Verizon Wireless 2014 Annual Report Download - page 48

46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Income Taxes
Our eective tax rate is based on pre-tax income, statutory tax rates, tax
laws and regulations and tax planning strategies available to us in the
various jurisdictions in which we operate.
Deferred income taxes are provided for temporary dierences in the
bases between nancial statement and income tax assets and liabili-
ties. Deferred income taxes are recalculated annually at tax rates then in
eect. We record valuation allowances to reduce our deferred tax assets
to the amount that is more likely than not to be realized.
We use a two-step approach for recognizing and measuring tax benets
taken or expected to be taken in a tax return. The rst step is recognition:
we determine whether it is more likely than not that a tax position will be
sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not rec-
ognition threshold, we presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets
the more-likely-than-not recognition threshold is measured to determine
the amount of benet to recognize in the nancial statements. The tax
position is measured at the largest amount of benet that is greater than
50 percent likely of being realized upon ultimate settlement. Dierences
between tax positions taken in a tax return and amounts recognized in
the nancial statements will generally result in one or more of the fol-
lowing: an increase in a liability for income taxes payable, a reduction of
an income tax refund receivable, a reduction in a deferred tax asset, or an
increase in a deferred tax liability.
The accounting standard relating to income taxes generated by lever-
aged lease transactions requires that changes in the projected timing of
income tax cash ows generated by a leveraged lease transaction be rec-
ognized as a gain or loss in the year in which the change occurs.
Signicant management judgment is required in evaluating our tax posi-
tions and in determining our eective tax rate.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based
compensation awards made to employees and directors based on esti-
mated fair values. See Note 11 for further details.
Foreign Currency Translation
The functional currency of our foreign operations is generally the local
currency. For these foreign entities, we translate income statement
amounts at average exchange rates for the period, and we translate
assets and liabilities at end-of-period exchange rates. We record these
translation adjustments in Accumulated other comprehensive income,
a separate component of Equity, in our consolidated balance sheets.
We report exchange gains and losses on intercompany foreign currency
transactions of a long-term nature in Accumulated other comprehensive
income. Other exchange gains and losses are reported in income.
Employee Benet Plans
Pension and postretirement health care and life insurance benefits
earned during the year as well as interest on projected benet obli-
gations are accrued currently. Prior service costs and credits resulting
from changes in plan benets are generally amortized over the average
remaining service period of the employees expected to receive benets.
Expected return on plan assets is determined by applying the return on
assets assumption to the actual fair value of plan assets. Actuarial gains
and losses are recognized in operating results in the year in which they
occur. These gains and losses are measured annually as of December
31 or upon a remeasurement event. Verizon management employees
no longer earn pension benets or earn service towards the company
retiree medical subsidy (see Note 12).
We recognize a pension or a postretirement plan’s funded status as either
an asset or liability on the consolidated balance sheets. Also, we measure
any unrecognized prior service costs and credits that arise during the
period as a component of Accumulated other comprehensive income,
net of applicable income tax.
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 strategies,
which may include the use of a variety of derivatives including cross cur-
rency 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 instru-
ments 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 deriva-
tive instruments 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 recognized 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 (loss) and rec-
ognized in earnings when the hedged item is recognized in earnings.
Recently Adopted Accounting Standards
During the rst quarter of 2014, we adopted 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 car-
ryforward exists. 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. The adoption of this
standard update did not have a signicant impact on our consolidated
nancial statements.
Recently Issued Accounting Standards
In April 2014, the accounting standard update related to the reporting
of discontinued operations and disclosures of disposals of components
of an entity was issued. This standard update changes the criteria for
reporting discontinued operations and enhances convergence of the
reporting requirements for discontinued operations. As a result of this
standard update, a disposal of a component of an entity or a group of