 2113.

This account shall also include the original cost of power-operated

equipment, general purpose tools, and other items of work equipment.

Sec. 32.2115 [Removed]

10. Section 32.2115 is removed.

Sec. 32.2116 [Removed]

11. Section 32.2116 is removed.

12. Section 32.2124 is amended by removing and reserving paragraph

(c) and revising paragraph (d) as follows:

Sec. 32.2124 General purpose computers.

* * * * *

(d) This account does not include the cost of computers and their

associated peripheral devices associated with switching, network

signaling, network operations, or other specific telecommunications

plant. Such computers and peripherals shall be classified to the

appropriate switching, network signaling, network expense, or other

plant account.

13. Section 32.2311(d) is revised to read as follows:

Sec. 32.2311 Station apparatus.

* * * * *

(d) Operator head sets and transmitters in central offices and at

private branch exchanges, and test sets such as those used by wire

chiefs, outside plant technicians, and others, shall be included in

Account 2114, Tools and other work equipment, Account 2220, Operator

systems, or Account 2341, Large Private Branch Exchanges, as

appropriate.

* * * * *

14. Section 32.2690(c) is revised to read as follows:

Sec. 32.2690 Intangibles.

* * * * *

(c) The cost of other intangible assets, not including software,

having a life of one year or less shall be charged directly to Account

6564, Amortization Expense--Intangible. Such intangibles acquired at

small cost may also be charged to Account 6564, irrespective of their

term of life. The cost of software having a life of one year or less

shall be charged directly to the applicable expense account with which

the software is associated.

15. Section 32.3500 is amended by revising paragraph (c) and adding

paragraph (d) as follows:

Sec. 32.3500 Accumulated amortization--intangible.

* * * * *

[[Page 50008]]

(c) When any item carried in Account 2690, other than software, is

sold, relinquished, or otherwise retired from service, this account

shall be charged with the cost of the retired item. Remaining amounts

associated with the item shall be debited to Account 7360, Other

Nonoperating Income.

(d) When software that is classified to Account 2690 is sold,

relinquished, or otherwise retired from service, this account shall be

credited, and Account 6564, Amortization expense--intangible, shall be

charged with the unamortized cost of the existing software.

16. Section 32.4999(l) is revised and the table in paragraph (n) is

amended by removing the entry ``Public telephone revenue 5010'' under

the heading Local Network Services Revenues to read as follows:

Sec. 32.4999 General.

* * * * *

(l) Nonregulated revenues. The nonregulated revenue account shall

be used for nonregulated operating revenues when a nonregulated

activity involves the common or joint use of assets or resources in the

provision of regulated and nonregulated products or services as

required in Sec. 32.23(c) of this subpart. Revenues from nontariffed

activities offered incidental to tariffed services may be accounted for

as regulated revenues, provided the activities are outgrowths of

regulated operations and the revenues do not exceed, in the aggregate,

one percent of total revenues for three consecutive years. Such

activities must be listed in the Commission-approved Cost Allocation

Manual for any company required to file a Cost Allocation Manual.

Sec. 32.5010 [Removed]

17. Section 32.5010 is removed.

18. Section 32.5280 is amended by revising paragraph (a) as

follows:

Sec. 32.5280 Nonregulated operating revenue.

(a) This account shall include revenues derived from a nonregulated

activity involving the common or joint use of assets or resources in

the provision of regulated and nonregulated products or services.

* * * * *

19. Section 32.5999 is amended by revising the first sentence in

paragraph (f)(5) and paragraph (h) is amended by revising the table

entry ``Special purpose vehicles expense'' to ``Tools and other work

equipment expense'' and removing the table entries ``Garage work

equipment expense'' and ``Other work equipment expense'' under the

Account title of Income Statement Accounts to read as follows:

Sec. 32.5999 General.

* * * * *

(f) * * *

(5) Clearances. This subsidiary record category shall include

amounts transferred to Construction accounts (see

Sec. 32.2000(c)(2)(iii)), other Plant Specific Operations Expense

accounts and/or Account 3100, Accumulated Depreciation (cost of

removal; see Sec. 32.2000(g)(1)(iii)), as appropriate, from Accounts

6112, Motor Vehicles Expense, 6114, Tools and Other Work Equipment

Expense, 6534, Plant Operations and Administration Expense, and 6535,

Engineering Expense.

* * * * *

20. Section 32.6110 is amended by revising paragraph (a) as

follows:

Sec. 32.6110 Network support expenses.

(a) This account number shall be used by Class A telephone

companies to summarize for reporting purposes the contents of Accounts

6112 through 6114. Class B telephone companies shall use this account

for expenses of the type and character required of Class A companies in

Accounts 6112 through 6114.

* * * * *

21. Section 32.6114 is revised to read as follows:

Sec. 32.6114 Tools and other work equipment expense.

(a) This account shall include costs incurred in connection with

special purpose vehicles, garage work equipment and other work

equipment included in Account 2114, Tools and other work equipment.

This account shall be charged with costs incurred in connection with

the work equipment itself. This account shall also include such costs

as fuel, licenses and inspection fees, washing, repainting and minor

accessories. The costs of using garage work equipment to maintain motor

vehicles shall be charged to Account 6112, Motor vehicles expense. This

account shall not be charged with the costs of operators of special

purpose vehicles and other work equipment. The costs of operators of

this equipment shall be charged to accounts appropriate for the

activities performed.

(b) Credits shall be made to this account for amounts related to

special purpose vehicles and other work equipment transferred to

Construction and/or to other Plant Specific Operations Expense

accounts. These amounts shall be computed on the basis of direct labor

hours. (See also Sec. 32.5999(f)(5).

Sec. 32.6115 [Removed]

22. Section 32.6115 is removed.

Sec. 32.6116 [Removed]

23. Section 32.6116 is removed.

24. Section 32.6124 revised to read as follows:

Sec. 32.6124 General purpose computers expense.

This account shall include the costs of personnel whose principal

job is the physical operation of general purpose computers and the

maintenance of operating systems. This excludes the cost of preparation

of input data or the use of outputs which are chargeable to the

accounts appropriate for the activities being performed. Also excluded

are costs incurred in planning and maintaining application systems and

databases for general purpose computers. (See also Sec. 32.6724,

Information management.) Separately metered electricity for general

purpose computers shall also be included in this account.

25. Section 32.6724 is revised to read as follows:

Sec. 32.6724 Information management.

This account shall include costs incurred in planning and

maintaining application systems and databases for general purpose

computers.

26. Section 32.9000 is amended by adding the following definition

in alphabetical order.

Sec. 32.9000 Glossary of terms.

* * * * *

Mid-sized incumbent local exchange carrier is a carrier whose

operating revenue equals or exceeds the indexed revenue threshold and

whose revenue when aggregated with the revenues of any local exchange

carrier that it controls, is controlled by, or with which it is under

common control is less than $7 billion. Each of these local exchange

carriers would be eligible for Class B accounting, except as noted in

Sec. 32.11(b) and (d), even if the annual operating revenue of any

individual local exchange carrier exceeds the indexed revenue threshold

(see definition for indexed revenue threshold in this section).

* * * * *

PART 64--MISCELLANEOUS RULES RELATING TO COMMON CARRIERS

27. The authority citation for part 64 continues to read as

follows:

Authority: 47 U.S.C. 10, 201, 218, 226, 228, 332, unless

otherwise noted.

[[Page 50009]]

28. Section 64.904 is amended by revising paragraph (a) and by

redesignating paragraph (b) as paragraph (c) and a new paragraph (b) is

added to read as follows:

Sec. 64.904 Independent audits.

(a) With the exception of mid-sized local exchange carriers each

local exchange carrier required to file a cost allocation manual, by

virtue of having annual operating revenues that equal or exceed the

indexed revenue threshold for a given year or by order by the

Commission, shall have an audit performed by an independent auditor on

an annual basis, with the initial audit performed in the calendar year

after the carrier is first required to file a cost allocation manual.

The audit shall provide a positive opinion on whether the applicable

data shown in the carrier's annual report required by Sec. 43.21(e)(2)

of this chapter present fairly, in all material respects, the

information of the carrier required to be set forth therein in

accordance with the carrier's cost allocation manual, the Commission's

Joint Cost Orders issued in conjunction with CC Docket No. 86-111 and

the Commission's Accounting Safeguards proceeding in CC Docket No. 96-

150 and the Commission's rules and regulations including Secs. 32.23

and 32.27 of this chapter and Secs. 64.901 and 64.903 in force as of

the date of the auditor's report. The audit shall be conducted in

accordance with generally accepted auditing standards, except as

otherwise directed by the Chief, Common Carrier Bureau.

(b) A mid-sized incumbent local exchange carrier, as defined in

Sec. 32.9000, required to file a cost allocation manual, shall have an

attest engagement performed by an independent auditor every two years

covering the two year period, with the initial engagement performed in

the calendar year after the carrier is first required to file a cost

allocation manual. The attest engagement shall be an examination

engagement and shall provide a written communication that expresses an

opinion that the results reported pursuant to Sec. 43.21(e)(2) of this

chapter are an accurate application of the Commission's Joint Cost

orders issued in conjunction with CC Docket No. 86-111 and the

Commission's Accounting Safeguards proceeding in CC Docket No. 96-150

and the Commission's rules and regulations including Secs. 32.23 and

32.27 of this chapter and Secs. 64.901 and 64.903 in force as of the

date of the auditor's written report. The written communication shall

also express an opinion that the cost methodologies in place are in

conformance with the cost allocation manual filed with the Commission.

The attest engagement shall be conducted in accordance with the

attestation standards established by the American Institute of

Certified Public Accountants, except as otherwise directed by the

Chief, Common Carrier Bureau.

* * * * *

[FR Doc. 99-23304 Filed 9-14-99; 8:45 am]

BILLING CODE 6712-01-P