Eligible Expenses

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On March 23, 2018, the Federal Communications Commission (FCC) issued Order FCC 18-29—Report and Order, Third Order on Reconsideration, and Notice of Proposed Rulemaking—that contains several changes to the Rate-of-Return Reform Order. One notable change is a revision of which expenses are eligible for recovery in high-cost Universal Service Fund (USF) support and interstate ratemaking (Settlements), which went into effect May 31, 2018.

The FCC’s intent is to prevent expenses that aren’t specifically related to the “provision, maintenance, and upgrading of facilities and services” from being included for eligibility and therefore receiving recovery in USF and Settlements. Some expenses the FCC included were never allowed in recovery, while others are new.

The following table summarizes the expenses the FCC targeted:

 

Expense

USF

Settlements

Personal travel

X

X

Personal housing

X

X

Child care

X

X

Gifts (not included in taxable compensation)

X

X

Entertainment/meals (excluding business travel)

X

X

Food services: cafeterias & lunch rooms

X

Ok, if customary & reasonable

Political contributions

X

X

Charitable donations

X

Ok, if customary & reasonable

Scholarships

X

Ok, if customary & reasonable

Memberships/dues: nontrade, nonprofessional

X

X

Memberships/dues: trade & professional

X

Ok, if customary & reasonable

Sponsorships of community events/conferences

X

Ok, if customary & reasonable

Penalties/fines (statutory/regulatory)

X

X

Penalties/late fees (debt)

X

X

Corporate image advertising

X

Not specifically mentioned

Corporate luxury goods*

X

X

*Artwork, aircraft, watercraft, off-road vehicles, kitchen appliances, entertainment items, etc., are excluded unless considered a valid business need, such as only such craft can reach facilities.

In the Order, the FCC reminds carriers that failing to keep the FCC-prescribed accounts, records and memoranda is a violation that may subject a company to forfeiture liabilities in the amount of $6,000 for each day of the continuance of each violation. Thus, disallowing expenses for recovery doesn’t remove a carrier’s responsibility to record the disallowed expenses in accordance with 47 CFR Part 32, Uniform System of Accounts for Telecommunications Companies.

Cost consultants are limited when making reclassifications in the preparation of annual cost studies. When possible, National Exchange Carrier Association has indicated its preference is for the audited financials to be accurate and to avoid a cost study reclassification to correct improperly recorded expenses. Carriers will need to track the disallowed expenses or record the disallowed expenses in new accounts. Our recommendation is to create new subaccounts for accounts currently containing both allowed and disallowed expenses. For example, if a carrier has one marketing expense account, it should create a new subaccount to house all of the disallowed marketing expenses. Further, we recommend the same subaccount suffix be used consistently. For accounts containing only disallowed expenses, a carrier can either leave the account as is or add the suffix.

If you have questions about expenses your company has incurred or how to implement the exclusion of these expenses from your USF or Settlements recovery, contact Jamie, Mike or your trusted BKD advisor.

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