Verizon Wireless 2006 Annual Report Download - page 34

Foreign Currency Translation
The functional currency for our foreign operations is primarily the
local currency. The translation of income statement and balance
sheet amounts of our foreign operations into U.S. dollars are
recorded as cumulative translation adjustments, which are included
in Accumulated Other Comprehensive Loss in our consolidated bal-
ance sheets. The translation gains and losses of foreign currency
transactions and balances are recorded in the consolidated state-
ments of income in Other Income and (Expense), Net and Income
from Discontinued Operations, Net of Tax. At December 31, 2006,
our primary translation exposure was to the Venezuelan bolivar,
British pound and the euro. During 2005, we entered into zero cost
euro collars to hedge a portion of our net investment in Vodafone
Omnitel. In accordance with the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities and
related amendments and interpretations, changes in the fair value of
these contracts due to exchange rate fluctuations are recognized in
Accumulated Other Comprehensive Loss and offset the impact of
foreign currency changes on the value of our net investment in the
operation being hedged. As of December 31, 2005, our positions in
the zero cost euro collars have been settled. We have not hedged
our accounting translation exposure to foreign currency fluctuations
relative to the carrying value of our other investments.
SIGNIFICANT ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS
Significant Accounting Policies
A summary of the significant accounting policies used in preparing
our financial statements are as follows:
•Special and non-recurring items generally represent revenues and
gains as well as expenses and losses that are non-operational
and/or non-recurring in nature. Special and non-recurring items
include asset impairment losses, which were determined in accor-
dance with our policy of comparing the fair value of the asset with
its carrying value. The fair value is determined by quoted market
prices or by estimates of future cash flows. There is inherent sub-
jectivity involved in estimating future cash flows, which can have a
significant impact on the amount of any impairment.
•Verizon’s plant, property and equipment balance represents a sig-
nificant component of our consolidated assets. Depreciation
expense on Verizon’s local telephone operations is principally
based on the composite group remaining life method and
straight-line composite rates, which provides for the recognition
of the cost of the remaining net investment in telephone plant,
less anticipated net salvage value, over the remaining asset lives.
We depreciate other plant, property and equipment generally on
a straight-line basis over the estimated useful life of the assets.
Changes in the remaining useful lives of assets as a result of tech-
nological change or other changes in circumstances, including
competitive factors in the markets where we operate, can have a
significant impact on asset balances and depreciation expense.
•We maintain benefit plans for most of our employees, including
pension and other postretirement benefit plans. In the aggregate,
the fair value of pension plan assets exceeds benefit obligations,
which contributes to pension plan income. Other postretirement
benefit plans have larger benefit obligations than plan assets,
resulting in expense. Significant benefit plan assumptions,
including the discount rate used, the long-term rate of return on
plan assets and health care trend rates are periodically updated
Guarantees
In connection with the execution of agreements for the sales of busi-
nesses and investments, Verizon ordinarily provides representations
and warranties to the purchasers pertaining to a variety of nonfinan-
cial matters, such as ownership of the securities being sold, as well
as financial losses.
As of December 31, 2006, letters of credit totaling $223 million had
been executed in the normal course of business, which support sev-
eral financing arrangements and payment obligations to third parties.
MARKET RISK
We are exposed to various types of market risk in the normal course
of business, including the impact of interest rate changes, foreign cur-
rency exchange rate fluctuations, changes in equity investment prices
and changes in corporate tax rates. We employ risk management
strategies using a variety of derivatives, including interest rate swap
agreements, interest rate locks, foreign currency forwards and collars
and equity options. We do not hold derivatives for trading purposes.
It is our general policy to enter into interest rate, foreign currency
and other derivative transactions only to the extent necessary to
achieve our desired objectives in limiting our exposures to the var-
ious market risks. Our objectives include maintaining a mix of fixed
and variable rate debt to lower borrowing costs within reasonable
risk parameters and to protect against earnings and cash flow
volatility resulting from changes in market conditions. We do not
hedge our market risk exposure in a manner that would completely
eliminate the effect of changes in interest rates, equity prices and
foreign exchange rates on our earnings. We do not expect that our
net income, liquidity and cash flows will be materially affected by
these risk management strategies.
Interest Rate Risk
The table that follows summarizes the fair values of our long-term
debt and interest rate derivatives as of December 31, 2006 and
2005. The table also provides a sensitivity analysis of the estimated
fair values of these financial instruments assuming 100-basis-point
upward and downward parallel shifts in the yield curve. Our sensi-
tivity analysis did not include the fair values of our commercial paper
and bank loans because they are not significantly affected by
changes in market interest rates.
(dollars in millions)
Fair Value Fair Value
assuming assuming
+100 basis –100 basis
At December 31, 2006 Fair Value point shift point shift
Long-term debt and
interest rate derivatives $33,569 $ 31,724 $ 35,607
At December 31, 2005
Long-term debt and
interest rate derivatives $ 37,340 $ 35,421 $ 39,478
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Management’s Discussion and Analysis
of Results of Operations and Financial Condition continued