Item 8.01 Other Events.
Throughout this document, AT&T Inc. is referred to as "we" or "AT&T." On March 22, 2018, we provided updated information regarding certain items impacting the first quarter of 2018.
The areas discussed below do not change the annual guidance we provided on January 31, 2018 in our Item 2.02 Form 8-K.
REVENUE RECOGNITION
Effective January 1, 2018, we adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," as modified (ASC 606), using the modified retrospective method. With our adoption of the revenue standard, we made a policy election to record certain revenue-based regulatory fees, primarily Universal Service Fund (USF) fees, on a net basis.
When using the modified retrospective approach, prior period results are not restated to reflect the impact of ASC 606, resulting in limited comparability between 2018 and 2017 operating results. As a convenience to investors who may want to consider the effects of certain aspects of ASC 606 on our 2017 operating results, we are providing a summary of the areas with the most significant impacts to AT&T and approximate impacts based on our 2017 transactions. These approximate impacts are intended to illustrate general changes in categories and are not proposed pro forma adjustments to the financial results and operations included in our Form 10-K filed February 20, 2018.
ASC 606 most significantly impacts AT&T in these three areas: 1) bundled service and equipment contracts, 2) deferral of commission costs, and 3) netting of certain regulatory fees, previously recognized in both revenue and expense. Additional details for these three areas and illustrative impacts on operating items follow in the tables below (increases are denoted "+" and decreases "-").
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Bundled service and equipment contracts
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For bundled contracts, ASC 606 has the effect of increasing revenue attributable to equipment delivered and reducing revenue attributed to service. This results in a shift from service to equipment revenue for contracts with promotional activity or subsidy arrangements. This revenue shift will primarily impact our wireless business. Service-only contracts, customer billing and cash flows will not be impacted by ASC 606. The volume of promotional activity will affect the timing and amount of revenue shifted between categories, but not impact the total revenue recognized over the life of the contract.
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Treatment 2017 and prior
a) Revenue allocation driven by amounts billed
for
products and services
b) Promotional discounts attributed to delivered
elements only, recognizing discounts upfront
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Treatment 2018 and beyond
a) Revenue allocation driven by value of
products and services delivered
b) Promotional discounts attributed to all
elements of the contracts, spreading
recognition over the contract term
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Historical Impact using 2017 – Illustrative
Revenue:
Service -$1.5B
Equipment +$1.5B
Total Revenue insignificant
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Contract acquisition costs
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Upon adoption of ASC 606, deferred commission is recorded on all open contracts at December 31, 2017. Beginning January 1, 2018, all new contracts will have commissions deferred and amortized over the contract period or expected customer life. Commission deferrals will impact our wireless, video/broadband and other businesses, representing approximately 60%, 35% and 5%, respectively, of the operating expense impacts below. We expect near-term improvements in our operating margins; however, the impact of these deferrals will moderate as our base increases. The volume of gross subscriber additions will impact the amount of benefit to operating expense compared to our previous accounting. 2017 volumes used for approximate impact below are not necessarily intended to be representative of future year's activity.
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Treatment 2017 and prior
a) Commissions expensed when customer
contract signed
b) Fulfillment costs deferred and amortized
over customer life
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Treatment 2018 and beyond
a) Commissions deferred and amortized
over contract period or expected customer
life
b) No change from prior treatment
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Historical Impact using 2017 – Illustrative
Operating Expense:
Commission Deferrals -$3.5B
Amortization +$1.5B
Total Operating Expense -$2.0B
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Regulatory fees recorded net (primarily USF)
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With our decision to record net USF fees, revenues will be lower than in prior years, contributing to wireless service and operating margin increases with no change in operating income. ARPU (average revenue per subscriber) will be lower than under our previous policy. This change predominately affects our domestic wireless, fixed business and video/broadband operations representing approximately 45%, 35%, and 20%, respectively, of the impacts shown below.
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Treatment 2017 and prior
a) Recognized in both operating revenues
and operating expenses
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Treatment 2018 and beyond
b) Recognized net
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Historical Impact using 2017 – Illustrative
Total Revenue -$3.5B
Operating Expense -$3.5B
Net -
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OTHER CHANGES IMPACTING HISTORICAL RESULTS
Consolidated Statements of Income
With our adoption of
ASU No. 2017-07, "Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost" (ASU 2017-07), our
consolidated statements of income have been adjusted to remove
certain components of our net periodic benefit cost from our consolidated operating expenses and include those amounts in "other income (expense) – net." For segment reporting, we continue to include service cost and amortization of net prior service credits in segment operating results as this is the basis on which we analyze our segment results. While operating income is impacted by this standard change, net income and earnings per share are not impacted. The following table summarizes the increase (decrease) on our consolidated income statement.
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2017
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2016
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Operating income
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Other income (expense)
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Net Income
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Operating income
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Other income (expense)
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Net Income
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Q1
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$
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(508
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)
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$
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508
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|
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-
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$
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(457
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)
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$
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457
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-
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Q2
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(797
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)
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797
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-
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(457
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)
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457
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-
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Q3
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|
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(596
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)
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596
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|
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-
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(458
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)
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458
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-
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Q4
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922
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(922
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)
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-
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563
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|
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(563
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)
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-
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Annual
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$
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(979
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)
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$
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979
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-
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$
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(809
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)
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$
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809
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-
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Consolidated Statements of Cash Flows
With our adoption of ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15), our previously reported consolidated statements of cash flows have been adjusted to remove any additional cash received for installment receivables (i.e., AT&T Next) sold to the banks from operating activities and to include those receipts as cash from investing activities. We will continue to record cash received from the banks at the time of sale as cash from operating activities. Modifications made to our securitization program in 2017 should moderate the ongoing impact of ASU 2016-15 as we collect more cash upfront when installment receivables are sold to the banks. The following table summarizes the impact to cash from operations and cash from investing:
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2017
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2016
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Operating Activities
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Investing Activities
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Operating Activities
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Investing Activities
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Q1
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$
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(185
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)
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$
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185
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$
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(205
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)
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$
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205
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Q2
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|
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(197
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)
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197
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|
|
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(157
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)
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157
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Q3
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|
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(283
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)
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283
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|
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(172
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)
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172
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Q4
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(311
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)
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311
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(197
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)
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197
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Annual
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$
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(976
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)
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$
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976
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$
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(731
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)
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$
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731
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CAUTIONARY LANGUAGE CONCERNING FORWARD-LOOKING STATEMENTS
Information set forth in this filing contains financial estimates and other forward-looking statements that are subject to risks and uncertainties. A discussion of factors that may affect future results is contained in AT&T's filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update or revise statements contained in this filing based on new information or otherwise.