Verizon Wireless 2014 Annual Report Download - page 60

58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 9
WIRELESS EQUIPMENT INSTALLMENT PLANS
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 their handset over a period of time (an equipment installment
plan) and 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. The gross guarantee
liability related to this program, which was approximately $0.7 billion
at December 31, 2014 and was not material at December 31, 2013,
was primarily included in Other current liabilities on our consolidated
balance sheets.
At the time of sale, we impute risk adjusted interest on the receivables
associated with Verizon Edge. We record the imputed interest as a
reduction to the related accounts receivable. Interest income, which is
included within Other income and (expense), net on our consolidated
statements of income, is recognized over the nanced installment term.
We assess the collectability of our Verizon Edge receivables based upon
a variety of factors, including the credit quality of the customer base,
payment trends and other qualitative factors. The current portion of our
receivables related to Verizon Edge included in Accounts receivable was
$2.3 billion at December 31, 2014 and was not material at December 31,
2013. The long-term portion of the equipment installment plan receiv-
ables included in Other assets was $1.2 billion at December 31, 2014 and
was not material at December 31, 2013.
The credit proles of our customers with a Verizon Edge plan are similar
to those of our customers with a traditional subsidized plan. Customers
with a credit prole which carries a higher risk are required to make a
down payment for equipment nanced through Verizon Edge.
NOTE 10
FAIR VALUE MEASUREMENTS AND FINANCIAL INSTRUMENTS
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities mea-
sured at fair value on a recurring basis as of December 31, 2014:
(dollars in millions)
Level 1(1) Level 2(2) Level 3(3) Total
Assets:
Short-term investments:
Equity securities $ 295 $ – $ – $ 295
Fixed income securities – 260 – 260
Other assets:
Fixed income securities 250 893 – 1,143
Interest rate swaps – 72 – 72
Cross currency swaps – 6 – 6
Total $ 545 $ 1,231 $ – $ 1,776
Liabilities:
Other current liabilities:
Cross currency swaps
and other $ – $ 74 $ – $ 74
Other liabilities:
Forward interest rate swaps – 216 – 216
Cross currency swaps – 528 – 528
Total $ – $ 818 $ – $ 818
(1) quoted prices in active markets for identical assets or liabilities
(2)
observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) no observable pricing inputs in the market
Equity securities consist of investments in common stock of
domestic and international corporations measured using quoted prices
in active markets.
Fixed income securities consist primarily of investments in municipal
bonds as well as U.S. Treasury securities. We use quoted prices in active
markets for our U.S. Treasury securities, therefore these securities are
classied as Level 1. For all other xed income securities that do not
have quoted prices in active markets, we use alternative matrix pricing
resulting in these debt securities being classied as Level 2.
Derivative contracts are valued using models based on readily observable
market parameters for all substantial terms of our derivative contracts
and thus are classied within Level 2. We use mid-market pricing for fair
value measurements of our derivative instruments. Our derivative instru-
ments are recorded on a gross basis.
We recognize transfers between levels of the fair value hierarchy as of the
end of the reporting period. There were no transfers within the fair value
hierarchy during 2014.
Fair Value of Short-term and Long-term Debt
The fair value of our debt is determined using various methods, including
quoted prices for identical terms and maturities, which is a Level 1 mea-
surement, as well as quoted prices for similar terms and maturities in
inactive markets and future cash ows discounted at current rates, which
are Level 2 measurements. The fair value of our short-term and long-
term debt, excluding capital leases, was as follows:
(dollars in millions)
At December 31, 2014 2013
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Short- and long-term debt,
excluding capital leases $ 112,755 $ 126,549 $ 93,298 $ 103,527
Derivative Instruments
Interest Rate Swaps
We enter into domestic interest rate swaps to achieve a targeted mix of
xed and variable rate debt. We principally receive xed rates and pay
variable rates based on LIBOR, resulting in a net increase or decrease to
Interest expense. These swaps are designated as fair value hedges and
hedge against changes in the fair value of our debt portfolio. We record
the interest rate swaps at fair value on our consolidated balance sheets as
assets and liabilities.
During the second quarter of 2013, interest rate swaps with a notional
value of $1.25 billion matured and the impact to our consolidated nan-
cial statements was not material. During the third quarter of 2013, we
entered into interest rate swaps with a total notional value of $1.8 billion.
At December 31, 2014 and 2013, the fair value of these interest rate swaps
was not material. At December 31, 2014, the total notional amount of
these interest rate swaps was $1.8 billion. The ineective portion of these
interest rate swaps was not material at December 31, 2014 and 2013.