Sprint - Nextel 2015 Annual Report Download - page 61

Table of Contents
OFF-BALANCE SHEET FINANCING
Sprint has an accounts Receivable Facility providing for the sale of eligible wireless service, installment and certain future lease receivables, with a
maximum funding limit of $4.3 billion and an expiration date of November 2017. For the period ended March 31, 2016 , we received $1.3 billion in cash proceeds.
In connection with the Receivables Facility, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPEs. At Sprint's direction, the SPEs sell
wireless service, installment and future lease receivables to unaffiliated third parties or to a bank agent. Sales of eligible receivables generally occur daily and are
settled on a monthly basis. Sprint pays a fee for the drawn and undrawn portions of the Receivables Facility.
In November, 2015, Sprint also entered into a Handset Sale-Leaseback Tranche 1 agreement to sell and lease-back certain leased devices with MLS. In
connection with the Handset Sale-Leaseback Tranche 1, Sprint formed certain wholly-owned consolidated bankruptcy-remote SPE Lessees. The SPE Lessees then
sold the devices and transferred certain specified customer lease end rights and obligations to MLS in exchange for proceeds totaling $1.1 billion and a DPP of
$126 million in December 2015. See the detailed AccountsReceivablesFacilityand HandsetSale-LeasebackTranche1discussions within Liquidity and Capital
Resources above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Sprint applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with U.S.
GAAP. Sprint's more critical accounting policies include allowance for doubtful accounts, estimated economic lives and residual values of property, plant and
equipment, valuation and recoverability of long-lived assets, evaluation of goodwill and indefinite-lived assets for impairment and valuation of guarantee
liabilities. Inherent in such policies are certain key assumptions and estimates made by management. Management regularly updates its estimates used in the
preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. Sprint's significant
accounting policies and estimates are summarized in the Notes to the Consolidated Financial Statements.
Depreciation
Our property, plant and equipment balance represents a significant component of our consolidated assets. We record property, plant and equipment at
cost and generally depreciate it on a straight-line basis over the estimated useful life of the assets. We expect that a one-year increase in estimated useful lives of
our property, plant and equipment, exclusive of leased devices, would result in a decrease to our fiscal year 2016 depreciation expense of $800 million and that a
one-year decrease would result in an increase of approximately $1.2 billion in our fiscal year 2016 depreciation expense.
Leased Devices
Our accounting for device leases involves specific determinations under applicable lease accounting standards. These determinations affect the timing
of revenue recognition and the timing and classification of the related cost of the device. If a lease is classified as an operating lease, revenue is recognized ratably
over the lease term and the leased asset is included in property, plant and equipment and depreciated to its estimated residual value generally over the lease term. If
the lease is classified as a sales-type lease, equipment revenue is recognized at the inception of the lease with a corresponding charge to cost of product. If the lease
is classified as a direct-financing lease, there is no related revenue or cost of products recorded and the net investment in a leased asset is reported. The critical
elements that we consider in determining the classification of our leased devices are the economic life and the fair value of the device, including the estimated
residual value. For the purposes of assessing the economic life of a device, we consider both internal and external datasets including, but not limited to, the length
of time subscribers use our devices, sales trends post launch, and transactions in the secondary market as there is currently a significant after-market for used
telecommunication devices.
At lease inception, the devices are classified as operating leases and are reclassified from inventory to property, plant and equipment when leased
through Sprint's direct channels. For those devices leased through indirect channels, we purchase the devices at lease inception from the dealer, which is then
capitalized to property, plant and equipment. Residual values associated with devices under operating leases represent the estimated fair value at the end of the
lease term. We review residual values regularly and, when appropriate, adjust them based on, among other things, estimates of expected market conditions at the
end of the lease, including the impacts of future product launches. Adjustments to residual values of leased devices are recognized as a revision in depreciation
estimates. We estimate that a 10% increase or decrease in the estimated residual values of devices currently under operating leases at March 31, 2016 would not
have a material effect on depreciation expense over the next twelve months.
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