Detailed Guideline for Capital Cost Allocation of the Type I Telecommunications Enterprises (Aug. 08, 2000)

(Unofficial Translation)

Article 1
The Guideline is enacted under Article 48 of the Accounting Standards and Regulations for the Type I Telecommunications Enterprises.

Article 2
The Guideline shall be applicable to the computing of the Capital Cost for network components and the various telecommunications operations.

Article 3
Capital Cost refers to the capital employed in the various telecommunications services, multiplied by the Rate of Capital Cost. 
The computing formula is as follows:
Capital Cost =【（the Beginning Net Amount of Fixed Asset ＋the Ending Net Amount of Fixed Asset ／2＋Amount of Operating Fund）＊the Rate of Capital Cost／（1－the Rate of Income Tax）

Article 4
The value of Capital Employed and the Rate of Capital Cost shall be computed is as follows:

(1)The Value of Capital Employed：

1. The computation formula for the Capital Employed of the various telecommunications businesses shall be as follows:
The Capital Employed＝Book value of Fixed Asset＋Amount of Operating Fund

2. The separation of Fixed Asset of the various telecommunications businesses shall meet the asset attribution requirement in the Accounting Standards and Regulations for The Type I Telecommunications Enterprises, and the requirement of Detailed Guideline for Asset Separation of the Type I Telecommunications Enterprises.

3.The value of the Operating Fund of the various telecommunications businesses shall be computed is as follows:

Operating Fund＝Amount of Cash Expense（1）＋Amount of funding for Reserve Material（2）

Amount of Cash Expense（1）＝【Operating Expenses＋ Non-Operating Expenses－（Depreciation＋Loss of Foreign Exchange Rate Changes＋Other Non- Cash Expenses）】／365＊Days of Working Capital Turnover

Amount of Funding for Reserve Material（2）＝（Annual Material Cost／12）＊The Average Period（in Month）of Material Storage

4.The above-stated formulas shall be applied to the post separation elements of the various telecommunications businesses.

(2) The Corporate Rate of Capital Cost and the rate of the entire company and the various telecommunications businesses should be computed as follows:

1.The Corporate Rate of Capital Cost shall take into account the Cost of equity, Project Loans, General Rate Propose Debts, and computed as follow:
WACC=re＊E／（E+D1+D2）＋rd1＊D1／（E+D1+D2）＋rd2＊D2／（E+D1+D2）

WACC：The Corporate Rate of Weighted Average Capital Cost.
re： The Cost of the entity.
rd1：The Cost of Project Loan.
rd2：The Cost of General Purpose Debt.
E：The total value of Equity.
D1：The value of the Project Loan.
D2：The value of General Purpose Debt.

The General Purpose Debt shall be classified as Loans and Deferred Income Tax Liability. The rd2 refers to the Weighted Average Cost of Loans and Deferred Income Tax Liability.
The Cost of Equity refers to, under specified risks, the minimum returns that the shareholders of the operator require for their capital contribution. The operator shall clearly provide a reasonable computing formula regarding the same. When the operator fails to provide such formula, the Cost of Equity shall be treated as the Risk-free Rate. 

2. An operator operating in various telecommunication businesses shall take into account the financial and operating risks of the various businesses, properly reflect the operator's opportunity cost of funds invested. The cost of capital applicable to a telecommunications service shall be calculated per the following steps: 
The Operator shall first identify the capitals resources for its assets of various businesses. This asset with capital originating from a Project Loan, the related liability and interest shall be allocated in accordance with the method of separation of the related asset to the various telecommunications businesses.
The capital requires for the various businesses, except for the Project Loans, shall be attributed, in accordance with its origin, to General Purpose Debt and Equity. In attributing the origin of the capitals of the various businesses, the effect of the individual financial and operating risks on the financial leverage shall be taken into consideration. If no effect exists, the operator shall apply the average leverage of entire company.

The formulas for computing Capital Cost are as follows:

WACC i =r i, e＊Ei／（Ei+ Di,1+Di,2）＋r i,d1＊Di,2／（Ei+Di,2+Di,2）＋r i,d2＊Di ,2／（Ei+Di,1+Di,2）
i＝1…n

WACCi：The Rate of Weighted Average Capital Cost of type i services.
r i,e：The Rate of Self-owned Reserve Capital Cost of type i services.
r i,d1：The Rate of Weighted Average Interest Rate of Loans of type i services.
r i,d2：The Rate of Weighted Average Interest Rate of General Cost of Debt of type i services.
Ei：The total value of Self-owned Capital Reserve of type i services.
Di,1：The Liability Value of Loans of type i services.
Di,2：The Total Value of General Debt of type i services.
The Valuation of Self-owned Reserves and the Rate of General Cost of Debt shall take into account the individual financial and operating risks, and be compared with the Total Rate of Capital Cost of other related enterprises.

Article 5
The Guideline shall become effective on the date of promulgation.