Verizon Wireless 2013 Annual Report Download - page 48

46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Derivative Instruments
We have entered into derivative transactions primarily to manage our
exposure to uctuations in foreign currency exchange rates, interest
rates, equity and commodity prices. We employ risk management strat-
egies, which may include the use of a variety of derivatives including
cross currency swaps, foreign currency and prepaid forwards and collars,
interest rate and commodity swap agreements and interest rate locks. We
do not hold derivatives for trading purposes.
We measure all derivatives, including derivatives embedded in other
nancial instruments, at fair value and recognize them as either assets or
liabilities on our consolidated balance sheets. Our derivative instruments
are valued primarily using models based on readily observable market
parameters for all substantial terms of our derivative contracts and thus
are classied as Level 2. Changes in the fair values of derivative instru-
ments not qualifying as hedges or any ineective portion of hedges are
recognized in earnings in the current period. Changes in the fair values
of derivative instruments used eectively as fair value hedges are rec-
ognized in earnings, along with changes in the fair value of the hedged
item. Changes in the fair value of the eective portions of cash ow
hedges are reported in Other comprehensive income and recognized in
earnings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
During the rst quarter of 2013, we adopted the accounting standard
update regarding testing of intangible assets for impairment. This
standard update allows companies the option to perform a qualita-
tive assessment to determine whether it is more likely than not that an
indenite-lived intangible asset is impaired. An entity is not required to
calculate the fair value of an indenite-lived intangible asset and perform
the quantitative impairment test unless the entity determines that it is
more likely than not the asset is impaired. The adoption of this standard
update did not have an impact on our consolidated nancial statements.
During the rst quarter of 2013, we adopted the accounting standard
update regarding reclassications out of Accumulated other comprehen-
sive income. This standard update requires companies to report the eect
of signicant reclassications out of Accumulated other comprehensive
income on the respective line items in our consolidated statements of
income if the amount being reclassied is required to be reclassied in
its entirety to net income. For other amounts that are not required to be
reclassied in their entirety to net income in the same reporting period,
an entity is required to cross-reference to other required disclosures that
provide additional detail about those amounts. See Note 14 for addi-
tional details.
During the third quarter of 2013, we adopted the accounting standard
update regarding the ability to use the Federal Funds Eective Swap
Rate as a U.S. benchmark interest rate for hedge accounting purposes.
Previously the interest rates on direct Treasury obligations of the U.S.
government and the London Interbank Oered Rate (LIBOR) were con-
sidered to be the only benchmark interest rates. The adoption of this
standard update did not have a signicant impact on our consolidated
nancial statements.
Recent Accounting Standards
In July 2013, the accounting standard update relating to the presentation
of an unrecognized tax benet when a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward exists was issued. The standard
update provides that a liability related to an unrecognized tax benet
should be oset against same jurisdiction deferred tax assets for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward
if such settlement is required or expected in the event the uncertain tax
position is disallowed. We will adopt this standard update during the rst
quarter of 2014. We are currently evaluating the consolidated balance
sheet impact related to this standard update.
NOTE 2
ACQUISITIONS AND DIVESTITURES
Wireless
Wireless Transaction
On September 2, 2013, Verizon entered into a stock purchase agreement
(the Stock Purchase Agreement) with Vodafone Group Plc (Vodafone) and
Vodafone 4 Limited (Seller), pursuant to which Verizon agreed to acquire
Vodafone’s indirect 45% interest in Cellco Partnership d/b/a Verizon
Wireless (the Partnership, and such interest, the Vodafone Interest) for
aggregate consideration of approximately $130 billion.
On February 21, 2014, pursuant to the terms and subject to the condi-
tions set forth in the Stock Purchase Agreement, Verizon acquired (the
Wireless Transaction) from Seller all of the issued and outstanding capital
stock (the Transferred Shares) of Vodafone Americas Finance 1 Inc., a sub-
sidiary of Seller (VF1 Inc.), which indirectly through certain subsidiaries
(together with VF1 Inc., the Purchased Entities) owned the Vodafone
Interest. In consideration for the Transferred Shares, upon completion of
the Wireless Transaction, Verizon (i) paid approximately $58.89 billion in
cash, (ii) issued approximately $60.15 billion of Verizon’s common stock,
par value $0.10 per share (the Stock Consideration), (iii) issued senior
unsecured Verizon notes in an aggregate principal amount of $5.0 billion
(the Verizon Notes), (iv) sold Verizon’s indirectly owned 23.1% interest in
Vodafone Omnitel N.V. (Omnitel, and such interest, the Omnitel Interest),
valued at $3.5 billion and (v) provided other consideration of approxi-
mately $2.5 billion. As a result of the Wireless Transaction, Verizon issued
approximately 1.27 billion shares. The total cash paid to Vodafone and
the other costs of the Wireless Transaction, including nancing, legal and
bank fees, were nanced through the incurrence of third-party indebted-
ness. See Note 8 for additional information.
In accordance with the accounting standard on consolidation, a change
in a parent’s ownership interest while the parent retains a controlling
nancial interest in its subsidiary is accounted for as an equity transaction
and remeasurement of assets and liabilities of previously controlled and
consolidated subsidiaries is not permitted. As a result, we will account for
the Wireless Transaction by adjusting the carrying amount of the non-
controlling interest to reect the change in Verizon’s ownership interest
in Verizon Wireless. Any dierence between the fair value of the consid-
eration paid and the amount by which the noncontrolling interest is
adjusted will be recognized in equity attributable to Verizon.
Omnitel Transaction
On February 21, 2014, Verizon and Vodafone also implemented the sale of
the Omnitel Interest (the Omnitel Transaction) by a subsidiary of Verizon
to a subsidiary of Vodafone in connection with the Wireless Transaction
pursuant to a separate share purchase agreement. We will recognize a
gain on the disposal of the Omnitel interest in the rst quarter of 2014.
Verizon Notes
The Verizon Notes were issued pursuant to Verizon’s existing indenture.
The Verizon Notes were issued in two separate series, with $2.5 billion
due February 21, 2022 and $2.5 billion due February 21, 2025. The Verizon
Notes bear interest at a oating rate, which will be reset quarterly, with
interest payable quarterly in arrears, beginning May 21, 2014. The eight-
year Verizon notes bear interest at a oating rate equal to three-month
LIBOR, plus 1.222%, and the eleven-year Verizon notes bear interest at
a oating rate equal to three-month LIBOR, plus 1.372%. The indenture
that governs the Verizon Notes contains certain negative covenants,
including a negative pledge covenant and a merger or similar trans-
action covenant, armative covenants and events of default that are