America Online 2015 Annual Report Download - page 63

Note8
Wireless Device Installment Plans
Under the Verizon device payment program, our eligible wireless
customers purchase phones or tablets at unsubsidized prices on an
installment basis (a device installment plan). Customers that activate
service on devices purchased under the device payment program pay
lower service fees as compared to those under our fixed-term service
plans, and their installment charge is included in their standard wireless
monthly bill. As of December31, 2015 and 2014, respectively, the total
portfolio of device installment plan receivables we are servicing was
$11.9billion and $3.8billion. During 2015, we entered into programs to
sell certain device installment receivables. The outstanding portfolio
of device installment plan receivables derecognized from our consoli-
dated balance sheets but which we continue to service was $8.2billion
at December31, 2015.
Wireless Device Installment Plan Receivables
The following table displays device installment plan receivables, net,
that continue to be recognized in our consolidated balance sheets:
(dollars in millions)
At December31, 2015 2014
Device installment plan receivables, gross $ 3,720 $ 3,833
Unamortized imputed interest (142) (155)
Device installment plan receivables, net of
unamortized imputed interest 3,578 3,678
Allowance for credit losses (444) (76)
Device installment plan receivables, net $ 3,134 $ 3,602
Classied on our consolidated balance
sheets:
Accounts receivable, net $ 1,979 $ 2,470
Other assets 1,155 1,132
Device installment plan receivables, net $ 3,134 $ 3,602
At the time of sale, we impute risk adjusted interest on the device
installment plan receivables. We record the imputed interest as a
reduction to the related accounts receivable. Interest income, which is
included within Service revenues and other on our consolidated state-
ments of income, is recognized over the financed installment term.
We assess the collectability of our device installment plan receivables
based upon a variety of factors, including the credit quality of the
customer base, payment trends and other qualitative factors. We
use custom, empirical, risk models to measure the credit quality of a
customer and determine eligibility for the device payment program.
Based upon the risk assessed by the models, a customer may be
required to provide a down payment to enter into the program and
may be subject to lower limits on the total amount financed. The down
payment will vary in accordance with the risk assessed. We update
our risk assessments monthly based on payment trends and other
qualitative factors in order to monitor the overall quality of our receiv-
ables. The credit quality of our customers is consistent throughout the
periods presented.
Activity in the allowance for credit losses for the device installment
plan receivables was as follows:
(dollars in millions)
Balance at January1, 2015 $ 76
Bad debt expenses 662
Write-offs (203)
Allowance related to receivables sold (101)
Other 10
Balance at December31, 2015 $ 444
Customers entering into device installment agreements prior to
May31, 2015 have the right to upgrade their device, subject to certain
conditions, including making a stated portion of the required device
payments and trading in their device. Generally, customers entering into
device installment agreements on or after June1, 2015 are required to
repay all amounts due under their device installment agreement before
being eligible to upgrade their device. However, certain devices are
subject to promotions that allow customers to upgrade to a new device
after paying down the minimum percentage of their device installment
plan and trading in their device. When a customer is eligible to upgrade
to a new device, we record a guarantee liability in accordance with our
accounting policy. The gross guarantee liability related to the upgrade
program, which was approximately $0.2billion at December31, 2015
and $0.7billion at December31, 2014, was primarily included in Other
current liabilities on our consolidated balance sheets.
Sales of Wireless Device Installment Plan Receivables
Wireless Device Installment Plan Receivables Purchase Agreement
During the first quarter of 2015, we established a program
(Receivables Purchase Agreement, or RPA) to sell from time to time,
on an uncommitted basis, eligible device installment plan receivables
to a group of primarily relationship banks (Purchasers). Under the
program, we transfer the eligible receivables to wholly-owned sub-
sidiaries that are bankruptcy remote special purpose entities (Sellers
or SPEs). The Sellers then sell the receivables to the Purchasers for
upfront cash proceeds and additional consideration upon settlement
of the receivables (the deferred purchase price). The receivables
sold under the program are no longer considered assets of Verizon.
We continue to bill and collect on the receivables in exchange for a
monthly servicing fee, which is not material. Eligible receivables under
the RPA exclude device installment plans where a customer was
required to provide a down payment.
Revolving Sale of Wireless Device Installment Plan Receivables
During the fourth quarter of 2015, we entered into a one-year uncom-
mitted facility to sell eligible device installment plan receivables on a
revolving basis (Revolving Program), subject to a maximum funding
limit, to the Purchasers. Sales of eligible receivables by the Sellers, once
initiated, generally occur and are settled on a monthly basis. The receiv-
ables sold under the Revolving Program are no longer considered
assets of Verizon. We continue to bill and collect on the receivables in
exchange for a monthly servicing fee, which is not material. Customer
installment payments will be available to purchase eligible installment
plan receivables originated over the facility’s term. Eligible receivables
under the Revolving Program exclude device installment plans where a
customer was required to provide a down payment.
The sales of receivables under the RPA and Revolving Program did not
have a material impact on our consolidated statements of income. The
cash proceeds received from the Purchasers are recorded within Cash
flows provided by operating activities on our consolidated statement of
cash flows.
The following table provides a summary of device installment receiv-
ables sold under the RPA and the Revolving Program during the year
ended December31, 2015:
(dollars in millions) RPA
Revolving
Program Total
Device installment plan receivables
sold, net(1) $ 6,093 $ 3,270 $ 9,363
Cash proceeds received(2) 4,502 2,738 7,240
Deferred purchase price recorded 1,690 532 2,222
(1) Device installment plan receivables net of allowances, imputed interest and the device
trade-in right.
(2) As of December31, 2015, cash proceeds received, net of remittances, were $5.9billion.
61Verizon Communications Inc. and Subsidiaries
Notes to Consolidated Financial Statements continued