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X^?2PkQ^P ?xxxX9mXx6X@QX@(r:RC;XxXR>P PE3QXP  s;VC5X!XVQ p",QX(tU#1(#X.h1>P PE3QhP(uG)!X,)>P PE3Q,Pf:RC;XQSXR>P xQXX"5@^!.22YM!!!2Y!!!!2222222222!!dYd,YH?DJ?;HJ!'F?ZJH9HB5?JH^HHA!!!222,2,2,!222M2222%'22H22,,2,d!22222)222H,H,H,H,H,YBD,?,?,?,?,!!!!J2H2H2H2H2J2J2J2J2H2H,J2H2H2H2J292H2H2H2D,D2D2?2?2?2H2H2HH2H2J2J2222222!22F2??)J2J2H2YHB%B)5'5'N2!22!,))22222YY2#222Y#!!442Y22=Y!4x!#t!Y77YYc<h^s#^IxP7^P#IN REPLY REFER TO: ?[4(#\#x6X@8;9mX@#  [#4#Xw PE37xXP# ` `  hhCqppRAO Letter 25 ` `  hhCqppDA 95703 ` `  hhCqppAdopted: March 31, 1995 ` `  hhCqppReleased: April 3, 1995    Responsible Accounting Officer:  \=4Re:X Accounting and Reporting Requirements for Video Dialtone Service (#  \4 I.XIntroduction (#  "This letter provides guidance on video dialtone accounting to local exchange carriers  [4 xg("LECs") that receive Section 214 authorizations to provide video dialtone service.i wQE'ԍ This includes video dialtone trials and commercial applications.i It sets forth  xIspecific guidance on the requirements for accounting classifications, subsidiary records, and  [4amendments to cost allocation manuals ("CAMs") for LECs that provide video dialtone service._XX wQ' xԍ LECs with annual operating revenues of $100 million or more are required to file a CAM with the  xCommission. CAMs contain information regarding the carriers' allocation of costs between regulated and  wQ7'nonregulated activities. See 47 C.F.R.  64.903._  \4    \p4II.XBackground(#  [Y4  "In 1991 and 1992, the Commission adopted policies and rules to permit LECs to assume  [+4 x@an expanded role in the provision of video services in their telephone service areas.+x wQT ' xЍ See Telephone CompanyCable Television CrossOwnership Rules, Section 63.5463.58, Further Notice of  wQ!' xProposed Rulemaking, First Report and Order and Second Further Notice of Inquiry, 7 FCC Rcd 300 (1991) (First  wQ!' xReport and Order), recon., 7 FCC Rcd 5069 (1992), aff'd, National Cable Television Association v FCC, No. 91 wQ"' xk1649 (D.C. Cir. Aug. 26, 1994) (NCTA v. FCC); Telephone CompanyCable Television CrossOwnership Rules,  wQt#' xtSections 63.5463.58, Second Report and Order, Recommendation to Congress, and Second Further Notice of  wQ<$' xProposed Rulemaking, 7 FCC Rcd 5781 (1992) (Second Report and Order), aff'd, Memorandum Opinion and Order  wQ%' xon Reconsideration and Third Further Notice of Proposed Rulemaking, 10 FCC Rcd 244 (1994) ("VDT Recon  wQ%' xOrder"), appeal pending sub nom. Mankato Citizens Telephone Company v. FCC, No. 921404 (D.C. Cir. filed September 9, 1992). In its 1991  x@  and 1992 Orders, the Commission established a regulatory framework for telephone companies  [4 xcto provide video service on a common carrier basis and provide various related nonregulated"H 0*0*0*+"  xZservices consistent with the crossownership restrictions imposed by the Cable Communications  [4Policy Act of 1984 ("1984 Cable Act").) wQb' xЍ Cable Communications Policy Act of 1984, Pub. L. No. 98549, 613(b), 98 Stat. 2779 (codified at 47 U.S.C. 533(b)). This regulatory framework is called "video dialtone."  [4 "lOn November 7, 1994, the Commission issued the Video Dialtone Reconsideration Order  [4 x("VDT Recon Order"). In that Order, the Commission reaffirmed its basic video dialtone  [4 xframework adopted in the Second Report and Order, and, among other things, set forth  xaccounting and reporting requirements for LECs that offer video dialtone service. The  xCommission required carriers offering video dialtone to establish two sets of subsidiary  xIaccounting records: one to capture the investment, expense and revenue wholly dedicated to  xvideo dialtone; the other to capture the investment, expense and revenue shared between video  [ 4 xdialtone and other services.L ) wQ 'ԍ VDT Recon Order at para. 173.L Wholly dedicated refers to investment, expense and revenue related  x_exclusively to providing video dialtone service. Shared refers to investment, expense and  [ 4revenue related to providing video dialtone and other services on a joint or common basiss ) wQM'ԍ By "other services" we mean telephone and other services provided by LECs.s.  [ 4  [ 4 "The VDT Recon Order requires LECs to file a summary of these subsidiary accounting  xrecords with the Commission on a quarterly basis. The Commission delegated authority to the  xCommon Carrier Bureau to define the content and format of both the subsidiary accounting  [y4 xrecords and the quarterly reports, and to provide accounting guidance where necessary for  [b4 xVuniform classification of video dialtone investment, expense and revenue.Xb@) wQS' xoЍ In this Responsible Accounting Officer ("RAO") Letter, we only address the accounting classifications, format  x.and content requirements for LEC subsidiary records and CAM filing requirements. We plan to address the format and content for LEC video dialtone quarterly reports in a separate notice and comment proceeding. Finally, the VDT  [K4 xRecon Order required LECs to file revisions to their CAMs to reflect the provision of video dialtone service.  \4 III. Accounting Classification  [4 " The Commission did not change its Part 32, Uniform System of Accounts for  [4 xTelecommunications Companies ("USOA") in the VDT Recon Order, but it did require carriers  xto establish subsidiary accounting records, consistent with that system, in order to isolate video  [4 xdialtone costs and revenues from other LEC costs and revenues.L` ) wQ#'ԍ VDT Recon Order at para. 173.L We therefore require LECs  x[to maintain in subsidiary records, by USOA accounts, all wholly dedicated and shared  xinvestment, expense, and revenue related to providing video dialtone service. Finally, consistent  [N4 x_with Part 32 of the Commission's rules, Class A companies shall use Class A detail level"N 0*(("  xlaccounts and Class B companies shall use Class B detail level accounts in recording video  [4dialtone investment, expense and revenue in subsidiary records.> ) wQb'ԍ 47 C.F.R.  32.11.>  \4 ` ` A. Investment Classifications  [4 " For accounting classification purposes, video dialtone investment shall include all plant  x3wholly dedicated to video dialtone or shared between video dialtone and other services. Wholly  xdedicated investment is defined as investment that is used exclusively for the provision of video  x dialtone service. Shared investment is defined as investment that is common to, or used jointly  [24 xto provide video dialtone and other services. Under the VDT Recon Order, LECs must  [ 4 xseparately track both wholly dedicated and shared video dialtone investment. This requirement  xcovers both new investment purchased for the provision of video dialtone and existing plant  xconverted to video dialtone use. To track net investment, subsidiary records must identify, for  xeach plant account, all accumulated depreciation, amortization and deferred income taxes associated with wholly dedicated and shared video dialtone investment.  "In addition, the Commission conditioned LEC authorizations to provide video dialtone  xservice on a requirement that LECs keep subsidiary records to identify, by Part 32 plant account,  [c4 xthe cost of plant that is replaced or retired due to either the deployment of video dialtone plant  xIor the deployment of fiber optic network upgrades as mandated under state authority in study  [54areas where VDT deployment occurs. 5X) wQ>' xkЍ See, e.g., Application of New Jersey Bell Telephone Company for Authority pursuant to Section 214 of the Communications Act of 1934, 9 FCC Rcd 3677, 3690 at para. 72 (1994).  \4 ` ` B. Expense Classification  "Video dialtone expense shall include all expenses identified with the exclusive or shared  x<provision of video dialtone service. In addition to ongoing expenses incurred in the provision  xVof video dialtone service, these expenses shall include all expenses incurred during the initial  xdevelopment and deployment stages of video dialtone, such as research and development expense and legal services expense.  "In order to implement the Commission's requirement that the Common Carrier Bureau  xensure that LEC proposed expense allocations and overhead loadings associated with video  xdialtone tariff filing are reasonable, we will require separate subsidiary records for dedicated and  [ 4 xEshared video dialtone expenses.L ) wQl$'ԍ VDT Recon Order at para. 221.L Carriers must also separately identify depreciation and  x amortization expense associated with wholly dedicated and shared video dialtone investment by each Part 32 plant account. " @ 0*((!"Ԍ "_We recognize that some of the expenses that fall into the shared category may be the type  x@of expenses that are tracked by function codes and some may be the type that are not tracked by  xfunction codes. Expenses not tracked by function codes are support functions, such as network  xgsupport, general support, corporate operations and general administrative. Expenses tracked by  [4 xfunction codes shall be identified as video dialtone expense using the tracking mechanism. ) wQ' xHЍ All employees that incur video dialtone costs must employ existing time reporting procedures using some type  xof function codes. For example, carriers that currently utilize time reporting tracking mechanisms in order to  xidentify regulated and nonregulated activities of support functions, such as legal services, must continue to use  xsimilar accounting tracking mechanisms for identifying video dialtone expenses. In addition, expenses incurred or  xservices provided by LEC affiliates for LEC provision of video dialtone service must be identified with unique function codes that indicate video dialtone expense.   xcExpenses not tracked by function codes shall be so identified and shall be classified as shared  x/video dialtone expenses. These expenses will be subject to overhead allocation for the video dialtone tariff filing.  [H4 ` ` Đ \14  IV. Subsidiary Accounting Records  [ 4 "As required by the VDT Recon Order, LECs shall create subsidiary accounting records  xtthat identify investment and expense wholly dedicated to video dialtone, or shared between video  [ 4 xdialtone and other services.3  @) wQ' xԍ In the VDT Recon Order, the Commission determined that it was not necessary to make permanent changes  xto the Commission's USOA for LEC provision of video dialtone. The Commission, however, required that LECs  x|offering video dialtone service create subsidiary records to capture wholly dedicated and shared video dialtone costs.  wQ' x^See VDT Recon Order at para 173. Under the Commission's rules, subsidiary records categories are defined as  x"...segregations of certain regulated costs, expenses and revenues which must be maintained and are subject to  wQ'specific reporting requirements of this Commission." See 47 C.F.R. 32.9000. 3 Carriers shall ensure that subsidiary accounting record entries are  xreadily identifiable by account title, account number, subaccount identification, and study area.  xThese records shall also include all initial and ongoing transactions that directly impact  xEinvestment, expense and revenue accounts. In order to enhance our ability to verify LEC  xhcompliance with the Commission's established video dialtone accounting and reporting  xrequirements, carriers shall be required to have internal accounting controls and a complete audit  x}trail for each subsidiary account record. Subsidiary accounting records must be reconcilable  xwith total amounts reported in the Part 32 accounts. In addition, LECs shall maintain these  xyrecords until such time as the Commission decides otherwise. These requirements do not  x@preclude carriers from creating subaccounts, if necessary, to capture data necessary to provide subsidiary record information.  "Consistent with the Commission's requirements on accounting classifications and  xreporting, carriers shall capture all costs incurred for the provision of video dialtone, including  xthe preliminary planning, and research and development expenses incurred prior to the  xpCommission's approval of Section 214 application. Upon receiving Section 214 authorization  xfrom the Commission, carriers must establish subsidiary accounting records and report the results of these records to the Commission on a quarterly basis. "N 0*(("Ԍ "ԙSubsidiary accounting records for investment accounts must include, but shall not be  xlimited to, all telephone plant in service accounts, associated accumulated depreciation, deferred  xtaxes and any associated land and support assets which contain costs related to the provision of  [4 xcvideo dialtone service. Subsidiary accounting records for video dialtone investment accounts  xmust also identify the investment's location and whether that investment is wholly dedicated to  xvideo dialtone or shared between video dialtone and other services. LECs shall maintain  xsubsidiary accounting records so that the content of these records can be traced from the  xcontinuing property records ("CPRs") through the accounting system to the general ledger and to the equipment's physical location.  "[Carriers shall use tracking codes that allow video dialtone expense to be extracted and  xsummarized from the Part 32 USOA expense accounts. Carriers may create tracking codes that  x}are compatible with their existing internal accounting systems. Carriers may use either field  xreporting codes, job function codes, location codes, or any other identification codes that permits such expenses to be audited.  "Subsidiary accounting records for expense shall include all plantspecific operations  xexpense, plantnonspecific operations expense, customer operations expense, and corporate  xoperations expense accounts that contain any costs related to the provision of video dialtone  xservice. Subsidiary accounting records for video dialtone should separately identify revenues  [44 xZfrom intrastate and interstate tariffs.4) wQ' xԍ Carriers shall record revenues in Part 32 accounts consistent with the category of video dialtone service set  wQu'forth in a carrier's tariff provisions. See 47 C.F.R. 32.4999. Carriers shall identify by subsidiary record category any nonregulated video dialtone revenues.  \4 V.XCost Allocation Manual Filing Requirements (#  "#LECs offering video dialtone service must amend their CAMs to reflect both their regulated and nonregulated video dialtone service as follows:  [|4 "NLECs are required, pursuant to the VDT Recon Order, to amend their CAMs prior to  [e4 xtproviding nonregulated products or services related to video dialtone.Qe ) wQ6'ԍ VDT Recon Order at 330, para. 181.Q We require carriers that  xreceive Section 214 authorizations to provide video dialtone service to implement these  xrequirements by revising Section II (Nonregulated Activities) of their CAMs to include a detailed description of proposed nonregulated video dialtone services that they seek to provide.  "CAM revisions must include a statement indicating whether nonregulated video dialtone  xservice is provided through a standalone video dialtone system, or a system shared with  xytelephony. Carriers must also establish a new subsection in Section II of their CAMs that  xidentifies all costs incurred in the planning and development of nonregulated activities provided  xyin conjunction with video dialtone service. LECs that currently include enhanced services""0*((""  xplanning in their CAMs as a nonregulated activity associated with their provision of telephone  x service, shall be required to amend their CAMs to specifically identify any planning associated  xwith the provision of nonregulated video dialtone service. In addition, LECs shall amend their  x existing "Nonregulated Services Matrix"which shows nonregulated products/services and the  x<USOA accounts associated with these nonregulated products/servicesto list each individual USOA account affected by the provision of any nonregulated video dialtone activity.  "LECs must also amend Section VI (Cost Apportionment Tables) of their CAMs, so that  xexisting cost allocation tables include apportionment procedures for investment and expense used  xin the provision of regulated and nonregulated video dialtone service. We require LECs to  xgjustify and/or amend, if necessary, their existing cost apportionment methodology and allocators  xufor their provision of video dialtone service. LECs that choose not to modify their cost  [ 4 xgapportionment methodology or allocators for video dialtone, must also explain why their existing  xmethodology or allocation factors are still valid for their regulated, nonregulated and common  xgcost pools. In addition, because the allocation for nonregulated usage of common network plant  xis determined by a threeyear forecast of investment usage, LECs shall revise their forecast usage  xallocator to reflect accurately the provision of any nonregulated video dialtone service offered  xon common network plant. Moreover, carriers that currently do not provide nonregulated  xservices that use common network plant, but "reasonably anticipate" offering such services  xduring the plant's threeyear forecast usage period, shall include revised apportionment  xprocedures for the nonregulated usage of network plant in the Section VI, Cost Apportionment  [4Tables.) wQ' xԍ See American Telephone & Telegraph Company's Permanent Cost Allocation Manual for the Separation of Regulated and Nonregulated Costs, 4 FCC Rcd 6930 at para. 67 (1989).  "Finally, we require LECs to amend their CAMs to identify any affiliate transactions  xrelated to their provision of video dialtone service. LECs must amend Section V (Affiliate  x3Transactions) of their CAMs by listing all transactions with affiliates that involve video dialtone  xZservice. This listing must contain a brief description of the nature, terms and frequency of each  xtransaction. LECs that currently list transactions involving affiliates providing video related  xservices in existing CAMs, must amend such CAMs to indicate which, if any, specific transactions relate to the provision of video dialtone service.  [N4  [74 "As required by the VDT Recon Order, LECs shall file CAM revisions within thirty days  xafter the effective date of their Section 214 authorization and at least sixty days prior to providing nonregulated products or services related to video dialtone.  \4 VI. Accounting Consistency/Uniformity Issues  [!4 "  In reviewing various LEC Section 214 applications for video dialtone service, we have  xfound certain inconsistencies in the accounting classification of asynchronous transfer mode  x("ATM") equipment. LECs have described ATM equipment as providing the basic connection  xbetween the various video servers and various destinations. Some LECs have provisionally"h$ 0*(($"  xclassified ATM equipment in Account 2212, Digital electronic switching; other LECs have  [4 x+classified the same type of equipment in Account 2232, Circuit equipment. Based on our  x<analysis of video dialtone ATM equipment and LEC descriptions of the functional purpose of  xsuch equipment, we find that, although certain carriers have classified ATM equipment as  x_switches, this equipment does not perform the functions performed by traditional network  [4 xswitches.@) wQ' xԍ The criteria for switch classification are met if equipment performs some, but not necessarily all, of the  wQ' xMfollowing basic switching functions: 1) Attending monitors for offhook signals; 2) Control determines call  wQ' xdestination and assigns call to available line or trunk; 3) Busy testing determines whether the called line/trunk is  wQ^ ' xHbusy; 4) Information receivingĩ receives control and busy test results; 5) Information transmitting transmits control  wQ& ' xand busy test results to tell the alerting and interconnection functions whether to complete the call; 6) Interconnection  wQ ' xxԩ connects subscriber line to subscriber line or subscriber line to trunk; 7) Alerting rings the called subscriber's  wQ ' xline or other signalling means if the call is destined for another exchange; 8) Supervisingĩ monitors for call  wQ~ 'termination so the line can be released. See Responsible Accounting Officer Letter 21, 7 FCC Rcd 6075 (1992). We find based on the data before us, that ATM video dialtone equipment does not,  xat this stage of LEC video dialtone deployment, meet established criteria for classification as a  xgswitch. Therefore, carriers shall classify ATM equipment as circuit equipment and record it in  xAccount 2232, Circuit equipment. Our decision regarding the accounting classification for video  xdialtone ATM equipment does not in anyway preclude LECs from demonstrating at a future date any functional change that should alter this classification.  "8Finally, we intend to amend RAO Letter No. 6 shortly to incorporate video dialtone plant  [ 4investment within our existing itemized list of telecommunications plant in service.z ) wQV'ԍ See Revised Responsible Accounting Officer Letter 6, 4 FCC Rcd 1965 (1989).z  [ 4 "' This letter is issued pursuant to authority delegated under 0.291 of the Commission's  x<Rules, 47 C.F.R. 0.291. Applications for review under Section 1.115 of the Commission's  [y4 xRules, 47 C.F.R. 1.115, must be filed within 30 days of the date of this letter. See 47 C.F.R.  [b41.4(b)(2).  "_If you have any questions, please contact Kenneth Ackerman or Daniel Gonzalez at (202) 4180810. ` `  hhCqSincerely, ` `  hhCqKenneth P. Moran ` `  hhCqChief, Accounting and Audits Division ` `  hhCqCommon Carrier Bureau