The paper has been prepared in consultation with the Department of Telecommunication (DoT), Department of Telecom Services (DTS), MTNL, VSNL, Association of Basic Telecom Operators (ABTO), and Cellular Operators Association of India (COAI).

This paper is expected to enhance the understanding and commitment of service providers in developing capabilities in their accounting systems, which would generate more accurate information of dis-aggregated activities for regulatory and management purposes to analyze the costs, revenues, and capital employed.

However, the paper specifies that "the accounting practices for compilation of separate accounts are meant for regulatory reporting and are not intended to impinge on the prevailing guidelines for statutory financial reporting."As per the paper, the financial reporting at the corporate level presents aggregate information, which may not provide the regulator with the details required for regulatory purposes such as measuring financial performance of products and services, monitoring the returns of licencees on products and services regulated with price ceilings, and identifying cross subsidization practices, which influence the profitability of any segment.

The paper presents costing concepts based on two systems namely, Broad Financial Category Costing (BFCC) and Service Specific Costing (SSC). According to the paper, these concepts are equally applicable to the incumbent (Department of Telecom Services/ MTNL) as well as to the new entrants in basic/cellular mobile service.

BFCC provides a framework to identify sources and recipients of cross subsidies among broad categories of existing services (particularly in monopoly categories). SSC provides a framework for comparing alternative courses of action in order to determine the one that is most attractive from an economic point of view. It can also provide useful inputs for decision-making connected with significant changes in the pricing of an existing service.

The TRAI Act prescribes in Sections 12(3) and 35(2)(d), that every service provider maintain such books of accounts or other documents. Last year, the TRAI had carried out an elaborate exercise on tariff re-balancing, based on cost data for fixing tariffs. This exercise culminated in the release of the Telecommunication Tariff Order 1999.

According to TRAI, during the tariff re-balancing exercise, it was felt that cost allocations for different services in an integrated services network is quite a difficult task. Lack of source-wise unbundled cost data proved to be major constraint in determining the cost of service.

The Accounting Separation exercise would also help the regulator in identifying the instances of cross-subsidization of services and strengthen the TRAI's capabilities to provide regulatory supervision in an increasingly competitive telecom market, thereby enabling the Authority to make regulatory decision based on accurate cost data.

The exercise, therefore, has immense value for development and growth of the telecom sector. Failure to design appropriate accounting procedures can often turn out to be key reasons for not realizing the potential gains of restructuring the sector by opening it up to competition.