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                FEDERAL COMMUNICATIONS COMMISSION
                     Washington, D.C.  20554

                        September 1, 1987

                                             In reply refer to:
                                                   RAO Letter 9
                                                               
Responsible Accounting Officers

Part 32, Uniform System of Accounts for Class A and Class B Carriers-Inventories and Property
Leased to Others

     Accounting provisions included in Appendix C to the Report and Order in Docket 86-111
(released February 6, 1987), which amended Part 32, have prompted several questions with
respect to accounting for customer premises equipment and large private branch exchanges. The
amendment in Appendix C provides that Account 2311, Station Apparatus, and Account 2341,
Large Private Branch Exchanges, shall be used only by companies that have been permitted to
offer tariffed CPE beyond December 31, 1987. This provision has raised concern among some
companies which claim that companies will continue to retain ownership in such assets even
though they will not be provided to customers under tariff. This letter not only provides some
interpretive guidance on the issue raised, but also anticipates, for carrier planning purposes,
certain changes which may be required to accommodate the recommended accounting.

     Under the Commission's rules, carriers may now engage in nonregulated activities which,
for example, may include the sales of Customer Premises Equipment or the lease of property
under operating-type, direct financing-type or sales-type leases. When these activities are
conducted by the carriers in the same corporate entity that provides regulated telecommunications
services, the Report and Order in CC Docket 86-111 generally requires the use of accounts
formerly regarded as "purely regulated accounts". Distinctions between regulated activities and
nonregulated activities (for activities that have been preemptively deregulated or that have never
been regulated) are made prior to the separations process between interstate and intrastate
jurisdictions. Because the Report and Order provides for the use of "regulated accounts", we are
herein providing instructions for the handling of nonregulated activities which involve inventories
held for sale or lease and property under lease to others.

     First, CPE and Large PBXs held in inventory for sale or for lease, shall be classified to
Account 1220, Material and Supplies. Any other property acquired and held for sale or lease for
a nonregulated activity, when the activity involves common or joint use of assets or resources and
is not conducted through an affiliate, should be classified to this account, as well. However,
carriers should maintain this account in sufficient detail to be able to classify materials and
supplies held for company use separate from property held for sale or lease in a nonregulated
activity. At this time, subaccounts or subsidiary records are recommended for (i) materials and
supplies and (ii) property held for sale or lease.


     Second, any property or equipment that is leased to others under operating leases should
be reclassified to the proper plant and equipment accounts. With respect to CPE and Large PBXs,
the continued use of, respectively, Accounts 2311 and 2341, will provide the correct classification
of these items when leased to others under operating leases, and it is anticipated that the retention
of these accounts in Part 32 will be necessary for this purpose.

     Third, in those cases where property is leased to others under a sales-type lease or a direct
financing-type lease agreement, the asset should be removed from the books and the present value
of the amount due under the lease should be recorded as a receivable in Account 1410, Other
Noncurrent Assets. The current portion of the receivable should be reclassified to Account 1190,
Other Accounts Receivable. Carriers should maintain these accounts in sufficient detail to be able
to classify the investment in leases from other accounts receivable, and subaccounts or subsidiary
records are recommended for this purpose.

     This letter is issued under Section 0.291 of the Commission's rules. Applications for
review under Section 1.115 of the Commission's rules must be filed within 30 days from the date
indicated above (See Section 1.4(b)(4) of the Commission's rules).

     If you have any questions contact the Chief of the Accounting Systems Branch at (202)
418-0810.

                                        Sincerely,


                                        Kenneth P. Moran,
                                        Acting Chief
                                        Accounting and Audits Division