Verizon Wireless 2014 Annual Report Download - page 45

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Multiple Deliverable Arrangements
In both our Wireless and Wireline segments, we offer products and
services to our customers through bundled arrangements. These
arrangements involve multiple deliverables which may include products,
services, or a combination of products and services.
Wireless
Our Wireless segment earns revenue primarily by providing access to and
usage of its network. In general, access revenue is billed one month in
advance and recognized when earned. Usage revenue is generally billed
in arrears and recognized when service is rendered. Equipment sales
revenue associated with the sale of wireless handsets and accessories is
generally recognized when the products are delivered to and accepted
by the customer, as this is considered to be a separate earnings process
from providing wireless services. For agreements involving the resale of
third-party services in which we are considered the primary obligor in
the arrangements, we record the revenue gross at the time of the sale.
For equipment sales, we generally subsidize the cost of wireless devices
for plans under our traditional subsidy model. The amount of this sub-
sidy is generally contingent on the arrangement and terms selected by
the customer. In multiple deliverable arrangements which involve the
sale of equipment and a service contract, the equipment revenue is rec-
ognized up to the amount collected when the wireless device is sold.
In addition to the traditional subsidy model for equipment sales, we oer
new and existing customers the option to participate in Verizon Edge, a
program that provides eligible wireless customers with the ability to pay
for handsets under an equipment installment plan. Under the Verizon
Edge program, customers have the right to upgrade their handset after
a minimum of 30 days, subject to certain conditions, including making a
stated portion of the required device payments, trading in their handset
in good working condition and signing a new contract with Verizon.
Upon upgrade, the outstanding balance of the equipment installment
plan is exchanged for the used handset. This trade-in right is accounted
for as a guarantee obligation.
Verizon Edge is a multiple-element arrangement typically consisting of
the trade-in right, handset and monthly wireless service. At the incep-
tion of the arrangement, the amount allocable to the delivered units
of accounting is limited to the amount that is not contingent upon the
delivery of the monthly wireless service (the noncontingent amount).
The full amount of the trade-in right’s fair value (not an allocated value)
will be recognized as the guarantee liability and the remaining allocable
consideration will be allocated to the handset. The value of the guar-
antee liability eectively results in a reduction to revenue recognized
for the sale of the handset. The guarantee liability is measured at fair
value upon initial recognition based on assumptions lacking observ-
able pricing inputs including the probability and timing of the customer
upgrading to a new phone, the customer’s estimated remaining install-
ment balance at the time of trade-in and the estimated fair value of the
phone at the time of trade-in and therefore is classied within Level 3 of
the fair value hierarchy. When the customer trades-in their used phone,
the handset received is recorded to inventory and measured as the dif-
ference between the remaining equipment installment plan balance at
the time of trade-in and the guarantee liability. As a result of changes in
the Verizon Edge program during 2014, and corresponding changes in
related assumptions, the guarantee liability associated with Verizon Edge
VERIZON COMMUNICATIONS INC. AND SUBSIDIARIES
Description of Business
Verizon Communications Inc. (Verizon or the Company) is a holding com-
pany that, acting through its subsidiaries, is one of the world’s leading
providers of communications, information and entertainment products
and services to consumers, businesses and governmental agencies
with a presence around the world. We have two reportable segments,
Wireless and Wireline. For further information concerning our business
segments, see Note 14.
The Wireless segment provides wireless communications products and
services across one of the most extensive and reliable wireless networks
in the United States (U.S.) and has the largest fourth-generation (4G)
Long-Term Evolution (LTE) technology and third-generation (3G) net-
works of any U.S. wireless service provider.
The Wireline segment provides voice, data and video communications
products and enhanced services, including broadband video and data,
corporate networking solutions, data center and cloud services, security
and managed network services and local and long distance voice ser-
vices. We provide these products and services to consumers in the United
States, as well as to carriers, businesses and government customers both
in the United States and around the world.
Consolidation
The method of accounting applied to investments, whether consoli-
dated, equity or cost, involves an evaluation of all signicant terms of
the investments that explicitly grant or suggest evidence of control or
inuence over the operations of the investee. The consolidated nancial
statements include our controlled subsidiaries. For controlled subsidiaries
that are not wholly-owned, the noncontrolling interests are included in
Net income and Total equity. Investments in businesses which we do not
control, but have the ability to exercise signicant inuence over oper-
ating and nancial policies, are accounted for using the equity method.
Investments in which we do not have the ability to exercise signicant
inuence over operating and nancial policies are accounted for under
the cost method. Equity and cost method investments are included
in Investments in unconsolidated businesses in our consolidated bal-
ance sheets. Certain of our cost method investments are classied as
available-for-sale securities and adjusted to fair value pursuant to the
accounting standard related to debt and equity securities. All signicant
intercompany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassied certain prior year amounts to conform to the current
year presentation.
Use of Estimates
We prepare our financial statements using U.S. generally accepted
accounting principles (GAAP), which require management to make esti-
mates and assumptions that aect reported amounts and disclosures.
Actual results could dier from those estimates.
Examples of signicant estimates include: the allowance for doubtful
accounts, the recoverability of plant, property and equipment, the
recoverability of intangible assets and other long-lived assets, unbilled
revenues, fair values of financial instruments, unrecognized tax ben-
ets, valuation allowances on tax assets, accrued expenses, pension and
postretirement benet assumptions, contingencies and allocation of pur-
chase prices in connection with business combinations.