FEDERAL COMMUNICATIONS COMMISSION

FACT SHEET

November 1996

Q1: Under the Commission's current rules, are the rental payments paid by cable operators for customer equipment under a lease from a third party included in the development of equipment rates?

A1: The Commission's current rules provide that all direct and indirect costs associated with customer equipment may be included in the charges for the installation or lease of such equipment. Consistent with these rules, the rental expense of leasing from a third party by a cable operator should be included in the development of equipment rates. The FCC Form 1205 requirements, however, do not directly address the reporting of expenditures by operators for equipment leased to customers by the operator but which the operator obtains from a third party under a lease agreement.

Q2: What is the correct treatment for customer equipment obtained by the cable operator under a capital lease agreement from a third party?

A2: Under a capital or financing lease, ownership is actually or effectively passed to the lessee by the terms of the lease. In such case the property is considered, for accounting purposes, to be an asset of the lessee and is recorded as such. The property is depreciated in the same manner as other equipment purchased with any other form of financing. The present value of the lease payments is recorded as debt, and the payments are not recorded as periodic lease rental expense but rather as payment of debt principal and interest expense. Under this type of arrangement, the cost of such leased property would be recorded in Schedule C of FCC Form 1205, along with other consumer equipment owned.

Q3: What is the correct treatment for customer equipment obtained by the cable operator under an operating lease agreement from a third party?

A3: Under an operating lease, generally the lease term does not exceed 75% of the equipment's useful life and the total payments are less than 90% of the equipment's value.

The risks and benefits of ownership are not considered to pass to the lessee and the lease payments are deemed to be period expenses. The FCC Form 1205 requirements appear to require that operators record the payments within Schedule B of FCC Form 1205. We think the most appropriate manner to report operating lease costs is on Schedule C, Customer Costs of Leased Customer Equipment. Schedule C allows the costs associated with customer equipment to be included as part of the rate computation for the recovery of the cable operator's costs in this area.

Q4: If an operating lease is used, how should the rental payments be recorded within the FCC Form 1205?

A4: The number of units leased from a third party should be included on Line C of Schedule C, along with units owned by the operator. The total lease expense under the operating lease for each year should be reported on Line J of Schedule C, along with the depreciation indicated for the units owned by the operator.

Q5: Can the cost of the equipment obtained through a lease with a third party be averaged with the equipment owned by the cable operator?

A5: Consistent with the amendments made to our rules pursuant to the Telecommunications Act of 1996, operators, for the purpose of setting customer equipment prices, may average all customer equipment costs by type (regardless of model differences or levels of functionality), except for equipment used by basic only subscribers. The provisions in the rules for averaging do not distinguish between equipment costs associated with the ownership of equipment, and those costs associated with the lease of such equipment from a third party. Accordingly, operators may average customer equipment costs arising from operating leases with the costs of operator-owned equipment. This is consistent with the clarification set out in Q&A 4 above for reporting operating lease costs.

Q6: If an operating lease is entered into between a cable operator and an unaffiliated entity, will the lease payments be presumed a reasonable cost-based expense for the purposes of completing FCC Form 1205?

A6: Yes.