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Telecom Public Notice
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Ottawa, 7 September 1988
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Telecom Public Notice CRTC 1988-44
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ACCOUNTING FOR SWITCHING MACHINE SOFTWARE EXPENDITURES
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In British Columbia Telephone Company - 1987 Construction Program Review, Telecom Decision CRTC 88-12, 19 August 1988, the Commission noted that software expenditures are becoming an increasingly influential factor in the decision-making process. There are significant changes in service offerings and operational switching capabilities which are based on software, rather than hardware. Accordingly, the Commission stated its intention to initiate a public process involving Bell Canada, British Columbia Telephone Company, CNCP Telecommunications, Northwestel Inc., Teleglobe Canada Inc., Terra Nova Telecommunications Inc. and Telesat Canada (the carriers) to review the current accounting practices relating to software expenditures, focusing particularly on whether such expenditures should be capitalized or expensed. In the first phase of the review, initiated hereby, the Commission will limit its examination to switching machine software.
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In Inquiry into Telecommunications Carriers' Costing and Accounting Procedures Phase I: Accounting and Financial Matters, Telecom Decision CRTC 78-1, 13 January 1978 (Decision 78-1) and Inquiry into Telecommunications Carriers' Costing and Accounting Procedures, Phase I: Accounting and Financial Matters, Revision to Certain Directives Contained in Telecom Decision CRTC 78-1, Telecom Decision CRTC 79-9, 8 May 1979 (Decision 79-9), the Commission set out certain regulatory directives regarding depreciation and accounting practices.
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Generally, expenditures are capitalized if they have some future value to the company in generating revenue. Assets are then depreciated over their useful life in order to properly match costs with revenues for each period. In Decision 78-1, the two objectives of depreciation accounting were identified as follows:
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i) to determine the expenses attributable to each year's operation; and
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ii) to recover the capital invested in depreciable plant over its useful life.
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In Bell Canada, General Increase in Rates, Telecom Decision CRTC 81-15, 28 September 1981 (Decision 81-15), the Commission dealt directly with the accounting treatment of switching machine software costs. That decision states:
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The Commission does not accept Bell's method of expensing initial applications software costs for switching machines and directs that, effective 1 January 1982, these costs be capitalized and depreciated over the service life of the switch itself.
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The other carriers have adopted approaches similar to that established for Bell in Decision 81-15. Some of these carriers have chosen to define initial software costs as those costs associated with the software purchased at the same time as the hardware and, accordingly, have expensed all subsequent purchases of software. Others have taken a broader view and capitalized subsequent purchases of software that provides new service offerings or enhances operational capabilities. The Commission invites public comment in relation to the above-noted issues and announces the following procedure.
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1. The carriers shall be parties to this proceeding.
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2. Any person wishing to participate in this proceeding (interested party) should file a notice of intention to participate with the Commission on or before 30 September 1988 and serve a copy on each carrier.
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3. On or before 14 October 1988, each carrier shall file the following with the Commission, serving a copy on all other interested parties:
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(a) complete details of its present accounting procedures for switching machine software (both initial and subsequent expenditures);
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(b) justification for these procedures; and
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(c) comments with respect to the appropriate treatment of other switching machine software expenditures, including the possible capitalizing of expenditures incurred to provide extensions, new service offerings, or enhanced operational capabilities.
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4. Interested parties may address interrogatories to the carriers. These interrogatories must be filed with the Commission and served on the carriers on or before 4 November 1988.
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5. The carriers' written responses to these interrogatories must be filed with the Commission and served on all parties on or before 25 November 1988.
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6. Comments by interested parties must be filed with the Commission and served on the carriers on or before 16 December 1988.
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7. The carriers' replies to these comments must be filed with the Commission and served on all parties on or before 13 January 1989.
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8. Where a document is to be filed or served by a specific date, the document must be actually received, not merely mailed, by that date.
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9. The addresses to be used in connection with this proceeding are:
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Mr. Fernand Bélisle
Secretary General
CRTC
Ottawa, Ontario
K1A 0N2
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Mrs. Tannis Yankewicz
Director General
Regulatory Matters
Bell Canada
25 Eddy Street
4th Floor
Hull, Quebec
J8Y 6N4
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Ms. Dorothy E. Byrne
Director
Revenue Requirements
British Columbia Telephone Company
3777 Kingsway
Burnaby, B.C.
V5H 3Z7
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Mr. A.G. Duncan
Director,
Regulatory Matters
CNCP Telecommunications
3300 Bloor Street West
Suite 1200
West Tower
Toronto, Ontario
M8X 2W9
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Mr. J.M. Williamson
Director Marketing
Northwestel Inc.
P.O. Bag 2727
301 Lambert Street
Whitehorse, Y.T.
Y1A 4Y4
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Mr. Jules Lemay
Director
Regulatory and Corporate Analysis
Corporate Affairs Group
Teleglobe Canada
680 Sherbrooke Street West
Montréal, Québec
H3A 2S4
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Mr. J.H. Clarke
Director Marketing
Terra Nova Telecommunications Inc.
P.O. Box 3000 3,
Terra Nova Drive
Gander, Newfoundland
A1V 2K6
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Mr. T. Moss
Director
Regulatory Matters
Telesat Canada
333 River Road
Ottawa, Ontario
K1L 8B9
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Fernand Bélisle
Secretary General
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