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Notes to Consolidated Financial Statements
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Verizon Communications Inc. and Subsidiaries
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Note 1. Description of Business and Summary of Significant Accounting Policies
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Description of Business
Verizon Communications Inc. (Verizon or the Company) is a holding company that, acting through its subsidiaries, is one of the world’s leading providers of communications, technology, information and entertainment products and services to consumers, businesses and government entities. With a presence around the world, we offer data, video and voice services and solutions on our networks and platforms that are designed to meet customers’ demand for mobility, reliable network connectivity, security and control.
We have two reportable segments that we operate and manage as strategic business units - Verizon Consumer Group (Consumer) and Verizon Business Group (Business).
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the United States (U.S.) under the Verizon brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network through our Verizon Fios product portfolio and over a traditional copper-based network to customers who are not served by Fios. Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis.
Our Business segment provides wireless and wireline communications services and products, including data, video and conferencing services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various Internet of Things (IoT) services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.
Consolidation
The method of accounting applied to investments, whether consolidated or equity, involves an evaluation of all significant terms of the investments that explicitly grant or suggest evidence of control or influence over the operations of the investee. The consolidated financial statements include our controlled subsidiaries, as well as variable interest entities (VIE) where we are deemed to be the primary beneficiary. For controlled subsidiaries that are not wholly-owned, the noncontrolling interests are included in Net income and Total equity. Investments in businesses that we do not control, but have the ability to exercise significant influence over operating and financial policies, are accounted for using the equity method. Equity method investments are included in Investments in unconsolidated businesses in our consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated.
Basis of Presentation
We have reclassified 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 requires management to make estimates and assumptions that affect reported amounts and disclosures. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) pandemic and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts from COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates.
Examples of significant estimates include the allowance for credit losses, the recoverability of intangible assets, property, plant and equipment, and other long-lived assets, the incremental borrowing rate for the lease liability, fair value measurements, including those related to financial instruments, goodwill, spectrum licenses and intangible assets, unrecognized tax benefits, valuation allowances on tax assets, pension and postretirement benefit obligations, contingencies and the identification and valuation of assets acquired and liabilities assumed in connection with business combinations.
Revenue Recognition
We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment. These services include a variety of communication and connectivity services for our Consumer and Business customers including other carriers that use our facilities to provide services to their customers, as well as professional and integrated managed services for our large enterprises and government customers. We account for these revenues under Accounting Standards Update (ASU) 2014-09, "Revenue from Contracts with Customers" (Topic 606), which we adopted on January 1, 2018, using the modified retrospective approach. This standard update, along with related subsequently issued updates, clarifies the principles for recognizing revenue and develops a common revenue standard for GAAP. The standard update also amended prior guidance for the recognition of costs to obtain and fulfill
contracts with customers such that incremental costs of obtaining and direct costs of fulfilling contracts with customers are deferred and amortized consistent with the transfer of the related good or service.
We also earn revenues that are not accounted for under Topic 606 from leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.
Nature of Products and Services
Telecommunications
Service
We offer wireless services through a variety of plans on a postpaid or prepaid basis. For wireless service, we recognize revenue using an output method, either as the service allowance units are used or as time elapses, because it reflects the pattern by which we satisfy our performance obligation through the transfer of service to the customer. Monthly service is generally billed in advance, which results in a contract liability. See Note 2 for additional information. For postpaid plans, where monthly usage exceeds the allowance, the overage usage represents options held by the customer for incremental services and the usage-based fee is recognized when the customer exercises the option (typically on a month-to-month basis).
For our contracts related to wireline communication and connectivity services, in general, fixed monthly fees for service are billed one month in advance, which results in a contract liability, and service revenue is recognized over the enforceable contract term as the service is rendered, as the customer simultaneously receives and consumes the benefits of the services through network access and usage. While substantially all of our wireline service revenue contracts are the result of providing access to our networks, revenue from services that are not fixed in amount and, instead, are based on usage are generally billed in arrears and recognized as the usage occurs.
Equipment
We sell wireless devices and accessories under the Verizon brand and other brands. Equipment revenue is generally recognized when the products are delivered to and accepted by the customer, as this is when control passes to the customer. In addition to offering the sale of equipment on a standalone basis, we have two primary offerings through which customers pay for a wireless device, in connection with a service contract: fixed-term plans and device payment plans.
Under a fixed-term plan, the customer is sold the wireless device without any upfront charge or at a discounted price in exchange for entering into a fixed-term service contract (typically for a term of 24 months or less).
Under a device payment plan, the customer is sold the wireless device in exchange for a non-interest-bearing installment note, which is repaid by the customer, typically over a 24-month term, and concurrently enters into a month-to-month contract for wireless service. We may offer certain promotions that provide billing credits applied over a specified term, contingent upon the customer maintaining service. The credits are included in the transaction price, which are allocated to the performance obligations based on their relative selling price and are recognized when earned.
A financing component exists in both our fixed-term plans and device payment plans because the timing of the payment for the device, which occurs over the contract term, differs from the satisfaction of the performance obligation, which occurs at contract inception upon transfer of the device to the customer. We periodically assess, at the contract level, the significance of the financing component inherent in our fixed-term and device payment plan receivable based on qualitative and quantitative considerations related to our customer classes. These considerations include assessing the commercial objective of our plans, the term and duration of financing provided, interest rates prevailing in the marketplace, and credit risks of our customer classes, all of which impact our selection of appropriate discount rates. Based on current facts and circumstances, we determined that the financing component in our existing wireless device payments and fixed-term contracts sold through the direct channel is not significant and therefore is not accounted for separately. See Note 8 for additional information on the interest on equipment financed on a device payment plan agreement when sold to the customer by an authorized agent in our indirect channel.
Wireless Contracts
For our wireless contracts, total contract revenue, which represents the transaction price for wireless service and wireless equipment, is allocated between service and equipment revenue based on their estimated standalone selling prices. We estimate the standalone selling price of the device or accessory to be its retail price excluding subsidies or conditional purchase discounts. We estimate the standalone selling price of wireless service to be the price that we offer to customers on month-to-month contracts that can be cancelled at any time without penalty (i.e., when there is no fixed-term for service) or when service is procured without the concurrent purchase of a wireless device. In addition, we also assess whether the service term is impacted by certain legally enforceable rights and obligations in our contract with customers, such as penalties that a customer would have to pay to early terminate a fixed-term contract or billing credits that would cease if the month-to-month wireless service is canceled. The assessment of these legally enforceable rights and obligations involves judgment and impacts our determination of the transaction price and related disclosures.
From time to time, we may offer certain promotions that provide our customers on device payment plans with the right to upgrade to a new device after paying a specified portion of their device payment plan agreement amount and trading in their device in good working order. We account for this trade-in right as a guarantee obligation. The full amount of the trade-in right's fair value is recognized as a guarantee liability and results in a reduction to the revenue recognized upon the sale of the device. The guarantee liability was insignificant at December 31,
2020 and 2019. The total transaction price is reduced by the guarantee, which is accounted for outside the scope of Topic 606, and the remaining transaction price is allocated between the performance obligations within the contract.
Our fixed-term plans generally include the sale of a wireless device at subsidized prices. This results in the creation of a contract asset at the time of sale, which represents the recognition of equipment revenue in excess of amounts billed.
For our device payment plans, billing credits are accounted for as consideration payable to a customer and are included in the determination of total transaction price, resulting in a contract liability.
We may provide a right of return on our products and services for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly we recognize revenue based on the estimated amount to which we expect to be entitled after considering expected returns. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. We also may provide credits or incentives on our products and services for contracts with resellers, which are accounted for as variable consideration when estimating the amount of revenue to recognize.
Wireline Contracts
Total consideration for wireline services that are bundled in a single contract is allocated to each performance obligation based on our standalone selling price for each service. While many contracts include one or more service performance obligations, the revenue recognition pattern is generally not impacted by the allocation since the services are generally satisfied over the same period of time. We estimate the standalone selling price to be the price of the services when sold on a standalone basis without any promotional discount. In addition, we also assess whether the service term is impacted by certain legally enforceable rights and obligations in our contract with customers such as penalties that a customer would have to pay to early terminate a fixed-term contract. The assessment of these legally enforceable rights and obligations involves judgment and impacts our determination of transaction price and related disclosures.
We may provide performance-based credits or incentives on our products and services for contracts with our Business customers, which are accounted for as variable consideration when estimating the transaction price. Credits are estimated at contract inception and are updated at the end of each reporting period as additional information becomes available.
Wireless and Wireline Contracts
For offers that include third-party providers, we evaluate whether we are acting as the principal or as the agent with respect to the goods or services provided to the customer. This principal-versus-agent assessment involves judgment and focuses on whether the facts and circumstances of the arrangement indicate that the goods or services were controlled by us prior to transferring them to the customer. To evaluate if we have control, we consider various factors including whether we are primarily responsible for fulfillment, bear risk of loss and have discretion over pricing.
Other
Advertising revenues are generated through display advertising and search advertising. Display advertising revenue is generated by the display of graphical advertisements and other performance-based advertising. Search advertising revenue is generated when a consumer clicks on a text-based advertisement on the search results page. Our media business, Verizon Media Group (Verizon Media), primarily earns revenue through display advertising on Verizon Media properties, as well as on third-party properties through our advertising platforms, search advertising and subscription arrangements. Revenue for display and search advertising contracts is recognized as ads are delivered, while subscription contracts are recognized over time. We are generally the principal in transactions carried out through our advertising platforms, and therefore report gross revenue based on the amount billed to our customers. The control and transfer of digital advertising inventory occurs in a rapid, real-time environment, where our proprietary technology enables us to identify, enhance, verify and solely control digital advertising inventory that we then sell to our customers. Our control is further supported by us being primarily responsible to our customers for fulfillment and the fact that we can exercise a level of discretion over pricing.
We offer telematics services including smart fleet management and optimization software. Telematics service revenue is generated primarily through subscription contracts. We recognize revenue over time for our subscription contracts.
We report taxes collected from customers on behalf of governmental authorities on revenue-producing transactions on a net basis.
Maintenance and Repairs
We charge the cost of maintenance and repairs, including the cost of replacing minor items not constituting substantial betterments, principally to Cost of services as these costs are incurred.
Advertising Costs
Costs for advertising products and services, as well as other promotional and sponsorship costs, are charged to Selling, general and administrative expense in the periods in which they are incurred. See Note 15 for additional information.
Earnings Per Common Share
Basic earnings per common share are based on the weighted-average number of shares outstanding during the period. Where appropriate, diluted earnings per common share include the dilutive effect of shares issuable under our stock-based compensation plans.
There were a total of approximately 2 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the years ended December 31, 2020 and 2019. There were a total of approximately 4 million outstanding dilutive securities, primarily consisting of restricted stock units, included in the computation of diluted earnings per common share for the years ended December 31, 2018.
Cash, Cash Equivalents and Restricted Cash
We consider all highly liquid investments with an original maturity of 90 days or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates quoted market value and includes amounts held in money market funds.
Cash collections on the device payment plan agreement receivables collateralizing asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other and Other assets in our consolidated balance sheets.
Cash, cash equivalents and restricted cash are included in the following line items in the consolidated balance sheets:
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(dollars in millions)
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At December 31,
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2020
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2019
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Increase / (Decrease)
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Cash and cash equivalents
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$
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22,171
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$
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2,594
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$
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19,577
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Restricted cash:
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Prepaid expenses and other
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1,195
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1,221
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(26)
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Other assets
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132
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102
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30
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Cash, cash equivalents and restricted cash
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$
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23,498
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$
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3,917
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$
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19,581
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Investments in Debt and Equity Securities
Investments in equity securities that are not accounted for under equity method accounting or result in consolidation are to be measured at fair value. For investments in equity securities without readily determinable fair values, Verizon elects the measurement alternative permitted under GAAP to measure these investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. For investments in debt securities without quoted prices, Verizon uses an alternative matrix pricing method. Investments in equity securities that do not result in consolidation of the investee are included in Investments in unconsolidated businesses and debt securities are included in Other assets in our consolidated balance sheets.
Allowance for Credit Losses
Prior to January 1, 2020, accounts receivable were recorded at cost less an allowance for doubtful accounts. The gross amount of accounts receivable and corresponding allowance for doubtful accounts were presented separately in the consolidated balance sheets. We maintained allowances for uncollectible accounts receivable, including our direct-channel device payment plan agreement receivables, for estimated losses resulting from the failure or inability of our customers to make required payments. Indirect-channel device payment receivables are considered financial instruments and were initially recorded at fair value net of imputed interest, and credit losses were recorded as incurred. However, receivable balances were assessed quarterly for impairment and an allowance was recorded if the receivable was considered impaired. Subsequent to January 1, 2020, accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The gross amount of accounts receivable and corresponding allowance for credit losses are presented separately in the consolidated balance sheets. We maintain allowances for credit losses resulting from the expected failure or inability of our customers to make required payments. We recognize the allowance for credit losses at inception and reassess quarterly based on management’s expectation of the asset’s collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, such as the COVID-19 pandemic, as well as management’s expectations of conditions in the future, if applicable. Our allowance for credit losses is based on management’s assessment of the collectability of assets pooled together with similar risk characteristics.
We pool our device payment plan agreement receivables based on the credit quality indicators and shared risk characteristics of "new customers" and "existing customers." New customers are defined as customers who have been with Verizon for less than 210 days if they are classified as a Consumer segment customer, or less than 12 months if they are classified as a Business segment customer. Existing customers are defined as customers who have been with Verizon for more than 210 days if they are in Consumer, or more than 12 months if they are in Business. We record an allowance to reduce the receivables to the amount that is expected to be collectible. For device payment plan agreement receivables, we record bad debt expense based on a default and loss calculation using our proprietary loss model. The expected loss rate is determined based on customer credit scores and other qualitative factors as noted above. The loss rate is assigned individually on a customer by customer basis and the custom credit scores are then aggregated by vintage and used in our proprietary loss model to calculate the weighted-average loss rate used for determining the allowance balance.
We monitor the collectability of our wireless service receivables as one overall pool. Wireline service receivables are disaggregated and pooled by the following customer groups: consumer, small and medium business, global enterprise, public sector and wholesale. For wireless service receivables and wireline consumer and small and medium business receivables, the allowance is calculated based on a 12 month rolling average write-off balance multiplied by the average life-cycle of an account from billing to write-off. The risk of loss is assessed over the contractual life of the receivables and we adjust the historical loss amounts for current and future conditions based on management’s qualitative considerations. For global enterprise, public sector and wholesale wireline receivables, the allowance for credit losses is based on historical write-off experience and individual customer credit risk, if applicable. We consider multiple factors in determining the allowance as discussed above.
Inventories
Inventory consists of wireless and wireline equipment held for sale, which is carried at the lower of cost (determined principally on either an average cost or first-in, first-out basis) or net realizable value.
Plant and Depreciation
We record property, plant and equipment at cost. Property, plant and equipment are generally depreciated on a straight-line basis.
Leasehold improvements are amortized over the shorter of the estimated life of the improvement or the remaining term of the related lease, calculated from the time the asset was placed in service.
When depreciable assets are retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the property, plant and equipment accounts and any gains or losses on disposition are recognized in Selling, general and administrative expense.
We capitalize and depreciate network software purchased or developed within property, plant and equipment assets. We also capitalize interest associated with the acquisition or construction of network-related assets. Capitalized interest is reported as a reduction in interest expense and depreciated as part of the cost of the network-related assets.
In connection with our ongoing review of the estimated useful lives of property, plant and equipment during 2018, we determined that the average useful lives of certain assets would be increased. These changes in estimates were applied prospectively in 2018 and resulted in a decrease to depreciation expense of $271 million for the year ended December 31, 2018. While the timing and extent of current deployment plans are subject to ongoing analysis and modification, we believe that the current estimates of useful lives are reasonable.
Computer Software and Cloud Computing Costs
We capitalize the cost of internal-use network and non-network software and defer the costs associated with cloud computing arrangements that have a useful life and term in excess of one year. Subsequent additions, modifications or upgrades to internal-use network and non-network software are capitalized only to the extent that they add significant new functionality. Planning, software maintenance and training costs for internal-use software and cloud computing arrangements are expensed in the period in which they are incurred. We capitalize interest associated with the development of internal-use network and non-network software. Capitalized non-network internal-use software costs are amortized using the straight-line method over a period of 5 to 7 years and are included in Other intangible assets, net in our consolidated balance sheets. Costs incurred in implementing a cloud computing arrangement are deferred during the application-development stage and recorded as Prepaid expense and Other in our consolidated balance sheets. Once a project is substantially complete and ready for its intended use, we stop deferring the related cloud computing arrangement costs.
For a discussion of our impairment policy for capitalized software costs, see "Goodwill and Other Intangible Assets" below. Also, see Note 4 for additional information of internal-use non-network software reflected in our consolidated balance sheets. Similar to capitalized software costs, deferred costs associated with cloud computing arrangements are subject to impairment testing.
Goodwill and Other Intangible Assets
Goodwill
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Impairment testing for goodwill is performed annually in the fourth quarter or more frequently if impairment indicators are present.
To determine if goodwill is potentially impaired, we have the option to perform a qualitative assessment. However, we may elect to bypass the qualitative assessment and perform a quantitative impairment test even if no indications of a potential impairment exist.
Under the qualitative assessment, we consider several qualitative factors, including the business enterprise value of the reporting unit from the last quantitative test and the excess of fair value over carrying value from this test, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and Earnings before interest, taxes, depreciation and amortization (EBITDA) margin results, projections and recent merger and acquisition activity), the recent and projected financial performance of the reporting unit, as well as other factors.
The quantitative impairment test for goodwill is performed at the reporting unit level and compares the fair value of the reporting unit (calculated using a combination of a market approach and a discounted cash flow method, as a form of the income approach) to its carrying
value. Estimated fair values of reporting units are Level 3 measures in the fair value hierarchy, see Fair Value Measurements discussion below for additional information. The market approach includes the use of comparative multiples of guideline companies to corroborate discounted cash flow results. The discounted cash flow method is based on the present value of two components, a projected cash flows and a terminal value. The terminal value represents the expected normalized future cash flows of the reporting unit beyond the cash flows from the discrete projection period. The fair value of the reporting unit is calculated based on the sum of the present value of the cash flows from the discrete period and the present value of the terminal value. The discount rate represents our estimate of the weighted-average cost of capital, or expected return, that a marketplace participant would have required as of the valuation date. If the carrying value exceeds the fair value, an impairment charge is booked for the excess carrying value over fair value, limited to the total amount of goodwill of that reporting unit. During the fourth quarter each year, we update our five-year strategic planning review for each of our reporting units. Those plans consider current economic conditions and trends, estimated future operating results, our view of growth-rates and anticipated future economic and regulatory conditions.
See Note 4 for additional information regarding our goodwill impairment testing.
Intangible Assets Not Subject to Amortization
A significant portion of our intangible assets are wireless licenses that provide our wireless operations with the exclusive right to utilize designated radio frequency spectrum to provide wireless communication services. While licenses are issued for only a fixed time, generally ten years, such licenses are subject to renewal by the Federal Communications Commission (FCC). License renewals have occurred routinely and at nominal cost. Moreover, we have determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of our wireless licenses. As a result, we treat the wireless licenses as an indefinite-lived intangible asset. We re-evaluate the useful life determination for wireless licenses each year to determine whether events and circumstances continue to support an indefinite useful life. We aggregate our wireless licenses into one single unit of accounting, as we utilize our wireless licenses on an integrated basis as part of our nationwide wireless network.
We test our wireless licenses for potential impairment annually or more frequently if impairment indicators are present. We have the option to first perform a qualitative assessment to determine whether it is necessary to perform a quantitative impairment test. However, we may elect to bypass the qualitative assessment in any period and proceed directly to performing the quantitative impairment test.
As part of our qualitative assessment, we consider several qualitative factors including the business enterprise value of our combined wireless business, macroeconomic conditions (including changes in interest rates and discount rates), industry and market considerations (including industry revenue and EBITDA margin results, projections and recent merger and acquisition activity), the recent and projected financial performance of our combined wireless business, as well as other factors. See Note 4 for additional information regarding our impairment tests.
Our quantitative assessment consists of comparing the estimated fair value of our aggregate wireless licenses to the aggregated carrying amount as of the test date. Using a quantitative assessment, we estimate the fair value of our aggregate wireless licenses using the Greenfield approach. The Greenfield approach is an income based valuation approach that values the wireless licenses by calculating the cash flow generating potential of a hypothetical start-up company that goes into business with no assets except the wireless licenses to be valued. A discounted cash flow analysis is used to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the estimated fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, then an impairment charge is recognized.
Interest expense incurred while qualifying activities are performed to ready wireless licenses for their intended use is capitalized as part of wireless licenses. The capitalization period ends when the development is discontinued or substantially completed and the license is ready for its intended use.
Wireless licenses can be purchased through public auctions conducted by the FCC. Deposits required to participate in these auctions and purchase licenses are recorded within Other assets in our consolidated balance sheets until the corresponding licenses are received and within Net cash used in investing activities in our consolidated statements of cash flows.
Intangible Assets Subject to Amortization and Long-Lived Assets
Our intangible assets that do not have indefinite lives (primarily customer lists and non-network internal-use software) are amortized over their estimated useful lives. All of our intangible assets subject to amortization and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If any indications of impairment are present, we would test for recoverability by comparing the carrying amount of the asset group to the net undiscounted cash flows expected to be generated from the asset group. If those net undiscounted cash flows do not exceed the carrying amount, we would perform the next step, which is to determine the fair value of the asset and record an impairment, if any. We re-evaluate the useful life determinations for these intangible assets each year to determine whether events and circumstances warrant a revision to their remaining useful lives.
For information related to the carrying amount of goodwill, wireless licenses and other intangible assets, as well as the major components and average useful lives of our other acquired intangible assets, see Note 4.
Leases
We lease network equipment including towers, distributed antenna systems, small cells, real estate, connectivity mediums which include dark fiber, equipment, and other various types of assets for use in our operations under both operating and finance leases. We assess whether an arrangement is a lease or contains a lease at inception. For arrangements considered leases or that contain a lease that is accounted for separately, we determine the classification and initial measurement of the right-of-use asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use.
For both operating and finance leases, we recognize a right-of-use asset, which represents our right to use the underlying asset for the lease term, and a lease liability, which represents the present value of our obligation to make payments arising over the lease term. The present value of the lease payments is calculated using the incremental borrowing rate for operating and finance leases. The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. Management uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate, which is updated on a quarterly basis.
In those circumstances where the Company is the lessee, we account for non-lease components associated with our leases (e.g., common area maintenance costs) and lease components as a single lease component for substantially all of our asset classes. Additionally, in arrangements where we are the lessor, we have customer premise equipment for which we account for non-lease components (e.g., service revenue) and lease components as combined components under the revenue recognition guidance in Topic 606 as the service revenues are the predominant components in the arrangements.
Rent expense for operating leases is recognized on a straight-line basis over the term of the lease and is included in either Cost of services or Selling, general and administrative expense in our consolidated statements of income, based on the use of the facility or equipment on which rent is being paid. Variable rent payments related to both operating and finance leases are expensed in the period incurred. Our variable lease payments consist of payments dependent on various external indicators, including real estate taxes, common area maintenance charges and utility usage.
Operating leases with a term of 12 months or less are not recorded on the balance sheet; we recognize rent expense for these leases on a straight-line basis over the lease term.
We recognize the amortization of the right-of-use asset for our finance leases on a straight-line basis over the shorter of the lease term or the useful life of the right-of-use asset in Depreciation and amortization expense in our consolidated statements of income. The interest expense related to finance leases is recognized using the effective interest method based on the discount rate determined at lease commencement and is included within Interest expense in our consolidated statements of income.
See Note 6 for additional information related to leases, including disclosure required under ASU 2016-02, ASU 2018-01, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01, Leases (Topic 842).
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 — Unobservable pricing inputs in the market
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy.
Income Taxes
Our effective 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 differences in the basis between financial statement and income tax assets and liabilities. Deferred income taxes are recalculated annually at tax rates in effect for the years in which those tax assets and liabilities are expected to be realized or settled. 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 benefits taken or expected to be taken in a tax return. The first 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 recognition 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 benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: 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.
Significant management judgment is required in evaluating our tax positions and in determining our effective tax rate.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based compensation awards made to employees and directors based on estimated fair values. See Note 10 for additional information.
Foreign Currency Translation and Transactions
The functional currency of our foreign operations is generally the local currency. For these foreign entities, we translate their financial statements into U.S. dollars using average exchange rates for the period for income statement amounts and using end-of-period exchange rates for assets and liabilities. We record these translation adjustments in Accumulated other comprehensive income (loss), a separate component of Equity, in our consolidated balance sheets. We record exchange gains and losses resulting from the conversion of transaction currency to functional currency as a component of Other income (expense), net.
Employee Benefit Plans
Pension and postretirement health care and life insurance benefits earned during the year, as well as interest on projected benefit obligations, are accrued. Prior service costs and credits resulting from changes in plan benefits are generally amortized over the average remaining service period of the employees expected to receive benefits. 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 Other income (expense), net 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 benefits or earn service towards the Company retiree medical subsidy. See Note 11 for additional information.
We recognize a pension or a postretirement plan’s funded status as either an asset or liability in 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 enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. We employ risk management strategies, which may include the use of a variety of derivatives including cross currency swaps, forward starting interest rate swaps, interest rate swaps, treasury rate locks, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes.
We measure all derivatives at fair value and recognize them as either assets or liabilities in 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 classified as Level 2. Changes in the fair values of derivative instruments applied as economic hedges are recognized in earnings in the current period. For fair value hedges, the change in the fair value of the derivative instruments is recognized in earnings, along with the change in the fair value of the hedged item. For cash flow hedges, the change in the fair value of the derivative instruments is reported in Other comprehensive income (loss) and recognized in earnings when the hedged item is recognized in earnings. For net investment hedges of certain of our foreign operations, the change in the fair value of the hedging instruments is reported in Other comprehensive income (loss) as part of the cumulative translation adjustment and partially offsets the impact of foreign currency changes on the value of our net investment.
Cash flows from derivatives, which are designated as accounting hedges or applied as economic hedges, are presented consistently with the cash flow classification of the related hedged items. See Note 9 for additional information.
Variable Interest Entities
VIEs are entities that lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity. We consolidate the assets and liabilities of VIEs when we are deemed to be the primary beneficiary. The primary beneficiary is the party that has the power to make the decisions that most significantly affect the economic performance of the VIE and has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
Recently Adopted Accounting Standards
The following ASUs were issued by the Financial Accounting Standards Board (FASB), and have been recently adopted by Verizon.
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Description
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Date of Adoption
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Effect on Financial Statements
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ASU 2016-13, ASU 2018-19, ASU 2019-04, and ASU 2019-05, Financial Instruments - Credit Losses (Topic 326)
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In June 2016, the FASB issued Topic 326 which requires certain financial assets to be measured at amortized cost net of an allowance for estimated credit losses, such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on all relevant information including historical information, current conditions, and reasonable and supportable forecasts that affect the collectability of the amounts. An entity applies the update through a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (January 1, 2020). A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. Early adoption of this standard is permitted.
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1/1/2020
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We adopted Topic 326 beginning on January 1, 2020 using the modified retrospective approach with a cumulative effect adjustment to opening retained earnings recorded at the beginning of the period of adoption. Therefore upon adoption, we recognized and measured estimated credit losses without revising comparative period information or disclosures. We recorded the pre-tax cumulative effect of $265 million ($200 million net of tax) as a reduction to the January 1, 2020 opening balance of retained earnings, which was related to the timing of expected credit loss recognition for certain device payment plan receivables based upon reasonable and supportable forecasts of the future economic condition as of January 1, 2020. Additionally, the adoption of the standard impacted the consolidated balance sheet by presenting financial assets measured at amortized cost separate from the allowance for estimated credit losses. There is no significant impact to our operating results upon the adoption of this standard update.
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ASU 2020-04, Reference Rate Reform (Topic 848)
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Topic 848 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. Topic 848 provides optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met.
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3/12/2020
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Topic 848 was effective for the Company beginning on March 12, 2020, and we will apply the amendments prospectively through December 31, 2022. There was no impact to our consolidated financial statements for the current period as a result of adopting this standard update.
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`
The cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of Topic 326 were as follows:
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(dollars in millions)
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At December 31, 2019
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Adjustments due to
Topic 326
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At January 1, 2020
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Allowance for credit losses
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$
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—
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|
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$
|
919
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$
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919
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Allowance for doubtful accounts
|
733
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(733)
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—
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Other assets
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10,141
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(79)
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10,062
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Deferred income taxes
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34,703
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(65)
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34,638
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Retained earnings
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53,147
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(200)
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52,947
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See Note 8 for additional information related to credit losses, including disclosures required under Topic 326.
Opening Equity Balance Sheet Adjustments from Accounting Standards Adopted in 2019 and 2018
On January 1, 2019, we adopted Topic 842 using the modified retrospective approach. The cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of Topic 842 was as follows:
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(dollars in millions)
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At December 31, 2018
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|
Adjustments due to Topic 842
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At January 1, 2019
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Retained earnings
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$
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43,542
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$
|
410
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$
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43,952
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Noncontrolling interests
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1,565
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1
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1,566
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On January 1, 2018, we adopted Topic 606, ASU 2018-02, Income Statement-Reporting Comprehensive Income and other ASUs. We adopted Topic 606 using the modified retrospective method. We early adopted ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act (TCJA). The
cumulative after-tax effect of the changes made to our consolidated balance sheet for the adoption of Topic 606, ASU 2018-02 and other ASUs was as follows:
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Adjustments due to
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(dollars in millions)
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At December 31, 2017
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Topic 606
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ASU 2018-02
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Other ASUs
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At January 1,
2018
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Retained earnings
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$
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35,635
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$
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2,890
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$
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(652)
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$
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(6)
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$
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37,867
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Accumulated other comprehensive income
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2,659
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—
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652
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(22)
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3,289
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Noncontrolling interests
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1,591
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44
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—
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—
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1,635
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Note 2. Revenue and Contract Costs
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We earn revenue from contracts with customers, primarily through the provision of telecommunications and other services and through the sale of wireless equipment.
Revenue by Category
We have two reportable segments that we operate and manage as strategic business units, Consumer and Business. Revenue is disaggregated by products and services within Consumer, and customer groups (Small and Medium Business, Global Enterprise, Public Sector and Other, and Wholesale) within Business. See Note 13 for additional information on revenue by segment.
Corporate and other includes the results of our media business, Verizon Media, and other businesses. Verizon Media generated revenues from contracts with customers under Topic 606 of approximately $7.0 billion, $7.5 billion and $7.7 billion for the years ended December 31, 2020, 2019 and 2018, respectively.
We also earn revenues that are not accounted for under Topic 606 from leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent. As allowed by the practical expedient within Topic 842, we have elected to combine the lease and non-lease components for those arrangements of customer premise equipment where we are the lessor as components accounted for under Topic 606. Revenues from arrangements that were not accounted for under Topic 606 were approximately $3.0 billion, $3.1 billion and $4.5 billion for the years ended December 31, 2020, 2019 and 2018, respectively.
Remaining Performance Obligations
When allocating the total contract transaction price to identified performance obligations, a portion of the total transaction price may relate to service performance obligations which were not satisfied or are partially satisfied as of the end of the reporting period. Below we disclose information relating to these unsatisfied performance obligations. We apply the practical expedient available under Topic 606 that provides the option to exclude the expected revenues arising from unsatisfied performance obligations related to contracts that have an original expected duration of one year or less. This situation primarily arises with respect to certain month-to-month service contracts. At December 31, 2020, month-to-month service contracts represented approximately 90% of our wireless postpaid contracts and 75% of our wireline Consumer and Small and Medium Business contracts, compared to December 31, 2019, for which month-to-month service contracts represented approximately 88% of our wireless postpaid contracts and 61% of our wireline Consumer and Small and Medium Business contracts.
Additionally, certain contracts provide customers the option to purchase additional services. The fees related to these additional services are recognized when the customer exercises the option (typically on a month-to-month basis).
Contracts for wireless services are generally either month-to-month and cancellable at any time (typically under a device payment plan) or contain terms ranging from greater than one month to up to two years (typically under a fixed-term plan). Additionally, customers may incur charges based on usage or additional optional services purchased in conjunction with entering into a contract that can be cancelled at any time and therefore are not included in the transaction price. The transaction price allocated to service performance obligations, which are not satisfied or are partially satisfied as of the end of the reporting period, are generally related to contracts that are not accounted for as month-to-month contracts.
Our Consumer group customers also include traditional wholesale resellers that purchase and resell wireless service under their own brands to their respective customers. Reseller arrangements generally include a stated contract term, which typically extends longer than two years and, in some cases, include a periodic minimum revenue commitment over the contract term for which revenues will be recognized in future periods.
Consumer customer contracts for wireline services are generally month-to-month; however, they may have a service term of two years or shorter than twelve months. Certain contracts with Business customers for wireline services extend into future periods, contain fixed monthly fees and usage-based fees, and can include annual commitments in each year of the contract or commitments over the entire specified contract term; however, a significant number of contracts for wireline services with our Business customers have a contract term that is twelve months or less.
Additionally, there are certain contracts with Business customers for wireline and telematics services and certain Verizon Media contracts with customers that have a contractual minimum fee over the total contract term. We cannot predict the time period when revenue will be recognized related to those contracts; thus, they are excluded from the time bands below. These contracts have varying terms spanning over approximately five years ending in July 2026 and have aggregate contract minimum payments totaling $2.6 billion.
At December 31, 2020, the transaction price related to unsatisfied performance obligations for total Verizon that is expected to be recognized for 2021, 2022 and thereafter was $17.4 billion, $6.9 billion and $1.5 billion, respectively. Remaining performance obligation estimates are subject to change and are affected by several factors, including terminations and changes in the timing and scope of contracts, arising from contract modifications.
Accounts Receivable and Contract Balances
The timing of revenue recognition may differ from the time of billing to our customers. Receivables presented in our consolidated balance sheets represent an unconditional right to consideration. Contract balances represent amounts from an arrangement when either Verizon has performed, by transferring goods or services to the customer in advance of receiving all or partial consideration for such goods and services from the customer, or the customer has made payment to Verizon in advance of obtaining control of the goods and/or services promised to the customer in the contract.
The following table presents information about receivables from contracts with customers:
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|
At December 31,
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|
At December 31,
|
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At January 1,
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(dollars in millions)
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2020(1)
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2019
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2019
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Receivables(2)
|
$
|
12,029
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|
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$
|
12,078
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|
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$
|
12,104
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Device payment plan agreement receivables(3)
|
10,358
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11,741
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|
8,940
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(1) Balances reflected are subsequent to the adoption of Topic 326 on January 1, 2020.
(2) Balances do not include receivables related to the following contracts: leasing arrangements (such as those for towers and equipment), captive reinsurance arrangements primarily related to wireless device insurance and the interest on equipment financed under a device payment plan agreement when sold to the customer by an authorized agent.
(3) Included in device payment plan agreement receivables presented in Note 8. Balances do not include receivables related to contracts completed prior to January 1, 2018 and receivables derived from the sale of equipment on a device payment plan through an authorized agent.
The following table presents information about contract balances:
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|
|
At December 31,
|
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|
|
At December 31,
|
|
At January 1,
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(dollars in millions)
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2020
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|
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2019
|
|
2019
|
Contract asset
|
$
|
937
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$
|
1,150
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$
|
1,003
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Contract liability
|
5,598
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|
|
|
|
5,307
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|
|
4,943
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Contract assets primarily relate to our rights to consideration for goods or services provided to customers but for which we do not have an unconditional right at the reporting date. Under a fixed-term plan, total contract revenue is allocated between wireless service and equipment revenues. In conjunction with these arrangements, a contract asset is created, which represents the difference between the amount of equipment revenue recognized upon sale and the amount of consideration received from the customer when the performance obligation related to the transfer of control of the equipment is satisfied. The contract asset is reclassified to accounts receivable as wireless services are provided and billed. We have the right to bill the customer as service is provided over time, which results in our right to the payment being unconditional. The contract asset balances are presented in our consolidated balance sheets as Prepaid expenses and other and Other assets. We recognize the allowance for credit losses at inception and reassess quarterly based on management's expectation of the asset's collectability.
Contract assets decreased $213 million during the year ended December 31, 2020. The change in the contract asset balance was primarily due to reclassifications to accounts receivable due to billings on existing contracts and impairment charges of $75 million, partially offset by new contracts driven by customer activity related to wireless. Contract assets increased $147 million during the year ended December 31, 2019. The change in the contract asset balance was primarily due to new contracts and increases in sales promotions recognized upfront, driven by customer activity related to wireless and Fios services, partially offset by reclassifications to accounts receivable due to billings on existing contracts and impairment charges of $113 million.
Contract liabilities arise when we bill our customers and receive consideration in advance of providing the goods or services promised in the contract. We typically bill service one month in advance, which is the primary component of the contract liability balance. Contract liabilities are recognized as revenue when services are provided to the customer. The contract liability balances are presented in our consolidated balance sheets as Other current liabilities and Other liabilities.
Contract liabilities increased $291 million during the year ended December 31, 2020. The change in contract liabilities was primarily due to increases in sales promotions recognized over time and upfront fees, as well as increases in deferred revenue related to advanced billings, partially offset by the satisfaction of performance obligations related to wireless and Fios services. Contract liabilities increased $364 million during the year ended December 31, 2019. The change in contract liabilities was primarily due to increases in sales promotions recognized
over time and upfront fees, as well as increases in deferred revenue related to advanced billings, partially offset by the satisfaction of performance obligations related to wireless and Fios services.
Revenue recognized during the years ended December 31, 2020 and 2019 related to contract liabilities existing at January 1, 2020 and 2019 were $4.3 billion and $4.2 billion, respectively, as performance obligations related to services were satisfied.
The balance of contract assets and contract liabilities recorded in our consolidated balance sheets were as follows:
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|
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|
|
|
|
|
|
At December 31,
|
|
At December 31,
|
(dollars in millions)
|
2020
|
|
2019
|
Assets
|
|
|
|
Prepaid expenses and other
|
$
|
733
|
|
|
$
|
848
|
|
Other assets
|
204
|
|
|
302
|
|
Total
|
$
|
937
|
|
|
$
|
1,150
|
|
|
|
|
|
Liabilities
|
|
|
|
Other current liabilities
|
$
|
4,843
|
|
|
$
|
4,651
|
|
Other liabilities
|
755
|
|
|
656
|
|
Total
|
$
|
5,598
|
|
|
$
|
5,307
|
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Contract Costs
As discussed in Note 1, Topic 606 requires the recognition of an asset for incremental costs to obtain a customer contract, which are then amortized to expense over the respective periods of expected benefit. We recognize an asset for incremental commission expenses paid to internal and external sales personnel and agents in conjunction with obtaining customer contracts. We only defer these costs when we have determined the commissions are incremental costs that would not have been incurred absent the customer contract and are expected to be recoverable. Costs to obtain a contract are amortized and recorded ratably as commission expense over the period representing the transfer of goods or services to which the assets relate. Costs to obtain wireless contracts are amortized over both of our Consumer and Business customers' estimated device upgrade cycles, as such costs are typically incurred each time a customer upgrades. Costs to obtain wireline contracts are amortized as expense over the estimated customer relationship period for our Consumer customers. Incremental costs to obtain wireline contracts for our Business customers are insignificant. Costs to obtain contracts are recorded in Selling, general and administrative expense.
We also defer costs incurred to fulfill contracts that: (1) relate directly to the contract; (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract; and (3) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed as we satisfy our performance obligations and recorded in Cost of services. These costs principally relate to direct costs that enhance our wireline business resources, such as costs incurred to install circuits.
We determine the amortization periods for our costs incurred to obtain or fulfill a customer contract at a portfolio level due to the similarities within these customer contract portfolios.
Other costs, such as general costs or costs related to past performance obligations, are expensed as incurred.
Collectively, costs to obtain a contract and costs to fulfill a contract are referred to as deferred contract costs, and amortized over a two-to five-year period. Deferred contract costs are classified as current or non-current within Prepaid expenses and other and Other assets, respectively.
The balances of deferred contract costs included in our consolidated balance sheets were as follows:
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|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
At December 31,
|
(dollars in millions)
|
2020
|
|
2019
|
Assets
|
|
|
|
Prepaid expenses and other
|
$
|
2,472
|
|
|
$
|
2,578
|
|
Other assets
|
2,070
|
|
|
1,911
|
|
Total
|
$
|
4,542
|
|
|
$
|
4,489
|
|
For the years ended December 31, 2020 and 2019, we recognized expense of $3.1 billion and $2.7 billion, respectively, associated with the amortization of deferred contract costs, primarily within Selling, general and administrative expense in our consolidated statements of income.
We assess our deferred contract costs for impairment on a quarterly basis. We recognize an impairment charge to the extent the carrying amount of a deferred cost exceeds the remaining amount of consideration we expect to receive in exchange for the goods and services related to the cost, less the expected costs related directly to providing those goods and services that have not yet been recognized as expenses. There have been no impairment charges recognized for the years ended December 31, 2020 and 2019.
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|
|
Note 3. Acquisitions and Divestitures
|
Spectrum License Transactions
During 2019, the FCC completed two millimeter wave spectrum license auctions, Auction 101 and Auction 102. Verizon participated in these auctions and was the high bidder on 9 and 1,066 licenses, respectively, in the 24 Gigahertz (GHz) and 28 GHz bands. We submitted an application to the FCC and paid cash of approximately $521 million for the licenses. We received the licenses during the fourth quarter of 2019.
In March 2020, the FCC's incentive auction, Auction 103, for spectrum licenses in the upper 37 GHz, 39 GHz, and 47 GHz bands concluded. Verizon participated in this incentive auction and was the high bidder on 4,940 licenses, which primarily consisted of 37 GHz and, to a lesser extent, 39 GHz spectrum. As an incumbent licensee, our 39 GHz licenses provided us with incentive payments that were applied towards the purchase price of spectrum in the auction. The value of the licenses won by Verizon amounted to $3.4 billion, of which $1.8 billion was settled with the relinquished 39 GHz licenses. The remaining balance was settled in cash of $1.6 billion, of which $101 million was paid in December 2019. In connection with the incentive auction, a pre-tax net loss of $1.2 billion ($914 million after-tax) was recorded in Selling, general and administrative expense in the consolidated statement of income during 2020 because the exchange of the previously held licenses for new licenses had commercial substance. See Note 4 for additional information. The new reconfigured licenses were received in the second quarter 2020 and are included in Wireless licenses in our consolidated balance sheet. The average remaining renewal period for these acquired licenses was 9.9 years.
The fair value of the licenses represents a Level 2 measurement as defined in Accounting Standards Codification 820, Fair Value Measurements and Disclosures, and was determined based on the final auction price for each defined geographical area.
In September 2020, the FCC completed Auction 105 for Priority Access Licenses. Verizon participated in the auction and was the high bidder on 557 licenses in the 3.5 GHz band. We submitted an application to the FCC and paid a cash deposit of approximately $1.9 billion for the licenses. Deposits required to participate in these auctions and purchase licenses are recorded within Other assets in our consolidated balance sheet until the corresponding licenses are received, and within Net cash used in investing activities in our consolidated statements of cash flows. The timing of when the licenses will be issued will be determined by the FCC after all payments have been made.
In September 2020, Cellco Partnership (Cellco), a wholly-owned subsidiary of Verizon, filed an application to participate in FCC Auction 107, which relates to mid-band wireless spectrum known as C-Band. The auction commenced on December 8, 2020. On February 24, 2021, the FCC issued a final notice announcing the conclusion and results of the auction. In its final notice, the FCC announced that Cellco was the winning bidder with respect to approximately $45.5 billion of licenses. Down payments, in the amount of 20% of the cost of the spectrum licenses less the amount of the upfront payment made by bidders in October 2020, with respect to the auction are due on March 10, 2021, and final payments in the amount of 80% of the cost of the spectrum licenses are due on March 24, 2021. In accordance with the rules applicable to the auction, licensees also must pay their allocable shares of an estimated $13.1 billion in associated clearing and incentive costs at the times contemplated by the auction rules.
During 2020 and 2019, we entered into and completed various other wireless license acquisitions for cash consideration of $360 million and an insignificant amount, respectively. During 2018, we entered into and completed various wireless license transactions, including the purchase of Straight Path Communications Inc. (Straight Path) and NextLink Wireless LLC (NextLink).
Straight Path
In May 2017, we entered into a purchase agreement to acquire Straight Path, a holder of millimeter wave spectrum configured for fifth-generation (5G) wireless services, for total consideration reflecting an enterprise value of approximately $3.1 billion. Under the terms of the purchase agreement, we agreed to pay: (1) Straight Path shareholders $184.00 per share, payable in Verizon shares; and (2) certain transaction costs payable in cash of approximately $736 million, consisting primarily of a fee to be paid to the FCC. The transaction closed in February 2018 at which time we issued approximately 49 million shares of Verizon common stock, valued at approximately $2.4 billion, and paid the associated cash consideration.
The acquisition of Straight Path was accounted for as an asset acquisition, as substantially all of the value related to the acquired spectrum. Upon closing, we recorded approximately $4.5 billion of wireless licenses and $1.4 billion of a deferred tax liability. The spectrum acquired as part of the transaction is being used for our 5G technology deployment.
Blue Jeans Network, Inc.
In April 2020, we entered into a definitive purchase agreement to acquire Blue Jeans Network, Inc. (BlueJeans), an enterprise-grade video conferencing and event platform, whose services are sold to Business customers globally. The transaction closed in May 2020. The aggregate cash consideration paid by Verizon at the closing of the transaction was approximately $397 million, net of cash acquired.
The financial results of BlueJeans are included in the consolidated results of Verizon from the date of acquisition. Revenue related to BlueJeans was approximately $73 million for the year ended December 31, 2020.
The acquisition of BlueJeans was accounted for as a business combination. We are currently assessing the identification and measurement of the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, subject to customary closing adjustments. Preliminarily, we recorded approximately $253 million of goodwill and $190 million of other intangible assets, which primarily consisted of customer lists and internally developed technology. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of the net assets acquired. The goodwill represents future economic benefits that we expect to achieve as a result of the acquisition. The goodwill related to this acquisition is included within Business.
TracFone Wireless, Inc.
In September 2020, we entered into a purchase agreement (Tracfone Purchase Agreement) with América Móvil to acquire TracFone Wireless, Inc. (Tracfone), a provider of prepaid and value mobile services in the U.S. Under the terms of the Tracfone Purchase Agreement, we will acquire all of the stock of Tracfone for approximately $3.1 billion in cash and $3.1 billion in Verizon common stock, subject to customary adjustments, at closing. The number of shares issued will be based on an average trading price determined as of the closing date and is subject to a minimum number of shares issuable of 47,124,445 and a maximum number of shares issuable of 57,596,544. The Tracfone Purchase Agreement also includes up to an additional $650 million in future cash consideration related to the achievement of certain performance measures and other commercial arrangements. The transaction is subject to regulatory approvals and closing conditions and is expected to close in the second half of 2021.
Bluegrass Cellular
In October 2020, we entered into a definitive agreement to acquire certain assets of Bluegrass Cellular, a rural wireless operator serving central Kentucky. Bluegrass Cellular provides wireless service to 210,000 customers in 34 counties in rural service areas 3, 4, and 5 in Central Kentucky. The transaction is subject to regulatory approvals and closing conditions and is expected to close in the first quarter of 2021.
Other
In July 2019, Verizon completed a sale-leaseback transaction for buildings and real estate. See Note 6 for additional information related to the transaction. In connection with this transaction and other insignificant transactions, we recorded a pre-tax net gain from dispositions of assets and businesses of $261 million in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2019.
During 2020, we completed various other acquisitions for approximately $127 million in cash consideration. During 2019 and 2018, we completed various other acquisitions for an insignificant amount of cash consideration.
In November 2020, Verizon entered into an agreement to sell our Huffington Post business. In connection with this transaction, we recorded a pre-tax loss of $126 million in Selling, general and administrative expense in our consolidated statement of income for the year ended December 31, 2020. The transaction closed in February 2021.
|
|
|
Note 4. Wireless Licenses, Goodwill and Other Intangible Assets
|
Wireless Licenses
The carrying amounts of Wireless licenses are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Wireless licenses
|
$
|
96,097
|
|
|
$
|
95,059
|
|
At December 31, 2020 and 2019, approximately $6.4 billion and $6.2 billion, respectively, of wireless licenses were under development for commercial service for which we were capitalizing interest costs. We recorded approximately $242 million and $321 million of capitalized interest on wireless licenses for the years ended December 31, 2020 and 2019, respectively.
In the first quarter of 2020, we reclassified substantially all of our 39 GHz wireless licenses, including capitalized interest, with a carrying value of $2.8 billion to assets held for sale in connection with the FCC's incentive auction, Auction 103. As a result, these wireless licenses were adjusted down to their fair value of $1.6 billion resulting in a pre-tax loss of $1.2 billion ($914 million after-tax) in 2020. The new reconfigured licenses were received in the second quarter 2020 and had a value of $3.4 billion. See Note 3 for additional information regarding spectrum license transactions in 2020 and 2019.
During 2020, we renewed various wireless licenses in accordance with FCC regulations. The average renewal period for these licenses was 10 years. See Note 1 for additional information.
As discussed in Note 1, we test our wireless licenses for potential impairment annually or more frequently if impairment indicators are present. In 2020 and 2019, we performed a qualitative assessment to determine whether it was more likely than not that the fair value of our wireless licenses was less than the carrying amount. In 2018, our quantitative impairment test consisted of comparing the estimated fair value of our aggregate wireless licenses estimated using the Greenfield approach to the aggregated carrying amount of the licenses as of the test
date. Our annual assessments in 2020, 2019 and 2018 indicated that the fair value of our wireless licenses exceeded the carrying value and, therefore, did not result in impairment.
Our strategy requires significant capital investments primarily to acquire wireless spectrum, put the spectrum into service, provide additional capacity for growth in our networks, invest in the fiber that supports our businesses, evolve and maintain our networks and develop and maintain significant advanced information technology systems and data system capabilities.
Goodwill
The Company transitioned into our new reporting structure as of April 1, 2019, which resulted in certain changes to our operating segments and reporting units. Upon the date of reorganization, the goodwill of our historical Wireless reporting unit, historical Wireline reporting unit and historical Verizon Connect reporting unit were reallocated to our new Consumer and Business reporting units using a relative fair value approach.
Changes in the carrying amount of Goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Consumer
|
|
Business
|
|
Wireless
|
|
Wireline
|
|
Other (1)
|
|
Total
|
Balance at January 1, 2019
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,397
|
|
|
$
|
3,871
|
|
|
$
|
2,346
|
|
|
$
|
24,614
|
|
Acquisitions
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Reclassifications, adjustments and other
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance at March 31, 2019
|
—
|
|
|
—
|
|
|
18,397
|
|
|
3,892
|
|
|
2,346
|
|
|
24,635
|
|
Reporting Unit reallocation (2)
|
17,104
|
|
|
7,269
|
|
|
(18,397)
|
|
|
(3,892)
|
|
|
(2,084)
|
|
|
—
|
|
Balance at April 1, 2019
|
17,104
|
|
|
7,269
|
|
|
—
|
|
|
—
|
|
|
262
|
|
|
24,635
|
|
Acquisitions
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Media goodwill impairment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(186)
|
|
|
(186)
|
|
Reclassifications, adjustments and other
|
—
|
|
|
(2)
|
|
|
—
|
|
|
—
|
|
|
(60)
|
|
|
(62)
|
|
Balance at December 31, 2019
|
17,104
|
|
|
7,269
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
24,389
|
|
Acquisitions (3)
|
118
|
|
|
254
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
372
|
|
Reclassifications, adjustments and other
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Balance at December 31, 2020
|
$
|
17,222
|
|
|
$
|
7,535
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
$
|
24,773
|
|
(1) Other Goodwill is net of accumulated impairment charges of $4.8 billion at December 31, 2019 and December 31, 2020, related to our Media reporting unit.
(2) Represents the reallocation of goodwill as a result of the Company reorganizing its segments.
(3) Changes in goodwill due to acquisitions is related to BlueJeans and an other insignificant transaction. See Note 3 for additional information.
We performed qualitative impairment assessments for our Consumer and Business reporting units during the fourth quarter of 2020 and 2019. Our qualitative assessments indicated that it was more likely than not that the fair values for our Consumer and Business reporting units exceeded their respective carrying values and, therefore, did not result in an impairment.
We performed impairment assessments of the reporting units impacted by the strategic reorganization, specifically our historical Wireless, historical Wireline and historical Connect reporting units on March 31, 2019, immediately before our strategic reorganization became effective. Our impairment assessments indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying values, and therefore did not result in a goodwill impairment. We then performed quantitative assessments of our Consumer and Business reporting units on April 1, 2019, immediately following our strategic reorganization. Our impairment assessments indicated that the fair value for each of our Consumer and Business reporting units exceeded their respective carrying values and therefore, did not result in a goodwill impairment. Our Media reporting unit was not impacted by the strategic reorganization and there was no indicator of impairment as of the reorganization date.
We performed quantitative impairment assessments for our Media reporting unit in 2019 and 2018. For details on our Media reporting unit, refer to the discussion below.
Our Media business, Verizon Media, experienced increased competitive and market pressures throughout 2018 that resulted in lower than expected revenues and earnings. These pressures were expected to continue and have resulted in a loss of market positioning to our competitors in the digital advertising business. Our Media business also achieved lower than expected benefits from the integration of the Yahoo and AOL businesses.
In connection with Verizon’s annual budget process during the fourth quarter of 2019 and 2018, the leadership at both Verizon Media and Verizon completed a comprehensive five-year strategic planning review of Verizon Media's business prospects resulting in unfavorable adjustments to Verizon Media's financial projections. These revised projections were used as a key input into Verizon Media's annual goodwill impairment tests performed in the fourth quarter of 2019 and 2018.
During the fourth quarter of 2019 and 2018, consistent with our accounting policy, we applied a combination of a market approach and a discounted cash flow method reflecting current assumptions and inputs, including our revised projections, discount rate and expected growth
rates, which resulted in the determination that the fair value of the Media reporting unit was less than its carrying amount. As a result, we recorded a non-cash goodwill impairment charge of approximately $186 million ($176 million after-tax) in the fourth quarter of 2019 and a charge of $4.6 billion ($4.5 billion after-tax) in the fourth quarter of 2018 in our consolidated statement of income. The goodwill balance of the Media reporting unit has been fully written off as a result of these impairment charges.
We performed a quantitative impairment assessment for all of the other reporting units in 2018. Our impairment tests indicated that the fair value for each of our historical Wireless, historical Wireline and historical Connect reporting units exceeded their respective carrying value and, therefore, did not result in an impairment.
Other Intangible Assets
The following table displays the composition of Other intangible assets, net as well as the respective amortization period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
2020
|
|
|
|
|
|
2019
|
At December 31,
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Amount
|
Customer lists (8 to 13 years)
|
$
|
4,021
|
|
|
$
|
(1,961)
|
|
|
$
|
2,060
|
|
|
$
|
3,896
|
|
|
$
|
(1,511)
|
|
|
$
|
2,385
|
|
Non-network internal-use software (5 to 7 years)
|
21,685
|
|
|
(15,104)
|
|
|
6,581
|
|
|
20,530
|
|
|
(14,418)
|
|
|
6,112
|
|
Other (2 to 25 years)
|
1,771
|
|
|
(999)
|
|
|
772
|
|
|
1,967
|
|
|
(966)
|
|
|
1,001
|
|
Total
|
$
|
27,477
|
|
|
$
|
(18,064)
|
|
|
$
|
9,413
|
|
|
$
|
26,393
|
|
|
$
|
(16,895)
|
|
|
$
|
9,498
|
|
The amortization expense for Other intangible assets was as follows:
|
|
|
|
|
|
Years
|
(dollars in millions)
|
2020
|
$
|
2,445
|
|
2019
|
2,311
|
|
2018
|
2,217
|
|
Estimated annual amortization expense for Other intangible assets is as follows:
|
|
|
|
|
|
Years
|
(dollars in millions)
|
2021
|
$
|
2,337
|
|
2022
|
2,009
|
|
2023
|
1,639
|
|
2024
|
1,210
|
|
2025
|
846
|
|
|
|
|
Note 5. Property, Plant and Equipment
|
The following table displays the details of Property, plant and equipment, which is stated at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
Lives (years)
|
|
2020
|
|
2019
|
Land
|
-
|
|
$
|
608
|
|
|
$
|
594
|
|
Buildings and equipment
|
7 to 45
|
|
32,933
|
|
|
31,216
|
|
Central office and other network equipment
|
3 to 50
|
|
160,369
|
|
|
152,733
|
|
Cable, poles and conduit
|
7 to 50
|
|
56,814
|
|
|
52,658
|
|
Leasehold improvements
|
5 to 20
|
|
9,497
|
|
|
9,072
|
|
Work in progress
|
-
|
|
8,576
|
|
|
9,234
|
|
Furniture, vehicles and other
|
3 to 20
|
|
10,940
|
|
|
10,227
|
|
|
|
|
279,737
|
|
|
265,734
|
|
Less accumulated depreciation
|
|
|
184,904
|
|
|
173,819
|
|
Property, plant and equipment, net
|
|
|
$
|
94,833
|
|
|
$
|
91,915
|
|
|
|
|
Note 6. Leasing Arrangements
|
We enter into various lease arrangements for network equipment including towers, distributed antenna systems, small cells, real estate and connectivity mediums including dark fiber, equipment, and other various types of assets for use in our operations. Our leases have remaining lease terms ranging from 1 year to 30 years, some of which include options that we can elect to extend the leases term for up to 25 years, and some of which include options to terminate the leases. For the majority of leases entered into during the current period, we have concluded it is not reasonably certain that we would exercise the options to extend the lease or terminate the lease. Therefore, as of the lease
commencement date, our lease terms generally do not include these options. We include options to extend the lease when it is reasonably certain that we will exercise that option.
During March 2015, we completed a transaction with American Tower Corporation (American Tower) pursuant to which American Tower acquired the exclusive rights to lease and operate approximately 11,300 of our wireless towers for an upfront payment of $5.0 billion. We have subleased capacity on the towers from American Tower for a minimum of 10 years at current market rates in 2015, with options to renew. We continue to include the towers in Property, plant and equipment, net in our consolidated balance sheets and depreciate them accordingly. In addition to the rights to lease and operate the towers, American Tower assumed the interest in the underlying ground leases related to these towers. While American Tower can renegotiate the terms of and is responsible for paying the ground leases, we are still the primary obligor for these leases and accordingly, the present value of these ground leases are included in our operating lease right-of-use assets and operating lease liabilities. We do not expect to be required to make ground lease payments unless American Tower defaults, which we determined to be remote.
The components of net lease cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
Classification
|
2020
|
|
2019
|
Operating lease cost (1)
|
Cost of services
Selling, general and administrative expense
|
$
|
5,016
|
|
|
$
|
4,746
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets
|
Depreciation and amortization expense
|
309
|
|
|
330
|
|
Interest on lease liabilities
|
Interest expense
|
39
|
|
|
38
|
|
Short-term lease cost (1)
|
Cost of services
Selling, general and administrative expense
|
22
|
|
|
40
|
|
Variable lease cost (1)
|
Cost of services
Selling, general and administrative expense
|
295
|
|
|
218
|
|
Sublease income
|
Service revenues and other
|
(291)
|
|
|
(275)
|
|
Total net lease cost
|
|
$
|
5,390
|
|
|
$
|
5,097
|
|
|
|
|
|
|
Gain on sale and leaseback transaction, net
|
Selling, general and administrative expense
|
$
|
—
|
|
|
$
|
(391)
|
|
(1) All operating lease costs, including short-term and variable lease costs, are split between Cost of services and Selling, general and administrative expense in the consolidated statements of income based on the use of the facility or equipment that the rent is being paid on. See Note 1 for additional information. Variable lease costs represent payments that are dependent on a rate or index, or on usage of the asset.
Supplemental disclosure for the statements of cash flows related to operating and finance leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
Cash Flows from Operating Activities
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
Operating cash flows for operating leases
|
$
|
(4,813)
|
|
|
$
|
(4,392)
|
|
Operating cash flows for finance leases
|
(39)
|
|
|
(38)
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
Financing cash flows for finance leases
|
(394)
|
|
|
(352)
|
|
Supplemental lease cash flow disclosures
|
|
|
|
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities
|
3,800
|
|
|
3,510
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
562
|
|
|
564
|
|
Supplemental disclosures for the balance sheet related to finance leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Assets
|
|
|
|
Property, plant and equipment, net
|
$
|
1,127
|
|
|
$
|
939
|
|
|
|
|
|
Liabilities
|
|
|
|
Debt maturing within one year
|
$
|
368
|
|
|
$
|
336
|
|
Long-term debt
|
916
|
|
|
780
|
|
Total Finance lease liabilities
|
$
|
1,284
|
|
|
$
|
1,116
|
|
The weighted-average remaining lease term and the weighted-average discount rate of our leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
2020
|
|
2019
|
Weighted-average remaining lease term (years)
|
|
|
|
Operating Leases
|
8
|
|
9
|
Finance Leases
|
4
|
|
5
|
Weighted-average discount rate
|
|
|
|
Operating Leases
|
3.5
|
%
|
|
4.0
|
%
|
Finance Leases
|
2.5
|
%
|
|
3.2
|
%
|
The Company's maturity analysis of operating and finance lease liabilities as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years
|
Operating Leases
|
|
Finance Leases
|
2021
|
$
|
4,327
|
|
|
$
|
373
|
|
2022
|
3,924
|
|
|
324
|
|
2023
|
3,561
|
|
|
267
|
|
2024
|
3,023
|
|
|
211
|
|
2025
|
2,189
|
|
|
90
|
|
Thereafter
|
7,970
|
|
|
101
|
|
Total lease payments
|
24,994
|
|
|
1,366
|
|
Less interest
|
3,509
|
|
|
82
|
|
Present value of lease liabilities
|
21,485
|
|
|
1,284
|
|
Less current obligation
|
3,485
|
|
|
368
|
|
Long-term obligation at December 31, 2020
|
$
|
18,000
|
|
|
$
|
916
|
|
As of December 31, 2020, we have contractually obligated lease payments amounting to $1.6 billion primarily for office facility operating leases and small cell colocation and fiber operating leases that have not yet commenced. We have legally obligated lease payments for various other operating leases that have not yet commenced for which the total obligation was not significant. We have certain rights and obligations for these leases, but have not recognized an operating lease right-of-use asset or an operating lease liability since they have not yet commenced.
Real Estate Transaction
On July 23, 2019, Verizon completed a sale-leaseback transaction for buildings and real estate. We received total gross proceeds of approximately $1.0 billion. We leased back a portion of the buildings and real estate sold and accounted for it as an operating lease. The term of the leaseback is for two years with four options to renew for an additional three months each. The proceeds received as a result of this transaction have been classified in Other, net within Cash Flows from Investing Activities in our consolidated statement of cash flows for the year ended December 31, 2019. The net gain as a result of this transaction is included in the components of net lease cost table above.
Disclosures Related to Periods Prior to Adoption of Topic 842
Total rent expense under operating leases amounted to $4.1 billion in 2018.
Outstanding long-term debt obligations as of December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
Maturities
|
|
Interest
Rates %
|
|
2020
|
|
2019
|
Verizon Communications
|
< 5 Years
|
|
0.85 – 5.51
|
|
$
|
17,936
|
|
|
$
|
19,885
|
|
|
5-10 Years
|
|
1.38 – 7.75
|
|
35,423
|
|
|
30,038
|
|
|
> 10 Years
|
|
1.75 – 8.95
|
|
65,019
|
|
|
47,777
|
|
|
< 5 Years
|
|
Floating
|
(1)
|
2,917
|
|
|
2,210
|
|
|
5-10 Years
|
|
Floating
|
(1)
|
941
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
Alltel Corporation
|
5-10 Years
|
|
6.80
|
|
38
|
|
|
38
|
|
|
> 10 Years
|
|
7.88
|
|
58
|
|
|
58
|
|
Operating telephone company subsidiaries—debentures
|
< 5 Years
|
|
7.88 – 8.00
|
|
141
|
|
|
141
|
|
|
5-10 Years
|
|
6.00 – 8.38
|
|
317
|
|
|
286
|
|
|
> 10 Years
|
|
5.13 – 8.75
|
|
308
|
|
|
339
|
|
|
|
|
|
|
|
|
|
GTE LLC
|
< 5 Years
|
|
8.75
|
|
141
|
|
|
141
|
|
|
5-10 Years
|
|
6.94
|
|
250
|
|
|
250
|
|
Other subsidiaries—asset-backed debt
|
< 5 Years
|
|
0.41 – 3.56
|
|
9,414
|
|
|
8,116
|
|
|
< 5 Years
|
|
Floating
|
(1)
|
1,216
|
|
|
4,277
|
|
|
|
|
|
|
|
|
|
Finance lease obligations (average rate of 2.5% and 3.2% in 2020 and 2019, respectively)
|
|
|
|
|
1,284
|
|
|
1,116
|
|
Unamortized discount, net of premium
|
|
|
|
|
(6,057)
|
|
|
(4,480)
|
|
Unamortized debt issuance costs
|
|
|
|
|
(604)
|
|
|
(492)
|
|
Total long-term debt, including current maturities
|
|
|
|
|
128,742
|
|
|
111,489
|
|
Less long-term debt maturing within one year
|
|
|
|
|
5,569
|
|
|
10,777
|
|
Total long-term debt
|
|
|
|
|
$
|
123,173
|
|
|
$
|
100,712
|
|
|
|
|
|
|
|
|
|
Total long-term debt, including current maturities
|
|
|
|
|
$
|
128,742
|
|
|
$
|
111,489
|
|
Plus short-term notes payable
|
|
|
|
|
320
|
|
|
—
|
|
Total debt
|
|
|
|
|
$
|
129,062
|
|
|
$
|
111,489
|
|
(1) The debt obligations bore interest at a floating rate based on the London Interbank Offered Rate (LIBOR) plus an applicable interest margin per annum.
Maturities of long-term debt (secured and unsecured) outstanding, including current maturities, excluding unamortized debt issuance costs, at December 31, 2020 are as follows:
|
|
|
|
|
|
Years
|
(dollars in millions)
|
2021
|
$
|
5,227
|
|
2022
|
8,645
|
|
2023
|
7,511
|
|
2024
|
4,286
|
|
2025
|
8,528
|
|
Thereafter
|
93,865
|
|
During 2020, we received $31.5 billion of proceeds from long-term borrowings, which included $5.6 billion of proceeds from asset-backed debt transactions. The net proceeds are a result of the liquidity strategy that we pursued at the beginning of the COVID-19 pandemic to maintain a higher cash balance in order to further protect the Company against the economic uncertainties associated with the COVID-19 pandemic and to opportunistically raise cash to finance future obligations at a time when we believed that market conditions were favorable. We used $17.2 billion of cash to repay, redeem and repurchase long-term borrowings and finance lease obligations, including $7.4 billion to prepay and repay asset-backed, long-term borrowings. The net proceeds from the green bond issued in 2020 are expected to be used to fund certain renewable energy projects.
During 2019, we received $18.7 billion of proceeds from long-term borrowings, which included $8.6 billion of proceeds from asset-backed debt transactions. The net proceeds were used for general corporate purposes including the repayment of debt and the funding of certain eligible green projects. We used $23.9 billion of cash to repay, redeem and repurchase long-term borrowings and finance lease obligations, including $6.3 billion to prepay and repay asset-backed, long-term borrowings.
2020 Significant Debt Transactions
Debt or equity financing may be needed to fund additional investments or development activities, including, for example, to complete our acquisition of Tracfone or to acquire additional wireless spectrum, or to maintain an appropriate capital structure to ensure our financial flexibility.
The following tables show the significant transactions involving the senior unsecured debt securities of Verizon and its subsidiaries that occurred during the year ended December 31, 2020.
Exchange Offers
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Principal Amount Exchanged
|
|
Principal Amount Issued
|
Verizon 2.450% - 5.150% notes and floating rate notes, due 2021 - 2024
|
$
|
1,047
|
|
|
$
|
—
|
|
Verizon 1.680% notes due 2030 (1)
|
—
|
|
|
1,147
|
|
Verizon 5.012% - 6.550% notes, due 2037 - 2049
|
3,666
|
|
|
—
|
|
Verizon 2.987% notes due 2056 (1)
|
—
|
|
|
4,500
|
|
Total (2)
|
$
|
4,713
|
|
|
$
|
5,647
|
|
(1) The principal amount issued in exchange does not include either an insignificant amount of cash paid in lieu of the issuance of fractional new notes or accrued and unpaid interest paid on the old notes accepted for exchange to the date of exchange.
(2) The debt exchange offers above meet the criteria to be accounted for as a modification of debt. As a result, the excess of new notes issued over the notes exchanged of $934 million, and an additional $748 million cash consideration paid were recorded as a discount to Long-term debt in the consolidated balance sheets. The cash payment was recorded in Other, Net within Cash Flows from Financing activities.
Repayments, Redemptions and Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Principal Repaid/ Redeemed/ Repurchased
|
|
Amount Paid (1)
|
Verizon 4.950% notes due 2047
|
$
|
1,475
|
|
|
$
|
1,475
|
|
Verizon 5.143% preferred stock due 2020
|
1,650
|
|
|
1,650
|
|
Verizon floating rate (LIBOR +0.550%) notes due 2020 (2)
|
1,018
|
|
|
1,018
|
|
Verizon 4.600% notes due 2021
|
920
|
|
|
949
|
|
Verizon 3.125% notes due 2022
|
1,256
|
|
|
1,314
|
|
Verizon 3.450% notes due 2021
|
566
|
|
|
575
|
|
Open market repurchases of various Verizon notes
|
121
|
|
|
143
|
|
Verizon 2.375% notes due 2022 (3)
|
€
|
935
|
|
|
1,199
|
|
Verizon 0.500% notes due 2022 (4)
|
€
|
454
|
|
|
517
|
|
Total
|
|
|
$
|
8,840
|
|
(1) Represents amount paid to repay, redeem or repurchase, excluding interest or dividend.
(2) The three-month LIBOR.
(3) Principal and premium amount repaid was €980 million. U.S. dollar amount paid includes cash settlement from derivatives entered into in connection with the transaction. See Note 9 for information on cross currency swaps.
(4) Principal and premium amount repaid was €463 million. U.S. dollar amount paid includes cash settlement from derivatives entered into in connection with the transaction. See Note 9 for information on cross currency swaps.
Issuances
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Principal Amount Issued
|
|
Net Proceeds (1)
|
Verizon 3.600% notes due 2060
|
$
|
2,385
|
|
|
$
|
2,369
|
|
Verizon 3.000% notes due 2027
|
750
|
|
|
747
|
|
Verizon 3.150% notes due 2030
|
1,500
|
|
|
1,489
|
|
Verizon 4.000% notes due 2050
|
1,250
|
|
|
1,241
|
|
Verizon 1.500% notes due 2030 (2)
|
1,000
|
|
|
995
|
|
Verizon 3.000% notes due 2060
|
1,123
|
|
|
1,115
|
|
Verizon 0.850% notes due 2025
|
2,000
|
|
|
1,994
|
|
Verizon 1.750% notes due 2031
|
2,250
|
|
|
2,231
|
|
Verizon 2.650% notes due 2040
|
3,000
|
|
|
2,979
|
|
Verizon 2.875% notes due 2050
|
2,750
|
|
|
2,722
|
|
Verizon 3.000% notes due 2060
|
2,000
|
|
|
1,967
|
|
Verizon 2.500% notes due 2030 (3)
|
C$
|
1,000
|
|
|
705
|
|
Verizon 3.625% notes due 2050 (3)
|
C$
|
300
|
|
|
209
|
|
Verizon 1.300% notes due 2033 (3)
|
€
|
1,350
|
|
|
1,464
|
|
Verizon 1.850% notes due 2040 (3)
|
€
|
800
|
|
|
869
|
|
Verizon 1.125% notes due 2028 (3)
|
£
|
600
|
|
|
766
|
|
Verizon 1.875% notes due 2038 (3)
|
£
|
600
|
|
|
765
|
|
Total
|
|
|
$
|
24,627
|
|
(1) Net proceeds were net of discount and issuance costs.
(2) An amount equal to the net proceeds from this green bond is expected to be used to fund, in whole or in part, certain renewable energy projects, including new and existing investments made by us during the period from July 1, 2020 through the maturity date of the green bond.
(3) See Note 9 for information on derivative transactions related to the issuances.
Short-Term Borrowings and Commercial Paper Program
As of December 31, 2020, we had no short-term borrowings or commercial paper outstanding. In April 2020, we issued $3.5 billion in commercial paper, of which $2.5 billion was repaid during the three months ended June 30, 2020 and the remaining $1.0 billion was repaid during the three months ended September 30, 2020. These transactions were recorded within Other, net cash flow from financing in our consolidated statements of cash flows.
Asset-Backed Debt
As of December 31, 2020, the carrying value of our asset-backed debt was $10.6 billion. Our asset-backed debt includes Asset-Backed Notes (ABS Notes) issued to third-party investors (Investors) and loans (ABS Financing Facilities) received from banks and their conduit facilities (collectively, the Banks). Our consolidated asset-backed debt bankruptcy remote legal entities (each, an ABS Entity or collectively, the ABS Entities) issue the debt or are otherwise party to the transaction documentation in connection with our asset-backed debt transactions. Under the terms of our asset-backed debt, Cellco and certain other affiliates of Verizon (collectively, the Originators) transfer device payment plan agreement receivables to one of the ABS Entities, which in turn transfers such receivables to another ABS Entity that issues the debt. Verizon entities retain the equity interests in the ABS Entities, which represent the rights to all funds not needed to make required payments on the asset-backed debt and other related payments and expenses.
Our asset-backed debt is secured by the transferred device payment plan agreement receivables and future collections on such receivables. The device payment plan agreement receivables transferred to the ABS Entities and related assets, consisting primarily of restricted cash, will only be available for payment of asset-backed debt and expenses related thereto, payments to the Originators in respect of additional transfers of device payment plan agreement receivables, and other obligations arising from our asset-backed debt transactions, and will not be available to pay other obligations or claims of Verizon’s creditors until the associated asset-backed debt and other obligations are satisfied. The Investors or Banks, as applicable, which hold our asset-backed debt have legal recourse to the assets securing the debt, but do not have any recourse to Verizon with respect to the payment of principal and interest on the debt. Under a parent support agreement, Verizon has agreed to guarantee certain of the payment obligations of Cellco and the Originators to the ABS Entities.
Cash collections on the device payment plan agreement receivables collateralizing our asset-backed debt securities are required at certain specified times to be placed into segregated accounts. Deposits to the segregated accounts are considered restricted cash and are included in Prepaid expenses and other, and Other assets in our consolidated balance sheets.
Proceeds from our asset-backed debt transactions are reflected in Cash flows from financing activities in our consolidated statements of cash flows. The asset-backed debt issued and the assets securing this debt are included in our consolidated balance sheets.
As mentioned above, holders of our asset-backed debt do not have any recourse to Verizon with respect to the payment of principal and interest on the debt. However, if an early amortization of our asset-backed debt occurs, including as a result of increased customer
delinquencies or losses relating to the COVID-19 pandemic, all collections on the securitized device payment plan agreement receivables would be used to pay principal and interest on the asset-backed debt, and our financing cash flow requirements would increase for the twelve months immediately following an early amortization event.
ABS Notes
During the year ended December 31, 2020, we completed the following ABS Notes transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Interest Rates %
|
|
Expected Weighted-average Life to Maturity (in years)
|
Principal Amount Issued
|
January 2020
|
|
|
|
|
A-1a Senior class notes
|
1.850
|
|
|
2.46
|
$
|
1,326
|
|
A-1b Senior floating rate class notes
|
LIBOR + 0.270
|
(1)
|
2.46
|
100
|
|
B Junior class notes
|
1.980
|
|
|
3.18
|
98
|
|
C Junior class notes
|
2.060
|
|
|
3.36
|
76
|
|
January 2020 total
|
|
|
|
1,600
|
|
|
|
|
|
|
August 2020
|
|
|
|
|
A Senior class notes
|
0.470
|
|
|
2.48
|
1,426
|
|
B Junior class notes
|
0.680
|
|
|
3.18
|
98
|
|
C Junior class notes
|
0.830
|
|
|
3.36
|
76
|
|
August 2020 total
|
|
|
|
1,600
|
|
|
|
|
|
|
November 2020
|
|
|
|
|
A Senior class notes
|
0.410
|
|
|
2.45
|
1,069
|
|
B Junior class notes
|
0.670
|
|
|
3.19
|
74
|
|
C Junior class notes
|
0.770
|
|
|
3.37
|
57
|
|
November 2020 total
|
|
|
|
1,200
|
|
Total
|
|
|
|
$
|
4,400
|
|
(1) The one-month LIBOR at December 31, 2020 was 0.144%.
Under the terms of each series of ABS Notes, there is a two year revolving period during which we may transfer additional receivables to the ABS Entity. During the year ended December 31, 2020, we made aggregate principal repayments of $3.4 billion on ABS notes that have entered the amortization period, including principal payments made in connection with clean-up redemptions. During the year ended December 31, 2019, we made aggregate principal repayments of $3.3 billion on ABS notes that had entered the amortization period, including principal payments made in connection with clean-up redemptions. In January 2021, we made a principal payment of $180 million in connection with a clean-up redemption.
ABS Financing Facility
In May 2020, we amended and restated our outstanding ABS financing facility originally entered into in 2016, and previously amended and restated in 2019, with a number of financial institutions (ABS Financing Facility). Under the terms of the ABS Financing Facility, the financial institutions make advances under asset-backed loans backed by device payment plan agreement receivables of both consumer and business customers. One loan agreement is outstanding in connection with the ABS Financing Facility, and such loan agreement was amended and restated in May 2020. The loan agreement has a final maturity date in May 2024 and bears interest at floating rates. There is a one year revolving period until May 2021, which may be extended with the approval of the financial institutions. Under the loan agreement, we have the right to prepay all or a portion of the advances at any time without penalty, but in certain cases, with breakage costs. Subject to certain conditions, we may also remove receivables from the ABS Entity. During 2020, we borrowed $1.3 billion and prepaid $4.0 billion under the loan agreement. The aggregate outstanding balance under the ABS Financing Facility was $500 million as of December 31, 2020.
Variable Interest Entities
The ABS Entities meet the definition of a VIE for which we have determined that we are the primary beneficiary as we have both the power to direct the activities of the entity that most significantly impact the entity’s performance and the obligation to absorb losses or the right to receive benefits of the entity. Therefore, the assets, liabilities and activities of the ABS Entities are consolidated in our financial results and are included in amounts presented on the face of our consolidated balance sheets.
The assets and liabilities related to our asset-backed debt arrangements included in our consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
At December 31,
|
(dollars in millions)
|
2020
|
|
2019
|
Assets
|
|
|
|
Accounts receivable, net
|
$
|
9,257
|
|
|
$
|
10,525
|
|
Prepaid expenses and other
|
1,128
|
|
|
1,180
|
|
Other assets
|
2,950
|
|
|
3,856
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable and accrued liabilities
|
8
|
|
|
11
|
|
Debt maturing within one year
|
4,191
|
|
|
5,578
|
|
Long-term debt
|
6,413
|
|
|
6,791
|
|
See Note 8 for additional information on device payment plan agreement receivables used to secure asset-backed debt.
Long-Term Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
(dollars in millions)
|
Maturities
|
|
Facility Capacity
|
|
Unused Capacity
|
|
Principal Amount Outstanding
|
Verizon revolving credit facility (1)
|
2024
|
|
$
|
9,500
|
|
|
$
|
9,392
|
|
|
N/A
|
Various export credit facilities (2)
|
2022-2028
|
|
7,500
|
|
|
1,000
|
|
|
$
|
4,882
|
|
Total
|
|
|
$
|
17,000
|
|
|
$
|
10,392
|
|
|
$
|
4,882
|
|
N/A - not applicable
(1) The revolving credit facility does not require us to comply with financial covenants or maintain specified credit ratings, and it permits us to borrow even if our business has incurred a material adverse change. The revolving credit facility provides for the issuance of letters of credit.
(2) During 2020 and 2019, we drew down $1.0 billion and $1.5 billion from these facilities, respectively. These credit facilities are used to finance equipment-related purchases. Borrowings under certain of these facilities amortize semi-annually in equal installments up to the applicable maturity dates. Maturities reflect maturity dates of principal amounts outstanding. Any amounts borrowed under these facilities and subsequently repaid cannot be reborrowed.
2021 Credit Agreement
Delayed Draw Term Loan Credit Agreement
On February 24, 2021 (the Effective Date), Verizon entered into a $25.0 billion Delayed Draw Term Loan Credit Agreement (the Credit Agreement) with two financial institutions, which includes initial commitments of $12.5 billion from each of these parties. The Credit Agreement provides Verizon with the ability to borrow up to $25.0 billion for general corporate purposes, including any potential acquisition of spectrum. The loans under the Credit Agreement are available during the period (the Availability Period) beginning on the Effective Date and ending on the earlier of (i) May 28, 2021, and (ii) the receipt by the two financial institutions of written notice by Verizon of its election to terminate commitments pursuant to the Credit Agreement. The availability of the loans under the Credit Agreement, which have not yet been funded, is subject to the satisfaction (or waiver) of the conditions that certain representations of Verizon are accurate in all material respects and the absence of certain event of default. The loans under the Credit Agreement are to be made in a single borrowing on the funding date and will mature and be payable in full on the date that is 364 days after the funding date unless extended pursuant to the terms of the Credit Agreement. The two financial institutions may syndicate their commitments under the Credit Agreement, subject to the terms of the Credit Agreement.
Interest Rate and Fees
The loans under the Credit Agreement will bear interest at a rate equal to, at the option of Verizon, (i) the base rate (defined as the greater of the rate last quoted by the Wall Street Journal as the "prime rate", the federal funds rate plus 0.500%, and one-month LIBOR plus 1.000%, subject to a floor of 1.000%) or (ii) LIBOR, in each case plus a margin to be determined by reference to Verizon’s credit ratings and ranging from 0.000% to 0.125% in the case of base rate loans and 0.625% to 1.125% in the case of LIBOR loans. Additional margin of 0.125% is added to the loan on December 31, 2021.
Verizon will pay a commitment fee on the daily actual unused commitment of each lender starting on the date that is 60 days after the Effective Date through the last day of the Availability Period. This fee accrues at a rate determined by reference to Verizon’s credit ratings and ranges from 0.070% to 0.125% per annum.
Prepayments
The Credit Agreement requires Verizon to reduce unused commitments and prepay the loans with 100% of the net cash proceeds received from issuances or sales of equity and incurrences of borrowed money indebtedness, subject to certain exceptions.
Covenants and Events of Default
The Credit Agreement contains certain negative covenants, including a negative pledge covenant, a merger or similar transaction covenant and an accounting changes covenant, and affirmative covenants and events of default that are customary for companies maintaining an investment grade credit rating. An event of default may result in the inability to borrow in certain circumstances or the acceleration of any outstanding loan under the Credit Agreement, as applicable.
Non-Cash Transactions
During the years ended December 31, 2020, 2019 and 2018, we financed, primarily through vendor financing arrangements, the purchase of approximately $1.7 billion, $563 million, and $1.1 billion, respectively, of long-lived assets consisting primarily of network equipment. As of December 31, 2020 and 2019, $1.6 billion and $1.1 billion, respectively, relating to these financing arrangements, including those entered into in prior years and liabilities assumed through acquisitions, remained outstanding. These purchases are non-cash financing activities and therefore are not reflected within Capital expenditures in our consolidated statements of cash flows.
Guarantees
We guarantee the debentures of our operating telephone company subsidiaries. As of December 31, 2020, $765 million aggregate principal amount of these obligations remained outstanding. Each guarantee will remain in place for the life of the obligation unless terminated pursuant to its terms, including the operating telephone company no longer being a wholly-owned subsidiary of Verizon.
We also guarantee the debt obligations of GTE LLC as successor in interest to GTE Corporation that were issued and outstanding prior to July 1, 2003. As of December 31, 2020, $391 million aggregate principal amount of these obligations remain outstanding.
Debt Covenants
We and our consolidated subsidiaries are in compliance with all of our restrictive covenants in our debt agreements.
|
|
|
Note 8. Device Payment Plan Agreement and Wireless Service Receivables
|
The following table presents information about accounts receivable, net of allowances, recorded in our consolidated balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
(dollars in millions)
|
Device payment plan agreement
|
|
Wireless
service
|
|
Other receivables(1)
|
|
Total
|
Accounts receivable(2)
|
$
|
12,287
|
|
|
$
|
5,320
|
|
|
$
|
7,562
|
|
|
$
|
25,169
|
|
Less Allowance for credit losses
|
686
|
|
|
262
|
|
|
304
|
|
|
1,252
|
|
Accounts receivable, net of allowance
|
$
|
11,601
|
|
|
$
|
5,058
|
|
|
$
|
7,258
|
|
|
$
|
23,917
|
|
(1) Other receivables primarily include wireline receivables, Verizon Media receivables and other receivables, the allowances for which are individually insignificant.
(2) Following the adoption of Topic 326 on January 1, 2020, accounts receivable are measured at amortized cost.
Under the Verizon device payment program, our eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under our fixed-term service plans, and their device payment plan charge is included on their wireless monthly bill. We no longer offer Consumer customers new fixed-term, subsidized service plans for devices; however, we continue to offer subsidized plans to our Business customers. We also continue to service existing plans for customers who have not yet purchased and activated devices under the Verizon device payment program.
Wireless Device Payment Plan Agreement Receivables
The following table displays device payment plan agreement receivables, net, recognized in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019(1)
|
Device payment plan agreement receivables, gross
|
$
|
17,959
|
|
|
$
|
19,493
|
|
Unamortized imputed interest
|
(453)
|
|
|
(454)
|
|
Device payment plan agreement receivables, at amortized cost
|
17,506
|
|
|
19,039
|
|
Allowance (2)
|
(940)
|
|
|
(472)
|
|
Device payment plan agreement receivables, net
|
$
|
16,566
|
|
|
$
|
18,567
|
|
|
|
|
|
Classified in our consolidated balance sheets:
|
|
|
|
Accounts receivable, net
|
$
|
11,601
|
|
|
$
|
13,045
|
|
Other assets
|
4,965
|
|
|
5,522
|
|
Device payment plan agreement receivables, net
|
$
|
16,566
|
|
|
$
|
18,567
|
|
(1) Balances reflected are prior to the adoption of Topic 326 on January 1, 2020.
(2) Includes allowance for both short-term and long-term device payment plan agreement receivables. The allowance at December 31, 2020 and December 31, 2019 relate to our provision for credit losses and doubtful accounts, respectively.
Included in our device payment plan agreement receivables, net at December 31, 2020 and December 31, 2019, are net device payment plan agreement receivables of $12.1 billion and $14.3 billion, respectively, which have been transferred to ABS Entities and continue to be reported in our consolidated balance sheets. See Note 7 for additional information. We believe the carrying value of these receivables approximate their fair value using a Level 3 expected cash flow model.
For indirect channel wireless contracts with customers, we impute risk adjusted interest on the device payment plan agreement receivables. We record the imputed interest as a reduction to the related accounts receivable. Interest income, which is included within Service revenues and other in our consolidated statements of income, is recognized over the financed device payment term.
Promotions
We may offer certain promotions that allow a customer to trade in their owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, we may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. We recognize a liability, measured at fair value, for the customer's right to trade-in the device which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net does not reflect the trade-in device liability. At December 31, 2020 and December 31, 2019, the amount of trade-in liability was $70 million and $103 million, respectively.
From time to time, we offer certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a customer enters into a device payment plan agreement with the right to upgrade to a new device, we account for this trade-in right as a guarantee obligation.
Origination of Device Payment Plan Agreements
When originating device payment plan agreements, we use internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. Verizon’s experience has been that the payment attributes of longer tenured customers are highly predictive for estimating their reliability to make future payments. Customers with longer tenures tend to exhibit similar risk characteristics to other customers with longer tenures, and receivables due from customers with longer tenures tend to perform better than receivables from customers that have not previously been Verizon customers. As a result of this experience, we make initial lending decisions based upon whether the customers are "established customers" or "short-tenured customers." If a Consumer customer has been a customer for 45 days or more, or if a Business customer has been a customer for 12 months or more, the customer is considered an "established customer." For established customers, the credit decision and ongoing credit monitoring processes rely on a combination of internal and external data sources. If a Consumer customer has been a customer less than 45 days, or a Business customer has been a customer for less than 12 months, the customer is considered a "short-tenured customer." For short-tenured customers, the credit decision and credit monitoring processes rely more heavily on external data sources.
Internal data and/or external credit data are obtained from the credit reporting agencies, if available, to create a custom credit risk score for Consumer customers. The custom credit risk score is generated automatically from the applicant’s credit data using proprietary custom credit models. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment. For a small portion of short-tenured customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternative credit data is used for the risk assessment. For Business customers, we also verify the existence of the business with external data sources.
Based on the custom credit risk score, we assign each customer to a credit class, each of which has specified offers of credit including an account level spending limit and either a maximum amount of credit allowed per device or a required down payment percentage. During the fourth quarter 2018, we moved all Consumer customers, short-tenured and established, from a required down payment percentage, between zero and 100%, to a maximum amount of credit per device.
Credit Quality Information
Subsequent to origination, we assess indicators for the quality of our wireless device payment plan agreement portfolio using two models, one for new customers and one for existing customers. The model for new customers pools all Consumer and Business wireless customers based on 210 days and 12 months or less, respectively, as "new customers." The model for existing customers pools all Consumer and Business wireless customers based on 210 days and 12 months or more, respectively, as "existing customers."
The following table presents device payment plan agreement receivables, at amortized cost, as of December 31, 2020, by credit quality indicator and year of origination:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Origination
|
|
|
(dollars in millions)
|
2020
|
|
2019
|
|
Prior to 2019(1)
|
|
Total
|
New customers
|
$
|
1,914
|
|
|
$
|
765
|
|
|
$
|
12
|
|
|
$
|
2,691
|
|
Existing customers
|
10,662
|
|
|
4,103
|
|
|
50
|
|
|
14,815
|
|
Total
|
$
|
12,576
|
|
|
$
|
4,868
|
|
|
$
|
62
|
|
|
$
|
17,506
|
|
(1) Includes accounts that have been suspended at a point in time.
The data presented in the table above was last updated on December 31, 2020.
We assess indicators for the quality of our wireless service receivables portfolio as one overall pool. As of December 31, 2020, wireless service receivables, at amortized cost, originating in 2020 and 2019 were $5.3 billion and an insignificant amount, respectively.
Allowance for Credit Losses
The credit quality indicators are used in determining the estimated amount and the timing of expected credit losses for the device payment plan agreement and wireless service receivables portfolios.
Activity in the allowance for credit losses by portfolio segment of receivables were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Device Payment
Plan Agreement Receivables(1)
|
|
Wireless Service Plan Receivables
|
Balance at January 1, 2020
|
$
|
472
|
|
|
$
|
156
|
|
Opening balance sheet adjustment related to Topic 326 adoption
|
265
|
|
|
—
|
|
Adjusted opening balance, January 1, 2020
|
737
|
|
|
156
|
|
Current period provision for expected credit losses
|
780
|
|
|
340
|
|
Write-offs charged against the allowance
|
(621)
|
|
|
(303)
|
|
Recoveries collected
|
44
|
|
|
69
|
|
Balance at December 31, 2020
|
$
|
940
|
|
|
$
|
262
|
|
(1) Includes allowance for both short-term and long-term device payment plan agreement receivables.
We monitor delinquency and write-off experience based on the quality of our device payment plan agreement and wireless service receivables portfolios. The extent of our collection efforts with respect to a particular customer are based on the results of our proprietary custom internal scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These custom scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Since our customers’ behaviors may be impacted by general economic conditions, we analyzed whether changes in macroeconomic conditions impact our credit loss experience and have concluded that our credit loss estimates are generally not materially impacted by reasonable and supportable forecasts of future economic conditions. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. For device payment plan agreement receivables, we consider an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date. For wireless service receivables, an account is considered delinquent 34 days after the bill cycle date. The risk class determines the speed and severity of the collections effort including initiatives taken to facilitate customer payment.
As of December 31, 2020, our allowance for credit losses considered the current and potential future impacts caused by the COVID-19 pandemic based on available information to date. The impacts also include the Company's commitment to the FCC's "Keep Americans Connected" pledge, through which we pledged to waive late fees for, and not terminate service to, any of our consumer or small business customers who informed us that they had been impacted financially by the COVID-19 pandemic through May 13, which we extended to June 30, 2020. Starting July 1, customers who had notified us that they had been financially impacted by the pandemic and had an unpaid balance were automatically enrolled in our "Stay Connected" repayment program, which allows customers to pay off their service balance over six months and extends any unpaid device payment plan agreements by the number of months unpaid.
The balance and aging of the device payment plan agreement receivables, at amortized cost, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31, 2020
|
|
|
|
|
Unbilled
|
$
|
16,333
|
|
|
|
|
|
Billed:
|
|
|
|
|
|
Current
|
937
|
|
|
|
|
|
Past due
|
236
|
|
|
|
|
|
Device payment plan agreement receivables, at amortized cost
|
$
|
17,506
|
|
|
|
|
|
Collections of Repurchased Wireless Device Payment Plan Agreement Receivables
During 2017, we repurchased all outstanding device payment plan agreement receivables previously sold under the Receivables Purchase Agreement programs that were terminated in December 2017. Collections following the repurchase of receivables were insignificant during both 2020 and 2019, and were $195 million during 2018. Collections of repurchased receivables were recorded in Cash flows used in investing activities in our consolidated statement of cash flows.
|
|
|
Note 9. Fair Value Measurements and Financial Instruments
|
Recurring Fair Value Measurements
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Level 1(1)
|
|
Level 2(2)
|
|
Level 3(3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Prepaid expenses and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
—
|
|
|
459
|
|
|
—
|
|
|
459
|
|
Interest rate swaps
|
—
|
|
|
787
|
|
|
—
|
|
|
787
|
|
Cross currency swaps
|
—
|
|
|
1,446
|
|
|
—
|
|
|
1,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
2,704
|
|
|
$
|
—
|
|
|
$
|
2,704
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting interest rate swaps
|
$
|
—
|
|
|
$
|
409
|
|
|
$
|
—
|
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forwards
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
Interest rate swaps
|
—
|
|
|
303
|
|
|
—
|
|
|
303
|
|
Cross currency swaps
|
—
|
|
|
196
|
|
|
—
|
|
|
196
|
|
Forward starting interest rate swaps
|
—
|
|
|
388
|
|
|
—
|
|
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
1,298
|
|
|
$
|
—
|
|
|
$
|
1,298
|
|
(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) Unobservable pricing inputs in the market
The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Level 1 (1)
|
|
Level 2 (2)
|
|
Level 3 (3)
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
—
|
|
|
$
|
442
|
|
|
$
|
—
|
|
|
$
|
442
|
|
Interest rate swaps
|
—
|
|
|
568
|
|
|
—
|
|
|
568
|
|
Cross currency swaps
|
—
|
|
|
211
|
|
|
—
|
|
|
211
|
|
Foreign exchange forwards
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
1,226
|
|
|
$
|
—
|
|
|
$
|
1,226
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
—
|
|
|
$
|
173
|
|
Cross currency swaps
|
—
|
|
|
912
|
|
|
—
|
|
|
912
|
|
Forward starting interest rate swaps
|
—
|
|
|
604
|
|
|
—
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
—
|
|
|
$
|
1,689
|
|
|
$
|
—
|
|
|
$
|
1,689
|
|
(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) Unobservable pricing inputs in the market
Certain of our equity investments do not have readily determinable fair values and are excluded from the tables above. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our consolidated balance sheets. As of December 31, 2020 and December 31, 2019, the carrying amount of our investments without readily determinable fair values were $402 million and $284 million, respectively. During 2020, there were approximately $101 million of fair value adjustments due to observable price changes and insignificant impairment charges. Cumulative adjustments due to observable price changes and impairment charges were approximately $81 million and insignificant, respectively.
Fixed income securities consist primarily of investments in municipal bonds. For fixed income securities that do not have quoted prices in active markets, we use alternative matrix pricing resulting in these debt securities being classified 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 classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.
We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period.
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 debt instruments, which is a Level 1 measurement, as well as quoted prices for similar debt instruments with comparable terms and maturities, which is a Level 2 measurement.
The fair value of our short-term and long-term debt, excluding finance leases, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
(dollars in millions)
|
Carrying
Amount
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
At December 31, 2019
|
$
|
110,373
|
|
|
$
|
86,712
|
|
|
$
|
42,488
|
|
|
$
|
—
|
|
|
$
|
129,200
|
|
At December 31, 2020
|
127,778
|
|
|
103,967
|
|
|
52,785
|
|
|
—
|
|
|
156,752
|
|
Derivative Instruments
We enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. We employ risk management strategies, which may include the use of a variety of derivatives including interest rate swaps, cross currency swaps, forward starting interest rate swaps, treasury rate locks, interest rate caps and foreign exchange forwards. We do not hold derivatives for trading purposes.
The following table sets forth the notional amounts of our outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Interest rate swaps
|
$
|
17,768
|
|
|
$
|
17,004
|
|
Cross currency swaps
|
26,288
|
|
|
23,070
|
|
Forward starting interest rate swaps
|
2,000
|
|
|
3,000
|
|
Interest rate caps
|
—
|
|
|
679
|
|
Foreign exchange forwards
|
1,405
|
|
|
1,130
|
|
Interest Rate Swaps
We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates that are currently based on LIBOR, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. We record the interest rate swaps at fair value in our consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the hedged debt due to changes in interest rates.
During 2020, we entered into interest rate swaps with a total notional value of $10.2 billion and settled interest rate swaps with a total notional value of $9.5 billion. During 2020, we received $764 million from the settlement of interest rate swaps, which was recorded in Other, net within Cash Flow from Operating Activities. During 2019, we entered into interest rate swaps with a total notional value of $510 million and settled interest rate swaps with a total notional value of $3.3 billion.
The ineffective portion of these interest rate swaps was a gain of an insignificant amount and $54 million for the years ended December 31, 2020 and 2019, respectively.
The following amounts were recorded in Long-term debt in our consolidated balance sheets related to cumulative basis adjustments for fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Carrying amount of hedged liabilities
|
$
|
18,849
|
|
|
$
|
17,337
|
|
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities
|
557
|
|
|
433
|
|
Cumulative amount of fair value hedging adjustment remaining for which hedge accounting has been discontinued
|
627
|
|
|
—
|
|
Cross Currency Swaps
We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc, Canadian Dollar and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses.
During 2020, we entered into cross currency swaps with a total notional value of $4.8 billion and we settled cross currency swaps with a total notional value of $1.6 billion. A pre-tax gain of $1.8 billion was recognized in Other comprehensive loss with respect to these swaps.
During 2019, we entered into cross currency swaps with a total notional value of $6.4 billion and did not settle any cross currency swaps. A pre-tax loss of $385 million was recognized in Other comprehensive loss with respect to these swaps.
A portion of the gains and losses recognized in Other comprehensive loss was reclassified to Other income (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item. See Note 14 to the consolidated financial statements for additional information.
Forward Starting Interest Rate Swaps
We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions. We hedge our exposure to the variability in future cash flows based on the expected maturities of the related forecasted debt issuance.
During 2020, we did not enter into any forward starting interest rate swaps and we settled forward starting interest rate swaps with a total notional value of $1.0 billion. A pre-tax loss of $486 million, resulting from interest rate movements was recognized in Other comprehensive loss with respect to these swaps.
During 2019, we did not enter into any forward starting interest rate swaps and we settled forward starting interest rate swaps with a total notional value of $1.0 billion. A pre-tax loss of $565 million, resulting from interest rate movements was recognized in Other comprehensive loss with respect to these swaps.
Treasury Rate Locks
We enter into treasury rate locks to mitigate our interest rate risk. During 2020, we entered into and settled treasury rate locks designated as cash flow hedges with a total notional value of $5.5 billion, and we recognized an insignificant pre-tax loss in Other comprehensive loss. During 2019, we did not enter into or settle any treasury rate locks designated as cash flow hedges, and we did not recognize any amount in our consolidated financial statements. In January and February 2021, we entered into treasury rate locks with a total notional value of $4.3 billion.
Net Investment Hedges
We have designated certain foreign currency debt instruments as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. The notional amount of Euro-denominated debt as a net investment hedge was €750 million as of both December 31, 2020 and 2019.
Undesignated Derivatives
We also have the following derivative contracts which we use as economic hedges but for which we have elected not to apply hedge accounting.
Interest Rate Caps
We enter into interest rate caps to mitigate our interest exposure to interest rate increases on our ABS Financing Facilities and ABS Notes. During both 2020 and 2019, we recognized insignificant pre-tax losses in Interest expense related to interest rate caps.
Foreign Exchange Forwards
We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries, as well as foreign exchange risk related to debt settlements. During 2020, we entered into foreign exchange forwards with a total notional value of $14.0 billion and settled foreign exchange forwards with a total notional value of $13.8 billion. During 2019, we entered into foreign exchange forwards with a total notional value of $12.0 billion and settled foreign exchange forwards with a total notional value of $11.5 billion. During 2020, a pre-tax gain of $142 million was recognized in Other income (expense), net. During 2019, a pre-tax loss of an insignificant amount was recognized in Other income (expense), net.
Treasury Rate Locks
We enter into treasury rate locks to mitigate our interest rate risk. During 2020, we entered into and settled treasury rate locks with a total notional value of $1.6 billion, and we recognized an insignificant pre-tax gain in Interest expense.
During 2019, we entered into treasury rate locks with a total notional value of $1.5 billion to hedge the tender offers conducted in May 2019 for fifteen series of notes issued by Verizon with coupon rates ranging from 4.672% to 5.012% and maturity dates ranging from 2054 to 2055 (May Tender offers). In addition, we entered into treasury rate locks with a total notional value of $1.5 billion to hedge the tender offers conducted in November and December 2019 for eleven and twenty series of notes and debentures, respectively, issued by Verizon and other subsidiaries with coupon rates ranging from 3.850% to 8.950% and maturity dates ranging from 2021 to 2055 (November and December Tender offers). Upon the early settlement of the May, November and December Tender Offers, we settled these hedges and recognized an insignificant gain in Other income (expense), net.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, including device payment plan agreement receivables, certain notes receivable, including lease receivables, and derivative contracts.
Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. The CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. We do not offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value. At December 31, 2020, we held $0.2 billion of collateral related to derivative contracts under collateral exchange agreements, which were recorded as Other current liabilities in our consolidated balance sheet. At December 31, 2019, we held an insignificant amount of collateral related to derivative contracts under collateral exchange arrangements, which were recorded as Other current liabilities in our consolidated balance sheet. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties.
|
|
|
Note 10. Stock-Based Compensation
|
Verizon Long-Term Incentive Plan
In May 2017, Verizon’s shareholders approved the 2017 Long-Term Incentive Plan (the 2017 Plan) and terminated Verizon's authority to grant new awards under the Verizon 2009 Long-Term Incentive Plan (the 2009 Plan). The 2017 Plan provides for broad-based equity grants to employees, including executive officers, and permits the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance stock units and other awards. Upon approval of the 2017 Plan, Verizon reserved for issuance under the 2017 Plan the number of shares that were remaining but not issued under the 2009 Plan. Shares subject to outstanding awards under the 2009 Plan that expire, are canceled or otherwise terminated will also be available for awards under the 2017 Plan. As of December 31, 2020, 83 million shares are reserved for future issuance under the 2017 Plan.
Restricted Stock Units
Restricted Stock Units (RSUs) granted under the 2017 Plan generally vest in three equal installments on each anniversary of the grant date. The RSUs that are paid in stock upon vesting and are thus classified as equity awards are measured using the grant date fair value of Verizon common stock and are not remeasured at the end of each reporting period. The RSUs that are settled in cash are classified as liability awards and the liability is measured at its fair value at the end of each reporting period. All RSUs granted under the 2017 Plan have dividend equivalent units, which will be paid to participants at the time the RSU award is paid, and in the same proportion as the RSU award. In 2020, Verizon announced a broad-based program that provides for the annual award of cash-settled RSUs under the 2017 Plan to all full-time and part-time employees who meet eligibility requirements on the annual grant date.
In February 2018, Verizon announced a broad-based employee special award of RSUs under the 2017 Plan to eligible full-time and part-time employees. These RSUs vested in two equal installments on each anniversary of the grant date and paid in cash. The first installment of the restricted stock units vested and were paid in February 2019 and the remaining restricted stock units vested and were paid in February 2020.
In connection with our acquisition of Yahoo’s operating business, on the closing date of the Transaction each unvested and outstanding Yahoo RSU award that was held by an employee who became an employee of Verizon was replaced with a Verizon RSU award, which is generally payable in cash upon the applicable vesting date. These awards are classified as liability awards and are measured at fair value at the end of each reporting period.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate forfeitures and recognize that estimated compensation cost of restricted stock units, net of estimated forfeitures, on a straight-line basis over the vesting period.
Performance Stock Units
The 2017 Plan also provides for grants of Performance Stock Units (PSUs) that generally vest at the end of the third year after the grant. As defined by the 2017 Plan, the Human Resources Committee of the Board of Directors determines the number of PSUs a participant earns based on the extent to which the corresponding performance goals have been achieved over the three-year performance cycle. The PSUs that are paid in stock upon vesting and are classified as equity awards are measured using the grant date fair value of Verizon common stock and are not remeasured at the end of each reporting period. The PSUs that are settled in cash and are classified as liability awards are measured at its fair value at the end of each reporting period and, therefore, will fluctuate based on the price of Verizon common stock as well as performance relative to the targets. All PSUs granted under the 2017 Plan have dividend equivalent units, which will be paid to participants at the time that PSU award is determined and paid, and in the same proportion as the PSU award. The granted and cancelled activity for the PSU award includes adjustments for the performance goals achieved.
The following table summarizes Verizon’s Restricted Stock Unit and Performance Stock Unit activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Performance Stock Units
|
(shares in thousands)
|
Equity Awards
|
|
Liability Awards
|
|
Equity Awards
|
Liability Awards
|
Outstanding January 1, 2018
|
12,633
|
|
|
13,991
|
|
|
—
|
|
18,235
|
|
Granted
|
4,134
|
|
|
15,157
|
|
|
—
|
|
5,779
|
|
Payments
|
(5,977)
|
|
|
(6,860)
|
|
|
—
|
|
(4,526)
|
|
Cancelled/Forfeited
|
(213)
|
|
|
(2,362)
|
|
|
—
|
|
(2,583)
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2018
|
10,577
|
|
|
19,926
|
|
|
—
|
|
16,905
|
|
Granted
|
3,169
|
|
|
5,814
|
|
|
—
|
|
4,593
|
|
Payments
|
(6,397)
|
|
|
(9,429)
|
|
|
—
|
|
(3,255)
|
|
Cancelled/Forfeited
|
(90)
|
|
|
(1,598)
|
|
|
—
|
|
(2,692)
|
|
Outstanding December 31, 2019
|
7,259
|
|
|
14,713
|
|
|
—
|
|
15,551
|
|
Granted
|
3,638
|
|
|
15,161
|
|
|
4,358
|
|
1,389
|
|
Payments
|
(3,814)
|
|
|
(9,311)
|
|
|
—
|
|
(7,160)
|
|
Cancelled/Forfeited
|
(182)
|
|
|
(1,004)
|
|
|
(116)
|
|
(143)
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2020
|
6,901
|
|
|
19,559
|
|
|
4,242
|
|
9,637
|
|
As of December 31, 2020, unrecognized compensation expense related to the unvested portion of Verizon’s RSUs and PSUs was approximately $881 million and is expected to be recognized over approximately 2 years.
The equity awards granted in 2020 and 2019 have weighted-average grant date fair values of $57.38 and $56.66 per unit, respectively. During 2020, 2019 and 2018, we paid $961 million, $737 million and $773 million, respectively, to settle RSUs and PSUs classified as liability awards.
Stock-Based Compensation Expense
After-tax compensation expense for stock-based compensation related to RSUs and PSUs described above included in Net income attributable to Verizon was $780 million, $872 million and $720 million for 2020, 2019 and 2018, respectively.
|
|
|
Note 11. Employee Benefits
|
We maintain non-contributory defined benefit pension plans for certain employees. In addition, we maintain postretirement health care and life insurance plans for certain retirees and their dependents, which are both contributory and non-contributory, and include a limit on our share of the cost for certain current and future retirees. In accordance with our accounting policy for pension and other postretirement benefits, operating expenses include service costs associated with pension and other postretirement benefits while other credits and/or charges based on actuarial assumptions, including projected discount rates, an estimated return on plan assets, and impact from health care trend rates are reported in Other income (expense), net. These estimates are updated in the fourth quarter to reflect actual return on plan assets and updated actuarial assumptions or upon a remeasurement event. The adjustment is recognized in the income statement during the fourth quarter or upon a remeasurement event pursuant to our accounting policy for the recognition of actuarial gains and losses.
Pension and Other Postretirement Benefits
Pension and other postretirement benefits for certain employees are subject to collective bargaining agreements. Modifications in benefits have been bargained from time to time, and we may also periodically amend the benefits in the management plans. The following tables summarize benefit costs, as well as the benefit obligations, plan assets, funded status and rate assumptions associated with pension and postretirement health care and life insurance benefit plans.
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in Benefit Obligations
|
|
|
|
|
|
|
|
Beginning of year
|
$
|
21,248
|
|
|
$
|
19,567
|
|
|
$
|
15,669
|
|
|
$
|
16,364
|
|
Service cost
|
305
|
|
|
247
|
|
|
110
|
|
|
96
|
|
Interest cost
|
505
|
|
|
695
|
|
|
429
|
|
|
629
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
—
|
|
|
(22)
|
|
Actuarial (gain) loss, net
|
2,308
|
|
|
2,860
|
|
|
887
|
|
|
(414)
|
|
Benefits paid
|
(842)
|
|
|
(1,248)
|
|
|
(927)
|
|
|
(984)
|
|
|
|
|
|
|
|
|
|
Settlements paid
|
(1,288)
|
|
|
(873)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
End of year
|
22,236
|
|
|
21,248
|
|
|
16,168
|
|
|
15,669
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
Beginning of year
|
19,451
|
|
|
17,816
|
|
|
743
|
|
|
1,175
|
|
Actual return on plan assets
|
2,750
|
|
|
3,385
|
|
|
47
|
|
|
103
|
|
Company contributions
|
57
|
|
|
371
|
|
|
709
|
|
|
449
|
|
Benefits paid
|
(842)
|
|
|
(1,248)
|
|
|
(927)
|
|
|
(984)
|
|
Settlements paid
|
(1,288)
|
|
|
(873)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
End of year
|
20,128
|
|
|
19,451
|
|
|
572
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status - End of year
|
$
|
(2,108)
|
|
|
$
|
(1,797)
|
|
|
$
|
(15,596)
|
|
|
$
|
(14,926)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Amounts recognized on the balance sheet
|
|
|
|
|
|
|
|
Noncurrent assets
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(63)
|
|
|
(67)
|
|
|
(721)
|
|
|
(603)
|
|
Noncurrent liabilities
|
(2,050)
|
|
|
(1,735)
|
|
|
(14,875)
|
|
|
(14,323)
|
|
Total
|
$
|
(2,108)
|
|
|
$
|
(1,797)
|
|
|
$
|
(15,596)
|
|
|
$
|
(14,926)
|
|
Amounts recognized in Accumulated Other Comprehensive Income (Pre-tax)
|
|
|
|
|
|
|
|
Prior service cost (benefit)
|
$
|
463
|
|
|
$
|
524
|
|
|
$
|
(2,783)
|
|
|
$
|
(3,749)
|
|
Total
|
$
|
463
|
|
|
$
|
524
|
|
|
$
|
(2,783)
|
|
|
$
|
(3,749)
|
|
The accumulated benefit obligation for all defined benefit pension plans was $22.2 billion and $21.2 billion at December 31, 2020 and 2019, respectively.
Actuarial Loss, Net
The net actuarial loss in 2020 is primarily the result of a $3.2 billion loss due to a decrease in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.3% at December 31, 2019 to a weighted-average of 2.6% at December 31, 2020.
The net actuarial loss in 2019 is primarily the result of a $4.3 billion loss due to a decrease in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 4.4% at December 31, 2018 to a weighted-average of 3.3% at December 31, 2019, partially offset by other assumption adjustments of $1.9 billion, of which $1.6 billion related to healthcare claims experience.
Collective Bargaining Negotiations
The extension agreement ratified in August 2018 extended our collective bargaining agreements with the Communications Workers of America and the International Brotherhood of Electrical Workers that were due to expire on August 3, 2019 for four years until August 5, 2023. Amendments triggered by the collective bargaining negotiations were made to certain pension plans for certain union-represented employees and retirees. The impact of the plan amendments was an increase in our defined benefit pension plans plan obligations and a net decrease to Accumulated other comprehensive income of $230 million (net of taxes of $170 million). The annual impact of the amount recorded in Accumulated other comprehensive income that will be reclassified to net periodic benefit cost is insignificant.
The reclassifications from the amounts recorded in Accumulated other comprehensive income as a result of collective bargaining agreements and plan amendments made in 2016 and 2017 resulted in a decrease to net periodic benefit cost and increase to pre-tax income of approximately $729 million during 2020, 2019 and 2018.
Information for pension plans with an accumulated benefit obligation in excess of plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Accumulated benefit obligation
|
$
|
22,116
|
|
|
$
|
21,134
|
|
Fair value of plan assets
|
20,064
|
|
|
19,388
|
|
Information for pension plans with a projected benefit obligation in excess of plan assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
22,178
|
|
|
$
|
21,190
|
|
Fair value of plan assets
|
20,064
|
|
|
19,388
|
|
Net Periodic Benefit Cost (Income)
The following table summarizes the components of net periodic benefit cost (income) related to our pension and postretirement health care and life insurance plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
Health Care and Life
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Service cost - Cost of services
|
$
|
245
|
|
|
$
|
202
|
|
|
$
|
230
|
|
|
$
|
89
|
|
|
$
|
78
|
|
|
$
|
104
|
|
Service cost - Selling, general and administrative expense
|
60
|
|
|
45
|
|
|
54
|
|
|
21
|
|
|
18
|
|
|
23
|
|
Service cost
|
305
|
|
|
247
|
|
|
284
|
|
|
110
|
|
|
96
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
|
61
|
|
|
61
|
|
|
48
|
|
|
(966)
|
|
|
(971)
|
|
|
(976)
|
|
Expected return on plan assets
|
(1,186)
|
|
|
(1,130)
|
|
|
(1,293)
|
|
|
(28)
|
|
|
(37)
|
|
|
(44)
|
|
Interest cost
|
505
|
|
|
695
|
|
|
690
|
|
|
429
|
|
|
629
|
|
|
615
|
|
Remeasurement loss (gain), net
|
744
|
|
|
606
|
|
|
369
|
|
|
866
|
|
|
(480)
|
|
|
(2,658)
|
|
Curtailment and termination benefits
|
—
|
|
|
—
|
|
|
181
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other components
|
124
|
|
|
232
|
|
|
(5)
|
|
|
301
|
|
|
(859)
|
|
|
(3,063)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
429
|
|
|
$
|
479
|
|
|
$
|
279
|
|
|
$
|
411
|
|
|
$
|
(763)
|
|
|
$
|
(2,936)
|
|
The service cost component of net periodic benefit cost (income) is recorded in Cost of services and Selling, general and administrative expense in the consolidated statements of income while the other components, including mark-to-market adjustments, if any, are recorded in Other income (expense), net.
Other pre-tax changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Pension
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Prior service cost (benefit)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
(22)
|
|
|
$
|
(8)
|
|
Reversal of amortization items
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost (benefit)
|
(61)
|
|
|
(61)
|
|
|
(48)
|
|
|
966
|
|
|
971
|
|
|
976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive loss (income) (pre-tax)
|
$
|
(61)
|
|
|
$
|
(61)
|
|
|
$
|
182
|
|
|
$
|
966
|
|
|
$
|
949
|
|
|
$
|
968
|
|
Assumptions
The weighted-average assumptions used in determining benefit obligations follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Discount Rate
|
2.60
|
%
|
|
3.30
|
%
|
|
2.50
|
%
|
|
3.20
|
%
|
Rate of compensation increases
|
3.00
|
%
|
|
3.00
|
%
|
|
N/A
|
|
N/A
|
N/A - not applicable
The weighted-average assumptions used in determining net periodic cost follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Discount rate in effect for determining service cost
|
3.30
|
%
|
|
4.60
|
%
|
|
4.10
|
%
|
|
3.50
|
%
|
|
4.60
|
%
|
|
3.90
|
%
|
Discount rate in effect for determining interest cost
|
2.40
|
|
|
3.80
|
|
|
3.40
|
|
|
2.80
|
|
|
4.00
|
|
|
3.20
|
|
Expected return on plan assets
|
6.50
|
|
|
6.80
|
|
|
7.00
|
|
|
4.50
|
|
|
4.30
|
|
|
4.80
|
|
Rate of compensation increases
|
3.00
|
|
|
3.00
|
|
|
3.00
|
|
|
N/A
|
|
N/A
|
|
N/A
|
N/A - not applicable
In determining our pension and other postretirement benefit obligations, we used a weighted-average discount rate of 2.6% in 2020. The rates were selected to approximate the composite interest rates available on a selection of high-quality bonds available in the market at December 31, 2020. The bonds selected had maturities that coincided with the time periods during which benefits payments are expected to occur, were non-callable and available in sufficient quantities to ensure marketability (at least $300 million par outstanding).
In order to project the long-term target investment return for the total portfolio, estimates are prepared for the total return of each major asset class over the subsequent 10-year period. Those estimates are based on a combination of factors including the current market interest rates and valuation levels, consensus earnings expectations and historical long-term risk premiums. To determine the aggregate return for the
pension trust, the projected return of each individual asset class is then weighted according to the allocation to that investment area in the trust’s long-term asset allocation policy.
The assumed health care cost trend rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care and Life
|
At December 31,
|
2020
|
|
2019
|
|
2018
|
Weighted-average healthcare cost trend rate assumed for next year
|
6.20
|
%
|
|
6.30
|
%
|
|
6.80
|
%
|
Rate to which cost trend rate gradually declines
|
4.50
|
|
|
4.50
|
|
|
4.50
|
|
Year the rate reaches the level it is assumed to remain thereafter
|
2029
|
|
2027
|
|
2027
|
Plan Assets
The Company’s overall investment strategy is to achieve a mix of assets that allows us to meet projected benefit payments while taking into consideration risk and return. While target allocation percentages will vary over time, the current target allocation for plan assets is designed so that 48% to 68% of the assets have the objective of achieving a return in excess of the growth in liabilities (comprised of public equities, private equities, real estate, hedge funds, high yield bonds and emerging market debt) and 35% to 55% of the assets are invested as liability hedging assets (where interest rate sensitivity of the liability hedging assets better match the interest rate sensitivity of the liability) and a maximum of 15% is in cash. This allocation will shift as funded status improves to a higher allocation of liability hedging assets. Target policies will be revisited periodically to ensure they are in line with fund objectives. Both active and passive management approaches are used depending on perceived market efficiencies and various other factors. Due to our diversification and risk control processes, there are no significant concentrations of risk, in terms of sector, industry, geography or company names.
Pension and healthcare and life plans assets do not include significant amounts of Verizon common stock.
Pension Plans
The fair values for the pension plans by asset category at December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Asset Category
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1,968
|
|
|
$
|
1,823
|
|
|
$
|
145
|
|
|
$
|
—
|
|
Equity securities
|
1,972
|
|
|
1,623
|
|
|
347
|
|
|
2
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
2,039
|
|
|
1,756
|
|
|
283
|
|
|
—
|
|
Corporate bonds
|
4,110
|
|
|
153
|
|
|
3,781
|
|
|
176
|
|
International bonds
|
1,548
|
|
|
17
|
|
|
1,511
|
|
|
20
|
|
Other
|
916
|
|
|
—
|
|
|
916
|
|
|
—
|
|
Real estate
|
757
|
|
|
—
|
|
|
—
|
|
|
757
|
|
Other
|
|
|
|
|
|
|
|
Private equity
|
414
|
|
|
—
|
|
|
—
|
|
|
414
|
|
Hedge funds
|
244
|
|
|
—
|
|
|
106
|
|
|
138
|
|
Total investments at fair value
|
13,968
|
|
|
5,372
|
|
|
7,089
|
|
|
1,507
|
|
Investments measured at NAV
|
6,160
|
|
|
|
|
|
|
|
Total
|
$
|
20,128
|
|
|
$
|
5,372
|
|
|
$
|
7,089
|
|
|
$
|
1,507
|
|
The fair values for the pension plans by asset category at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Asset Category
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
1,529
|
|
|
$
|
1,507
|
|
|
$
|
22
|
|
|
$
|
—
|
|
Equity securities
|
2,988
|
|
|
2,850
|
|
|
135
|
|
|
3
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
1,986
|
|
|
1,768
|
|
|
218
|
|
|
—
|
|
Corporate bonds
|
3,818
|
|
|
524
|
|
|
3,149
|
|
|
145
|
|
International bonds
|
1,355
|
|
|
25
|
|
|
1,304
|
|
|
26
|
|
Other
|
768
|
|
|
—
|
|
|
768
|
|
|
—
|
|
Real estate
|
810
|
|
|
—
|
|
|
—
|
|
|
810
|
|
Other
|
|
|
|
|
|
|
|
Private equity
|
737
|
|
|
—
|
|
|
—
|
|
|
737
|
|
Hedge funds
|
293
|
|
|
—
|
|
|
164
|
|
|
129
|
|
Total investments at fair value
|
14,284
|
|
|
6,674
|
|
|
5,760
|
|
|
1,850
|
|
Investments measured at NAV
|
5,167
|
|
|
|
|
|
|
|
Total
|
$
|
19,451
|
|
|
$
|
6,674
|
|
|
$
|
5,760
|
|
|
$
|
1,850
|
|
The following is a reconciliation of the beginning and ending balance of pension plan assets that are measured at fair value using significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Equity
Securities
|
|
Corporate
Bonds
|
|
International
Bonds
|
|
Real
Estate
|
|
Private
Equity
|
|
Hedge
Funds
|
|
Total
|
Balance at January 1, 2019
|
$
|
13
|
|
|
$
|
277
|
|
|
$
|
18
|
|
|
$
|
727
|
|
|
$
|
664
|
|
|
$
|
86
|
|
|
$
|
1,785
|
|
Actual gain (loss) on plan assets
|
1
|
|
|
(1)
|
|
|
(1)
|
|
|
30
|
|
|
32
|
|
|
—
|
|
|
61
|
|
Purchases (sales)
|
(11)
|
|
|
18
|
|
|
9
|
|
|
53
|
|
|
41
|
|
|
116
|
|
|
226
|
|
Transfers out
|
—
|
|
|
(149)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(73)
|
|
|
(222)
|
|
Balance at December 31, 2019
|
3
|
|
|
145
|
|
|
26
|
|
|
810
|
|
|
737
|
|
|
129
|
|
|
1,850
|
|
Actual gain (loss) on plan assets
|
5
|
|
|
(8)
|
|
|
3
|
|
|
146
|
|
|
57
|
|
|
1
|
|
|
204
|
|
Purchases (sales)
|
(7)
|
|
|
39
|
|
|
(9)
|
|
|
(146)
|
|
|
(134)
|
|
|
69
|
|
|
(188)
|
|
Transfers out
|
1
|
|
|
—
|
|
|
—
|
|
|
(53)
|
|
|
(246)
|
|
|
(61)
|
|
|
(359)
|
|
Balance at December 31, 2020
|
$
|
2
|
|
|
$
|
176
|
|
|
$
|
20
|
|
|
$
|
757
|
|
|
$
|
414
|
|
|
$
|
138
|
|
|
$
|
1,507
|
|
Health Care and Life Plans
The fair values for the other postretirement benefit plans by asset category at December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Asset Category
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
40
|
|
|
$
|
—
|
|
Equity securities
|
178
|
|
|
178
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
83
|
|
|
83
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
54
|
|
|
54
|
|
|
—
|
|
|
—
|
|
International bonds
|
9
|
|
|
9
|
|
|
—
|
|
|
—
|
|
Total investments at fair value
|
364
|
|
|
324
|
|
|
40
|
|
|
—
|
|
Investments measured at NAV
|
208
|
|
|
|
|
|
|
|
Total
|
$
|
572
|
|
|
$
|
324
|
|
|
$
|
40
|
|
|
$
|
—
|
|
The fair values for the other postretirement benefit plans by asset category at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Asset Category
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Cash and cash equivalents
|
$
|
220
|
|
|
$
|
167
|
|
|
$
|
53
|
|
|
$
|
—
|
|
Equity securities
|
225
|
|
|
225
|
|
|
—
|
|
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
U.S. Treasuries and agencies
|
28
|
|
|
28
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
76
|
|
|
76
|
|
|
—
|
|
|
—
|
|
International bonds
|
18
|
|
|
18
|
|
|
—
|
|
|
—
|
|
Total investments at fair value
|
567
|
|
|
514
|
|
|
53
|
|
|
—
|
|
Investments measured at NAV
|
176
|
|
|
|
|
|
|
|
Total
|
$
|
743
|
|
|
$
|
514
|
|
|
$
|
53
|
|
|
$
|
—
|
|
The following are general descriptions of asset categories, as well as the valuation methodologies and inputs used to determine the fair value of each major category of assets.
Cash and cash equivalents include short-term investment funds (less than 90 days to maturity), primarily in diversified portfolios of investment grade money market instruments and are valued using quoted market prices or other valuation methods. The carrying value of cash equivalents approximates fair value due to the short-term nature of these investments.
Investments in securities traded on national and foreign securities exchanges are valued by the trustee at the last reported sale prices on the last business day of the year or, if no sales were reported on that date, at the last reported bid prices. Government obligations, corporate bonds, international bonds and asset-backed debt are valued using matrix prices with input from independent third-party valuation sources. Over-the-counter securities are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable such as multiple broker quotes.
Commingled funds not traded on national exchanges are priced by the custodian or fund's administrator at their net asset value (NAV). Commingled funds held by third-party custodians appointed by the fund managers provide the fund managers with a NAV. The fund managers have the responsibility for providing this information to the custodian of the respective plan.
The investment manager of the entity values venture capital, corporate finance and natural resource limited partnership investments. Real estate investments are valued at amounts based upon appraisal reports prepared by either independent real estate appraisers or the investment manager using discounted cash flows or market comparable data. Loans secured by mortgages are carried at the lesser of the unpaid balance or appraised value of the underlying properties. The values assigned to these investments are based upon available and current market information and do not necessarily represent amounts that might ultimately be realized. Because of the inherent uncertainty of valuation, estimated fair values might differ significantly from the values that would have been used had a ready market for the securities existed. These differences could be material.
Forward currency contracts, futures, and options are valued by the trustee at the exchange rates and market prices prevailing on the last business day of the year. Both exchange rates and market prices are readily available from published sources. These securities are classified by the asset class of the underlying holdings.
Hedge funds are valued by the custodian at NAV based on statements received from the investment manager. These funds are valued in accordance with the terms of their corresponding offering or private placement memoranda.
Commingled funds, hedge funds, venture capital, corporate finance, natural resource and real estate limited partnership investments for which
fair value is measured using the NAV per share as a practical expedient are not leveled within the fair value hierarchy but are included in total investments.
Employer Contributions
In 2020, we made no discretionary contribution to our qualified pension plans, $57 million of contributions to our nonqualified pension plans and $709 million of contributions to our other postretirement benefit plans. No qualified pension plans contributions are expected to be made in 2021. Nonqualified pension plans contributions are estimated to be approximately $70 million and contributions to our other postretirement benefit plans are estimated to be approximately $800 million in 2021.
Estimated Future Benefit Payments
The benefit payments to retirees are expected to be paid as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Year
|
Pension Benefits
|
|
Health Care and Life
|
2021
|
$
|
2,147
|
|
|
$
|
889
|
|
2022
|
1,706
|
|
|
921
|
|
2023
|
1,651
|
|
|
904
|
|
2024
|
1,107
|
|
|
887
|
|
2025
|
1,080
|
|
|
881
|
|
2026 to 2030
|
5,253
|
|
|
4,437
|
|
Savings Plan and Employee Stock Ownership Plans
We maintain four leveraged employee stock ownership plans (ESOP). We match a certain percentage of eligible employee contributions to certain savings plans with shares of our common stock from this ESOP. At December 31, 2020, the number of allocated shares of common stock in this ESOP was 46 million. There were no unallocated shares of common stock in this ESOP at December 31, 2020. All leveraged ESOP shares are included in earnings per share computations.
Total savings plan costs were $730 million in 2020, $897 million in 2019 and $1.1 billion in 2018.
Severance Benefits
The following table provides an analysis of our severance liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Year
|
Beginning of Year
|
|
Charged to
Expense
|
|
Payments
|
|
Other
|
|
End of Year
|
2018
|
$
|
627
|
|
|
$
|
2,093
|
|
|
$
|
(560)
|
|
|
$
|
(4)
|
|
|
$
|
2,156
|
|
2019
|
2,156
|
|
|
260
|
|
|
(1,847)
|
|
|
(4)
|
|
|
565
|
|
2020
|
565
|
|
|
309
|
|
|
(248)
|
|
|
(24)
|
|
|
602
|
|
Severance, Pension and Benefits (Credits) Charges
During 2020, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur, we recorded net pre-tax pension and benefits charges of $1.6 billion in our pension and postretirement benefit plans. The charges were recorded in Other income (expense), net in our consolidated statement of income and were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.3% at December 31, 2019 to a weighted-average of 2.6% at December 31, 2020 ($3.2 billion), partially offset by the difference between our estimated return on assets and our actual return on assets ($1.6 billion). During 2020, we also recorded net pre-tax severance charges of $309 million in Selling, general and administrative expense in our consolidated statements of income.
During 2019, in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur, we recorded net pre-tax pension and benefits charges of $126 million in our pension and postretirement benefit plans. The charges were recorded in Other income (expense), net in our consolidated statement of income and were primarily driven by a decrease in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 4.4% at December 31, 2018 to a weighted-average of 3.3% at December 31, 2019 ($4.3 billion), partially offset by the difference between our estimated return on assets and our actual return on assets ($2.3 billion) and other assumption adjustments of $1.9 billion, of which $1.6 billion related to healthcare claims experience. During 2019, we also recorded net pre-tax severance charges of $260 million in Selling, general and administrative expense in our consolidated statements of income.
During 2018, we recorded net pre-tax pension and benefits credits of $2.1 billion in accordance with our accounting policy to recognize actuarial gains and losses in the period in which they occur. The pension and benefits remeasurement credits of $2.3 billion, which were recorded in Other income (expense), net in our consolidated statements of income, were primarily driven by an increase in our discount rate assumption used to determine the current year liabilities of our pension plans and postretirement benefit plans from a weighted-average of 3.7% at December 31, 2017 to a weighted-average of 4.4% at December 31, 2018 ($2.6 billion), and mortality and other assumption adjustments of $1.7 billion, $1.6 billion of which related to healthcare claims and trend adjustments, offset by the difference between our estimated return on assets of 7.0% and our actual return on assets of (2.7)% ($1.9 billion). The credits were partially offset by $177 million due to the effect of participants retiring under the Voluntary Separation Program.
In September 2018, Verizon announced a Voluntary Separation Program for select U.S.-based management employees. Approximately 10,400 eligible employees separated from the Company under this program as of the end of June 2019. The severance benefit payments to these employees were substantially completed by the end of September 2019. Principally as a result of this program but also as a result of other headcount reduction initiatives, the Company recorded a severance charge of $1.8 billion ($1.4 billion after-tax) during the year ended December 31, 2018, which was recorded in Selling, general and administrative expense in our consolidated statement of income. During 2018, we also recorded $339 million in severance costs under our other existing separation plans.
The components of income before provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Domestic
|
$
|
22,844
|
|
|
$
|
21,655
|
|
|
$
|
19,801
|
|
Foreign
|
1,123
|
|
|
1,078
|
|
|
(178)
|
|
Total
|
$
|
23,967
|
|
|
$
|
22,733
|
|
|
$
|
19,623
|
|
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Current
|
|
|
|
|
|
Federal
|
$
|
2,826
|
|
|
$
|
518
|
|
|
$
|
2,187
|
|
Foreign
|
159
|
|
|
221
|
|
|
267
|
|
State and Local
|
1,081
|
|
|
974
|
|
|
741
|
|
Total
|
4,066
|
|
|
1,713
|
|
|
3,195
|
|
Deferred
|
|
|
|
|
|
Federal
|
1,432
|
|
|
1,150
|
|
|
175
|
|
Foreign
|
1
|
|
|
(13)
|
|
|
30
|
|
State and Local
|
120
|
|
|
95
|
|
|
184
|
|
Total
|
1,553
|
|
|
1,232
|
|
|
389
|
|
Total income tax provision
|
$
|
5,619
|
|
|
$
|
2,945
|
|
|
$
|
3,584
|
|
The following table shows the principal reasons for the difference between the effective income tax rate and the statutory federal income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State and local income tax rate, net of federal tax benefits
|
3.9
|
|
|
3.7
|
|
|
3.7
|
|
Preferred stock disposition
|
—
|
|
|
(9.9)
|
|
|
—
|
|
Affordable housing credit
|
(0.2)
|
|
|
(0.4)
|
|
|
(0.6)
|
|
Employee benefits including ESOP dividend
|
(0.2)
|
|
|
(0.3)
|
|
|
(0.3)
|
|
|
|
|
|
|
|
Internal restructure
|
(0.1)
|
|
|
—
|
|
|
(9.1)
|
|
Noncontrolling interests
|
(0.5)
|
|
|
(0.5)
|
|
|
(0.5)
|
|
Non-deductible goodwill
|
—
|
|
|
0.1
|
|
|
4.7
|
|
Other, net
|
(0.5)
|
|
|
(0.7)
|
|
|
(0.6)
|
|
Effective income tax rate
|
23.4
|
%
|
|
13.0
|
%
|
|
18.3
|
%
|
The effective income tax rate for 2020 was 23.4% compared to 13.0% for 2019. The increase in the effective income tax rate and the provision for income taxes was primarily due to the recognition of a $2.2 billion tax benefit in connection with the disposition of preferred stock representing a minority interest in a foreign affiliate in 2019 that did not reoccur in 2020.
The effective income tax rate for 2019 was 13.0% compared to 18.3% for 2018. The decrease in the effective income tax rate and the provision for income taxes was primarily due to the recognition of a $2.2 billion non-recurring tax benefit in connection with the disposition of preferred stock representing a minority interest in a foreign affiliate in 2019 compared to the non-recurring deferred tax benefit of approximately $2.1 billion, as a result of an internal reorganization of legal entities within the historical Wireless business, which was offset by a goodwill charge that is not deductible for tax purposes in 2018.
The amounts of cash taxes paid by Verizon are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Income taxes, net of amounts refunded
|
$
|
2,725
|
|
|
$
|
3,583
|
|
|
$
|
2,213
|
|
Employment taxes
|
618
|
|
|
1,044
|
|
|
1,066
|
|
Property and other taxes
|
2,093
|
|
|
1,551
|
|
|
1,598
|
|
Total
|
$
|
5,436
|
|
|
$
|
6,178
|
|
|
$
|
4,877
|
|
Deferred Tax Assets and Liabilities
Deferred taxes arise because of differences in the book and tax bases of certain assets and liabilities. Significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Deferred Tax Assets
|
|
|
|
Employee benefits
|
$
|
5,218
|
|
|
$
|
5,048
|
|
Tax loss and credit carry forwards
|
2,848
|
|
|
3,012
|
|
Other - assets
|
6,096
|
|
|
5,595
|
|
|
14,162
|
|
|
13,655
|
|
Valuation allowances
|
(2,183)
|
|
|
(2,260)
|
|
Deferred tax assets
|
11,979
|
|
|
11,395
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
Spectrum and other intangible amortization
|
22,726
|
|
|
22,388
|
|
Depreciation
|
18,009
|
|
|
16,884
|
|
Other - liabilities
|
6,867
|
|
|
6,742
|
|
Deferred tax liabilities
|
47,602
|
|
|
46,014
|
|
Net deferred tax liability
|
$
|
35,623
|
|
|
$
|
34,619
|
|
At December 31, 2020, undistributed earnings of our foreign subsidiaries indefinitely invested outside the U.S. amounted to approximately $5.0 billion. The majority of Verizon's cash flow is generated from domestic operations and we are not dependent on foreign cash or earnings to meet our funding requirements, nor do we intend to repatriate these undistributed foreign earnings to fund U.S. operations. Furthermore, a portion of these undistributed earnings represents amounts that legally must be kept in reserve in accordance with certain foreign jurisdictional requirements and are unavailable for distribution or repatriation. As a result, we have not provided U.S. deferred taxes on these undistributed earnings because we intend that they will remain indefinitely reinvested outside of the U.S. and therefore unavailable for use in
funding U.S. operations. Determination of the amount of unrecognized deferred taxes related to these undistributed earnings is not practicable.
At December 31, 2020, we had net after-tax loss and credit carry forwards for income tax purposes of approximately $2.8 billion that primarily relate to state and foreign taxes. Of these net after-tax loss and credit carry forwards, approximately $1.7 billion will expire between 2021 and 2040 and approximately $1.1 billion may be carried forward indefinitely.
During 2020, the valuation allowance decreased approximately $77 million. The $2.2 billion valuation allowance at December 31, 2020 as well as the 2020 activity is primarily related to state and foreign taxes.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
2020
|
|
2019
|
|
2018
|
Balance at January 1,
|
$
|
2,870
|
|
|
$
|
2,871
|
|
|
$
|
2,355
|
|
Additions based on tax positions related to the current year
|
160
|
|
|
149
|
|
|
160
|
|
Additions for tax positions of prior years
|
258
|
|
|
297
|
|
|
699
|
|
Reductions for tax positions of prior years
|
(166)
|
|
|
(300)
|
|
|
(248)
|
|
Settlements
|
(46)
|
|
|
(58)
|
|
|
(40)
|
|
Lapses of statutes of limitations
|
(132)
|
|
|
(89)
|
|
|
(55)
|
|
Balance at December 31,
|
$
|
2,944
|
|
|
$
|
2,870
|
|
|
$
|
2,871
|
|
Included in the total unrecognized tax benefits at December 31, 2020, 2019 and 2018 is $2.5 billion, $2.4 billion and $2.3 billion, respectively, that if recognized, would favorably affect the effective income tax rate.
We recognized the following net after-tax expenses related to interest and penalties in the provision for income taxes:
|
|
|
|
|
|
Years Ended December 31,
|
(dollars in millions)
|
2020
|
$
|
5
|
|
2019
|
35
|
|
2018
|
75
|
|
The after-tax accruals for the payment of interest and penalties in the consolidated balance sheets are as follows:
|
|
|
|
|
|
At December 31,
|
(dollars in millions)
|
2020
|
$
|
388
|
|
2019
|
385
|
|
Verizon and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state, local and foreign jurisdictions. As a large taxpayer, we are under audit by the Internal Revenue Service (IRS) and multiple state and foreign jurisdictions for various open tax years. The IRS is currently examining the Company’s U.S. income tax returns for tax years 2015-2016 and Cellco's U.S. income tax return for tax year 2017-2018. Tax controversies are ongoing for tax years as early as 2006. The amount of the liability for unrecognized tax benefits will change in the next twelve months due to the expiration of the statute of limitations in various jurisdictions and it is reasonably possible that various current tax examinations will conclude or require reevaluations of the Company’s tax positions during this period. An estimate of the range of the possible change cannot be made until these tax matters are further developed or resolved.
|
|
|
Note 13. Segment Information
|
Reportable Segments
We have two reportable segments that we operate and manage as strategic business units - Consumer and Business. We measure and evaluate our reportable segments based on segment operating income, consistent with the chief operating decision maker’s assessment of segment performance.
Our segments and their principal activities consist of the following:
|
|
|
|
|
|
|
|
|
Segment
|
|
Description
|
Verizon Consumer Group
|
|
Our Consumer segment provides consumer-focused wireless and wireline communications services and products. Our wireless services are provided across one of the most extensive wireless networks in the U.S. under the Verizon brand and through wholesale and other arrangements. Our wireline services are provided in nine states in the Mid-Atlantic and Northeastern U.S., as well as Washington D.C., over our 100% fiber-optic network through our Verizon Fios product portfolio and over a traditional copper-based network to customers who are not served by Fios.
|
|
|
|
Verizon
Business Group
|
|
Our Business segment provides wireless and wireline communications services and products, including data, video and conferencing services, corporate networking solutions, security and managed network services, local and long distance voice services and network access to deliver various IoT services and products. We provide these products and services to businesses, government customers and wireless and wireline carriers across the U.S. and select products and services to customers around the world.
|
Our Consumer segment's wireless and wireline products and services are available to our retail customers, as well as resellers that purchase wireless network access from us on a wholesale basis. Our Business segment’s wireless and wireline products and services are organized by the primary customer groups targeted by these offerings: Small and Medium Business, Global Enterprise, Public Sector and Other, and Wholesale.
Corporate and other includes the results of our media business, Verizon Media, and other businesses, investments in unconsolidated businesses, unallocated corporate expenses, certain pension and other employee benefit related costs and interest and financing expenses. Corporate and other also includes the historical results of divested businesses and other adjustments and gains and losses that are not allocated in assessing segment performance due to their nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Gains and losses from these transactions that are not individually significant are included in segment results as these items are included in the chief operating decision maker’s assessment of segment performance.
The reconciliation of segment operating revenues and expenses to consolidated operating revenues and expenses below includes the effects of special items that the chief operating decision maker does not consider in assessing segment performance, primarily because of their nature.
The following tables provides operating financial information for our two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2020
|
Consumer
|
|
Business
|
|
Total
Reportable
Segments
|
External Operating Revenues
|
|
|
|
|
|
Service
|
$
|
64,884
|
|
|
$
|
—
|
|
|
$
|
64,884
|
|
Wireless equipment
|
15,492
|
|
|
—
|
|
|
15,492
|
|
Other
|
7,916
|
|
|
—
|
|
|
7,916
|
|
Small and Medium Business
|
—
|
|
|
11,112
|
|
|
11,112
|
|
Global Enterprise
|
—
|
|
|
10,405
|
|
|
10,405
|
|
Public Sector and Other
|
—
|
|
|
6,362
|
|
|
6,362
|
|
Wholesale
|
—
|
|
|
3,013
|
|
|
3,013
|
|
Intersegment revenues
|
241
|
|
|
70
|
|
|
311
|
|
Total Operating Revenues(1)
|
88,533
|
|
|
30,962
|
|
|
119,495
|
|
|
|
|
|
|
|
Cost of services
|
15,610
|
|
|
10,659
|
|
|
26,269
|
|
Cost of wireless equipment
|
15,736
|
|
|
4,064
|
|
|
19,800
|
|
Selling, general and administrative expense
|
16,936
|
|
|
8,380
|
|
|
25,316
|
|
Depreciation and amortization expense
|
11,395
|
|
|
4,086
|
|
|
15,481
|
|
Total Operating Expenses
|
59,677
|
|
|
27,189
|
|
|
86,866
|
|
Operating Income
|
$
|
28,856
|
|
|
$
|
3,773
|
|
|
$
|
32,629
|
|
(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $28.1 billion and $2.9 billion, respectively, for the year ended December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2019
|
Consumer
|
|
Business
|
|
Total
Reportable
Segments
|
External Operating Revenues
|
|
|
|
|
|
Service
|
$
|
65,384
|
|
|
$
|
—
|
|
|
$
|
65,384
|
|
Wireless equipment
|
18,048
|
|
|
—
|
|
|
18,048
|
|
Other
|
7,384
|
|
|
—
|
|
|
7,384
|
|
Small and Medium Business
|
—
|
|
|
11,447
|
|
|
11,447
|
|
Global Enterprise
|
—
|
|
|
10,815
|
|
|
10,815
|
|
Public Sector and Other
|
—
|
|
|
5,922
|
|
|
5,922
|
|
Wholesale
|
—
|
|
|
3,198
|
|
|
3,198
|
|
Intersegment revenues
|
240
|
|
|
61
|
|
|
301
|
|
Total Operating Revenues(1)
|
91,056
|
|
|
31,443
|
|
|
122,499
|
|
|
|
|
|
|
|
Cost of services
|
15,884
|
|
|
10,655
|
|
|
26,539
|
|
Cost of wireless equipment
|
18,219
|
|
|
4,733
|
|
|
22,952
|
|
Selling, general and administrative expense
|
16,639
|
|
|
8,188
|
|
|
24,827
|
|
Depreciation and amortization expense
|
11,353
|
|
|
4,105
|
|
|
15,458
|
|
Total Operating Expenses
|
62,095
|
|
|
27,681
|
|
|
89,776
|
|
Operating Income
|
$
|
28,961
|
|
|
$
|
3,762
|
|
|
$
|
32,723
|
|
(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $27.9 billion and $3.5 billion, respectively, for the year ended December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
2018
|
Consumer
|
|
Business
|
|
Total
Reportable
Segments
|
External Operating Revenues
|
|
|
|
|
|
Service
|
$
|
64,207
|
|
|
$
|
—
|
|
|
$
|
64,207
|
|
Wireless equipment
|
18,874
|
|
|
—
|
|
|
18,874
|
|
Other
|
6,447
|
|
|
—
|
|
|
6,447
|
|
Small and Medium Business
|
—
|
|
|
10,732
|
|
|
10,732
|
|
Global Enterprise
|
—
|
|
|
11,197
|
|
|
11,197
|
|
Public Sector and Other
|
—
|
|
|
5,830
|
|
|
5,830
|
|
Wholesale
|
—
|
|
|
3,713
|
|
|
3,713
|
|
Intersegment revenues
|
234
|
|
|
62
|
|
|
296
|
|
Total Operating Revenues(1)
|
89,762
|
|
|
31,534
|
|
|
121,296
|
|
|
|
|
|
|
|
Cost of services
|
15,335
|
|
|
10,859
|
|
|
26,194
|
|
Cost of wireless equipment
|
18,763
|
|
|
4,560
|
|
|
23,323
|
|
Selling, general and administrative expense
|
15,701
|
|
|
7,689
|
|
|
23,390
|
|
Depreciation and amortization expense
|
11,952
|
|
|
4,258
|
|
|
16,210
|
|
Total Operating Expenses
|
61,751
|
|
|
27,366
|
|
|
89,117
|
|
Operating Income
|
$
|
28,011
|
|
|
$
|
4,168
|
|
|
$
|
32,179
|
|
(1) Service and other revenues and Wireless equipment revenues included in our Business segment amounted to approximately $28.1 billion and $3.4 billion, respectively, for the year ended December 31, 2018.
The following table provides Fios revenues for our two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Consumer
|
$
|
11,082
|
|
|
$
|
11,175
|
|
|
$
|
11,056
|
|
Business
|
1,057
|
|
|
967
|
|
|
883
|
|
Total Fios revenue
|
$
|
12,139
|
|
|
$
|
12,142
|
|
|
$
|
11,939
|
|
The following table provides Wireless service revenue for our reportable segments and includes intersegment activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Consumer
|
$
|
53,605
|
|
|
$
|
53,791
|
|
|
$
|
52,459
|
|
Business
|
11,805
|
|
|
11,188
|
|
|
10,484
|
|
Total Wireless service revenue
|
$
|
65,410
|
|
|
$
|
64,979
|
|
|
$
|
62,943
|
|
Reconciliation to Consolidated Financial Information
A reconciliation of the reportable segment operating revenues to consolidated operating revenues is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Operating Revenues
|
|
|
|
|
|
Total reportable segments
|
$
|
119,495
|
|
|
$
|
122,499
|
|
|
$
|
121,296
|
|
Corporate and other
|
9,334
|
|
|
9,812
|
|
|
9,936
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
(537)
|
|
|
(443)
|
|
|
(369)
|
|
Consolidated Operating Revenues
|
$
|
128,292
|
|
|
$
|
131,868
|
|
|
$
|
130,863
|
|
A reconciliation of the total reportable segments’ operating income to consolidated income before provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Operating Income
|
|
|
|
|
|
Total reportable segments
|
$
|
32,629
|
|
|
$
|
32,723
|
|
|
$
|
32,179
|
|
Corporate and other
|
(1,472)
|
|
|
(1,403)
|
|
|
(1,326)
|
|
Reconciling items:
|
|
|
|
|
|
Severance charges
|
(221)
|
|
|
(204)
|
|
|
(2,157)
|
|
Other components of net periodic pension and benefit (charges) credits (Note 11)
|
(817)
|
|
|
(813)
|
|
|
(823)
|
|
|
|
|
|
|
|
Acquisition and integration related charges (Note 3)
|
—
|
|
|
—
|
|
|
(553)
|
|
Loss on spectrum license transactions (Note 3)
|
(1,195)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Impairment charges
|
—
|
|
|
(186)
|
|
|
(4,591)
|
|
Product realignment charges
|
—
|
|
|
—
|
|
|
(451)
|
|
Net gain (loss) from dispositions of assets and businesses
|
(126)
|
|
|
261
|
|
|
—
|
|
Consolidated operating income
|
28,798
|
|
|
30,378
|
|
|
22,278
|
|
Equity in losses of unconsolidated businesses
|
(45)
|
|
|
(15)
|
|
|
(186)
|
|
Other income (expense), net
|
(539)
|
|
|
(2,900)
|
|
|
2,364
|
|
Interest expense
|
(4,247)
|
|
|
(4,730)
|
|
|
(4,833)
|
|
Income Before Provision For Income Taxes
|
$
|
23,967
|
|
|
$
|
22,733
|
|
|
$
|
19,623
|
|
No single customer accounted for more than 10% of our total operating revenues during the years ended December 31, 2020, 2019 and 2018. International operating revenues were not significant during the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020 and December 31, 2019, international long-lived assets were not significant.
The chief operating decision maker does not review disaggregated assets on a segment basis; therefore, such information is not presented. Depreciation included in the measure of segment profitability is primarily allocated based on proportional usage.
|
|
|
Note 14. Equity and Comprehensive Income
|
Equity
In December 2019, 46,100 preferred shares of a foreign affiliate of Verizon was sold for cash consideration of $51 million and is reflected in non-controlling interests. The preferred shares pay cumulative dividends of 8.25% per annum.
Common Stock
In February 2020, the Verizon Board of Directors authorized a share buyback program to repurchase up to 100 million shares of Verizon's common stock. The program will terminate when the aggregate number of shares purchased reaches 100 million, or a new share repurchase plan superseding the current plan is authorized, whichever is sooner. During the years ended December 31, 2020, 2019, and 2018, Verizon did not repurchase any shares of Verizon’s common stock under our current or previously authorized share buyback programs. At December 31, 2020, the maximum number of shares that could be purchased by or on behalf of Verizon under our share buyback program was 100 million.
Common stock has been used from time to time to satisfy some of the funding requirements of employee and shareholder plans. During the years ended December 31, 2020, 2019, and 2018, we issued 2.3 million, 3.8 million and 3.5 million common shares from Treasury stock, respectively, which had an insignificant aggregate value.
In connection with our acquisition of Straight Path in February 2018, we issued approximately 49 million shares of Verizon common stock, valued at approximately $2.4 billion.
Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. Significant changes in the components of Other comprehensive loss, net of provision for income taxes are described below.
The changes in the balances of Accumulated other comprehensive income (loss) by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Foreign
currency
translation
adjustments
|
|
Unrealized gains (losses) on cash flow hedges
|
|
Unrealized gains (losses) on marketable securities
|
|
Defined benefit
pension and
postretirement
plans
|
|
Total
|
Balance at January 1, 2018
|
$
|
(468)
|
|
|
$
|
(111)
|
|
|
$
|
32
|
|
|
$
|
3,206
|
|
|
$
|
2,659
|
|
Opening balance sheet adjustment (Note 1)
|
(15)
|
|
|
(24)
|
|
|
(13)
|
|
|
682
|
|
|
630
|
|
Adjusted opening balance
|
(483)
|
|
|
(135)
|
|
|
19
|
|
|
3,888
|
|
|
3,289
|
|
Other comprehensive income (loss)
|
(117)
|
|
|
(574)
|
|
|
—
|
|
|
(164)
|
|
|
(855)
|
|
Amounts reclassified to net income
|
—
|
|
|
629
|
|
|
1
|
|
|
(694)
|
|
|
(64)
|
|
Net other comprehensive income (loss)
|
(117)
|
|
|
55
|
|
|
1
|
|
|
(858)
|
|
|
(919)
|
|
Balance at December 31, 2018
|
(600)
|
|
|
(80)
|
|
|
20
|
|
|
3,030
|
|
|
2,370
|
|
Other comprehensive income (loss)
|
16
|
|
|
(699)
|
|
|
8
|
|
|
—
|
|
|
(675)
|
|
Amounts reclassified to net income
|
—
|
|
|
(37)
|
|
|
(1)
|
|
|
(659)
|
|
|
(697)
|
|
Net other comprehensive income (loss)
|
16
|
|
|
(736)
|
|
|
7
|
|
|
(659)
|
|
|
(1,372)
|
|
Balance at December 31, 2019
|
(584)
|
|
|
(816)
|
|
|
27
|
|
|
2,371
|
|
|
998
|
|
Other comprehensive income (loss)
|
180
|
|
|
953
|
|
|
7
|
|
|
—
|
|
|
1,140
|
|
Amounts reclassified to net income
|
—
|
|
|
(1,524)
|
|
|
(9)
|
|
|
(676)
|
|
|
(2,209)
|
|
Net other comprehensive income (loss)
|
180
|
|
|
(571)
|
|
|
(2)
|
|
|
(676)
|
|
|
(1,069)
|
|
Balance at December 31, 2020
|
$
|
(404)
|
|
|
$
|
(1,387)
|
|
|
$
|
25
|
|
|
$
|
1,695
|
|
|
$
|
(71)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts presented above in net other comprehensive income (loss) are net of taxes. The amounts reclassified to net income related to unrealized gains (losses) on cash flow hedges in the table above are included in Other income (expense), net and Interest expense in our consolidated statements of income. See Note 9 for additional information. The amounts reclassified to net income related to unrealized gains (losses) on marketable securities in the table above are included in Other income (expense), net in our consolidated statements of income. The amounts reclassified to net income related to defined benefit pension and postretirement plans in the table above are included in Cost of services and Selling, general and administrative expense in our consolidated statements of income. See Note 11 for additional information.
|
|
|
Note 15. Additional Financial Information
|
The following tables provide additional financial information related to our consolidated financial statements:
Income Statement Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Depreciation expense
|
$
|
14,275
|
|
|
$
|
14,371
|
|
|
$
|
15,186
|
|
Interest costs on debt balances
|
4,632
|
|
|
5,221
|
|
|
5,399
|
|
Net amortization of debt discount
|
170
|
|
|
165
|
|
|
174
|
|
Capitalized interest costs
|
(555)
|
|
|
(656)
|
|
|
(740)
|
|
Advertising expense
|
3,107
|
|
|
3,071
|
|
|
2,682
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
|
|
|
Interest income
|
$
|
65
|
|
|
$
|
121
|
|
|
$
|
94
|
|
Other components of net periodic benefit (cost) income
|
(425)
|
|
|
627
|
|
|
3,068
|
|
Early debt extinguishment costs
|
(129)
|
|
|
(3,604)
|
|
|
(725)
|
|
Other, net
|
(50)
|
|
|
(44)
|
|
|
(73)
|
|
|
|
|
|
|
|
|
$
|
(539)
|
|
|
$
|
(2,900)
|
|
|
$
|
2,364
|
|
Balance Sheet Information
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
At December 31,
|
2020
|
|
2019
|
Prepaid expenses and other
|
|
|
|
Prepaid taxes
|
$
|
1,200
|
|
|
$
|
2,438
|
|
Deferred contract costs
|
2,472
|
|
|
2,578
|
|
Restricted cash
|
1,195
|
|
|
1,221
|
|
Other prepaid expense and other
|
1,843
|
|
|
1,791
|
|
|
$
|
6,710
|
|
|
$
|
8,028
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
|
Accounts payable
|
$
|
6,667
|
|
|
$
|
7,725
|
|
Accrued expenses
|
6,050
|
|
|
5,984
|
|
Accrued vacation, salaries and wages
|
5,057
|
|
|
4,885
|
|
Interest payable
|
1,452
|
|
|
1,441
|
|
Taxes payable
|
1,432
|
|
|
1,771
|
|
|
$
|
20,658
|
|
|
$
|
21,806
|
|
|
|
|
|
Other current liabilities
|
|
|
|
Dividends payable
|
$
|
2,618
|
|
|
$
|
2,566
|
|
Contract liability
|
4,843
|
|
|
4,651
|
|
Other
|
2,167
|
|
|
1,807
|
|
|
$
|
9,628
|
|
|
$
|
9,024
|
|
Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Years Ended December 31,
|
2020
|
|
2019
|
|
2018
|
Cash Paid
|
|
|
|
|
|
Interest, net of amounts capitalized
|
$
|
4,420
|
|
|
$
|
4,714
|
|
|
$
|
4,408
|
|
Income taxes, net of amounts refunded
|
2,725
|
|
|
3,583
|
|
|
2,213
|
|
|
|
|
|
|
|
Other, net Cash Flows from Operating Activities
|
|
|
|
|
|
Changes in device payment plan agreement non-current receivables
|
$
|
558
|
|
|
$
|
23
|
|
|
$
|
(509)
|
|
Early debt extinguishment costs
|
129
|
|
|
3,604
|
|
|
725
|
|
Loss on spectrum license auction
|
1,195
|
|
|
—
|
|
|
—
|
|
Other, net
|
898
|
|
|
(134)
|
|
|
3
|
|
|
$
|
2,780
|
|
|
$
|
3,493
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net Cash Flows from Financing Activities
|
|
|
|
|
|
Net debt related costs
|
$
|
(1,055)
|
|
|
$
|
(1,797)
|
|
|
$
|
(141)
|
|
Change in short-term obligations, excluding current maturities
|
—
|
|
|
—
|
|
|
(790)
|
|
Other, net
|
(1,657)
|
|
|
(1,120)
|
|
|
(893)
|
|
|
$
|
(2,712)
|
|
|
$
|
(2,917)
|
|
|
$
|
(1,824)
|
|
|
|
|
Note 16. Commitments and Contingencies
|
In the ordinary course of business, Verizon is involved in various commercial litigation and regulatory proceedings at the state and federal level. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In none of the currently pending matters is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including: (1) uncertain damage theories and demands; (2) a less than complete factual record; (3) uncertainty concerning legal theories and their resolution by courts or regulators; and (4) the unpredictable nature of the opposing party and its demands. We continuously monitor these proceedings as they develop and adjust any accrual or disclosure as needed. We do not expect that the ultimate resolution of any pending regulatory or legal matter in future periods will have a material effect on our financial condition, but it could have a material effect on our results of operations for a given reporting period.
Verizon is currently involved in approximately 25 federal district court actions alleging that Verizon is infringing various patents. Most of these cases are brought by non-practicing entities and effectively seek only monetary damages; a small number are brought by companies that
have sold products and could seek injunctive relief as well. These cases have progressed to various stages and a small number may go to trial in the coming 12 months if they are not otherwise resolved.
In connection with the execution of agreements for the sales of businesses and investments, Verizon ordinarily provides representations and warranties to the purchasers pertaining to a variety of nonfinancial matters, such as ownership of the securities being sold, as well as indemnity from certain financial losses. From time to time, counterparties may make claims under these provisions, and Verizon will seek to defend against those claims and resolve them in the ordinary course of business.
Subsequent to the sale of Verizon Information Services Canada in 2004, we continue to provide a guarantee to publish directories, which was issued when the directory business was purchased in 2001 and had a 30-year term (before extensions). The preexisting guarantee continues, without modification, despite the subsequent sale of Verizon Information Services Canada and the spin-off of our domestic print and internet yellow pages directories business. The possible financial impact of the guarantee, which is not expected to be adverse, cannot be reasonably estimated as a variety of the potential outcomes available under the guarantee result in costs and revenues or benefits that may offset each other. We do not believe performance under the guarantee is likely.
As of December 31, 2020, letters of credit totaling approximately $677 million, which were executed in the normal course of business and support several financing arrangements and payment obligations to third parties, were outstanding.
During 2020, Verizon entered into 12 renewable energy purchase agreements (REPAs) with third parties. Each of the REPAs is based on the expected operation of a renewable energy-generating facility and has a fixed price term 12 to 18 years from the commencement of the facility's entry into commercial operation, which is expected to occur in 2021 through 2023, as applicable. The REPAs generally are expected to be financially settled based on the prevailing market price as energy is generated by the facilities.
We have various commitments, totaling $24.6 billion, primarily to purchase content and network services, equipment, software and marketing services, which will be used or sold in the ordinary course of business, from a variety of suppliers. Of this total amount, $8.2 billion is attributable to 2021, $10.8 billion is attributable to 2022 through 2023, $4.1 billion is attributable to 2024 through 2025 and $1.5 billion is attributable to years thereafter. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. Our commitments are generally determined based on the noncancellable quantities or termination amounts. Purchases against our commitments totaled approximately $10.5 billion for 2020, $10.9 billion for 2019 and $9.0 billion for 2018. Since the commitments to purchase programming services from television networks and broadcast stations have no minimum volume requirement, we estimated our obligation based on number of subscribers at December 31, 2020, and applicable rates stipulated in the contracts in effect at that time. We also purchase products and services as needed with no firm commitment.