Snippettes from Salomon Smith Barney Tuesday, September 07, 1999
Dark Fiber Accounting Change a Non-Issue
Salomon Smith Barney
Tuesday, September 07, 1999
.....
--SUMMARY:----Telecommunications Services
The Financial Accounting Standards Board (FASB) recently released an
opinion that will impact the way fiber companies can recognize dark fiber
sales. The key point, though, is that this is ultimately a non-event that
does not impact valuations.
Most dark fiber sales revenue will now have to be amortized over a
20-year, life rather than booked up-front on a percentage of completion
basis. This will affect future booked revenue and booked earnings, but
will not impact historical results and will not impact cash flow. Since
there is no impact on cash flow, there is absolutely no impact on
valuation. This is because these companies are valued on a dcf basis and
this standard does not affect cash flow.
MECHANICS
The mechanics of this change are straight forward. When title to the
fiber is not transferred, revenues from dark fiber sales and conduit
sales will have to be recognized over term of the IRU or the life of the
asset. This asset life is generally considered to be 20 years, which is
also generally the term of the IRU. So, when a sale occurs, the cash is
received, as stipulated in the contract and appropriate taxes are paid
(all just as before). A liability is then set up on the balance sheet
entitled something along the lines of "Deferred dark-fiber sales." The
revenue is then recognized over the assumed life of the asset (generally
20 years) and the liability is marked down accordingly. Note, there is no
cash impact.
When title is transferred, as is the case with Global Crossing undersea
cable, for example, revenue is booked as with any other sale (i.e., there
is no change).
SPECIFIC IMPACTS ON COMPANIES IN OUR UNIVERSE
(Current method used to account for dark fiber sales and expected impact
on accounting.)
Level 3
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Current Method: Cost Sharing for INTERNEXT.
Impact: Positive impact to revenues in changing from cost sharing to
deferred revenue recognition.
....
Metromedia Fiber Network
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Current: Recognizes revenues up-front for IRU sales (on percentage of
completion method).
Impact: Possible impact to reported revenues and earnings going forward,
although no impact to cash flow or DCF valuation.
Global Crossing
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Current Method for Undersea Fiber Cable: Recognize revenue up-front as
transfer of title occurs when the customer is ready to take control of
the undersea circuit and the cable is ready for service.
Current Method for Terrestrial Cable: Recognize revenues over the life of
the contract consistent with recent FASB interpretation.
Impact: No change expected.
........
NET/NET: This is purely a revenue recognition issue. There is no impact
on actual cash flow or actual sales, and absolutely no impact on
valuation. We reiterate our strongly positive view on the sector and
would take advantage of any market uncertainty surrounding this issue to
increase positions.
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Salomon Smith Barney is a U.S. registered broker-dealer. It is a member
of Citigroup Inc. and is affiliated with Citibank, N.A. and its
subsidiaries and branches worldwide (collectively "Citibank"). ....
Investors should obtain individual financial
advice based on their own particular circumstances before making an
investment decision on the basis of the recommendations in this report.
.......
Salomon Smith Barney Inc., 1999. All rights reserved. Any
unauthorized use, duplication or disclosure is prohibited by law and
will result in prosecution.
(i left out some boring parts (indicated by .....) so they won't send me to jail for posting the report.) |
