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Note 1 Basis of Presentation
United States Cellular Corporation (U.S. Cellular), a Delaware corporation, is an 83%-owned subsidiary of Telephone and Data Systems, Inc. (TDS).
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of U.S. Cellular’s financial position as of June 30, 2017 and December 31, 2016, its results of operations for the three and six months ended June 30, 2017 and 2016, and its cash flows and changes in equity for the six months ended June 30, 2017 and 2016. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and six months ended June 30, 2017 and 2016, equaled net income. These results are not necessarily indicative of the results to be expected for the full year. U.S. Cellular has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2016, except as described below.
Equipment Installment Plans
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact the lessor accounting model. However, some changes to the lessor accounting guidance were made to align with lessee accounting changes within Accounting Standards Codification (ASC) 842, Leases and certain key aspects of ASC 606, Revenue from Contracts with Customers. U.S. Cellular is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet. U.S. Cellular is evaluating the effects that adoption of ASU 2016-02 will have on its results of operations.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. U.S. Cellular is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results of operations and disclosures.
In December 2016, the FASB issued Accounting Standards Update 2016-19 Technical Corrections and Improvements (ASU 2016-19). ASU 2016-19 includes an amendment to Accounting Standards Codification Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software, which clarifies that a software license within the scope of the Subtopic will be accounted for as the acquisition of an intangible asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition. U.S. Cellular adopted this standard prospectively for all arrangements entered into or materially modified after January 1, 2017.
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. Goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. U.S. Cellular is required to adopt ASU 2017-04 on January 1, 2020. Early adoption is permitted. U.S. Cellular is assessing whether it will early adopt ASU 2017-04.
In February 2017, the FASB issued Accounting Standards Update 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05). ASU 2017-05 clarifies how entities account for the derecognition of a nonfinancial asset and adds guidance for partial sales of nonfinancial assets. U.S. Cellular is required to adopt ASU 2017-05 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-05 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation – Stock Compensation (ASU 2017-09). ASU 2017-09 clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as modifications. U.S. Cellular is required to adopt ASU 2017-09 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
Amounts Collected from Customers and Remitted to Governmental Authorities
U.S. Cellular records amounts collected from customers and remitted to governmental authorities on a net basis within a tax liability account if the tax is assessed upon the customer and U.S. Cellular merely acts as an agent in collecting the tax on behalf of the imposing governmental authority. If the tax is assessed upon U.S. Cellular, then amounts collected from customers as recovery of the tax are recorded in Service revenues and amounts remitted to governmental authorities are recorded in Selling, general and administrative expenses in the Consolidated Statement of Operations. The amounts recorded gross in revenues that are billed to customers and remitted to governmental authorities totaled $14 million and $28 million for the three and six months ended June 30, 2017, respectively, and $16 million and $34 million for the three and six months ended June 30, 2016, respectively.
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Note 2 Fair Value Measurements
As of June 30, 2017 and December 31, 2016, U.S. Cellular did not have any material financial or nonfinancial assets or liabilities that were required to be recorded at fair value in its Consolidated Balance Sheet in accordance with GAAP.
The provisions of GAAP establish a fair value hierarchy that contains three levels for inputs used in fair value measurements. Level 1 inputs include quoted market prices for identical assets or liabilities in active markets. Level 2 inputs include quoted market prices for similar assets and liabilities in active markets or quoted market prices for identical assets and liabilities in inactive markets. Level 3 inputs are unobservable. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. A financial instrument’s level within the fair value hierarchy is not representative of its expected performance or its overall risk profile and, therefore, Level 3 assets are not necessarily higher risk than Level 2 assets or Level 1 assets.
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| Level within the Fair Value Hierarchy |
| June 30, 2017 |
| December 31, 2016 | |||||||||
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| Book Value |
| Fair Value |
| Book Value |
| Fair Value | |||||
(Dollars in millions) |
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| ||
Cash and cash equivalents | 1 |
| $ | 472 |
| $ | 472 |
| $ | 586 |
| $ | 586 | ||
Long-term debt |
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|
| ||
| Retail | 2 |
|
| 917 |
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| 966 |
|
| 917 |
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| 929 | |
| Institutional | 2 |
|
| 533 |
|
| 552 |
|
| 533 |
|
| 532 | |
| Other | 2 |
|
| 197 |
|
| 197 |
|
| 203 |
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| 203 | |
The fair value of Cash and cash equivalents approximates the book value due to the short-term nature of these financial instruments. Long-term debt excludes capital lease obligations and the current portion of Long-term debt. The fair value of “Retail” Long-term debt was estimated using market prices for the 6.95% Senior Notes, 7.25% 2063 Senior Notes and 7.25% 2064 Senior Notes. U.S. Cellular’s “Institutional” debt consists of the 6.7% Senior Notes which are traded over the counter. U.S. Cellular’s “Other” debt consists of a senior term loan credit facility. U.S. Cellular estimated the fair value of its Institutional and Other debt through a discounted cash flow analysis using the interest rates or estimated yield to maturity for each borrowing, which ranged from 3.88% to 6.55% and 3.78% to 6.93% at June 30, 2017 and December 31, 2016, respectively.
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Note 3 Equipment Installment Plans
U.S. Cellular sells devices to customers under equipment installment contracts over a specified time period. For certain equipment installment plans, after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. U.S. Cellular values this trade-in right as a guarantee liability. The guarantee liability is initially measured at fair value and is determined based on assumptions including the probability and timing of the customer upgrading to a new device and the fair value of the device being traded-in at the time of trade-in. When a customer exercises the trade-in option, the difference between the outstanding receivable balance forgiven and the fair value of the used device is offset against the guarantee liability. If the customer does not exercise the trade-in option at the time of eligibility, U.S. Cellular begins amortizing the liability and records this amortization as additional equipment revenue. As of June 30, 2017 and December 31, 2016, the guarantee liability related to these plans was $24 million and $33 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.
U.S. Cellular equipment installment plans do not provide for explicit interest charges. Because equipment installment plans have a duration of greater than twelve months, U.S. Cellular imputes interest. U.S. Cellular records imputed interest as a reduction to the related accounts receivable and recognizes it over the term of the installment agreement. Equipment installment plan receivables had a weighted average effective imputed interest rate of 12.1% and 11.2% as of June 30, 2017 and December 31, 2016, respectively.
| June 30, 2017 |
| December 31, 2016 | |||
(Dollars in millions) |
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Equipment installment plan receivables, gross |
| $ | 722 |
| $ | 628 |
Deferred interest |
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| (63) |
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| (53) |
Equipment installment plan receivables, net of deferred interest |
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| 659 |
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| 575 |
Allowance for credit losses |
|
| (57) |
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| (50) |
Equipment installment plan receivables, net |
| $ | 602 |
| $ | 525 |
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Net balance presented in the Consolidated Balance Sheet as: |
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Accounts receivable — Customers and agents (Current portion) |
| $ | 363 |
| $ | 345 |
Other assets and deferred charges (Non-current portion) |
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| 239 |
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| 180 |
Equipment installment plan receivables, net |
| $ | 602 |
| $ | 525 |
U.S. Cellular uses various inputs, including internal data, information from the credit bureaus and other sources, to evaluate the credit profiles of its customers. From this evaluation, a credit class is assigned to the customer that determines the number of eligible lines, the amount of credit available, and the down payment requirement, if any. Customers assigned to credit classes requiring no down payment represent a lower risk category, whereas those assigned to credit classes requiring a down payment represent a higher risk category. The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
| June 30, 2017 |
| December 31, 2016 | |||||||||||||||
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| Lower Risk |
| Higher Risk |
| Total |
| Lower Risk |
| Higher Risk |
| Total | ||||||
(Dollars in millions) |
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Unbilled |
| $ | 636 |
| $ | 48 |
| $ | 684 |
| $ | 553 |
| $ | 38 |
| $ | 591 |
Billed — current |
|
| 25 |
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| 2 |
|
| 27 |
|
| 23 |
|
| 2 |
|
| 25 |
Billed — past due |
|
| 9 |
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| 2 |
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| 11 |
|
| 10 |
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| 2 |
|
| 12 |
Equipment installment plan receivables, gross |
| $ | 670 |
| $ | 52 |
| $ | 722 |
| $ | 586 |
| $ | 42 |
| $ | 628 |
| June 30, 2017 |
| June 30, 2016 | |||
(Dollars in millions) |
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|
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Allowance for credit losses, beginning of period |
| $ | 50 |
| $ | 26 |
Bad debts expense |
|
| 31 |
|
| 28 |
Write-offs, net of recoveries |
|
| (24) |
|
| (17) |
Allowance for credit losses, end of period |
| $ | 57 |
| $ | 37 |
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Note 5 Acquisitions, Divestitures and Exchanges
In February 2016, U.S. Cellular entered into an agreement with a third party to exchange certain 700 MHz licenses for certain AWS and PCS licenses and $28 million of cash. This license exchange was accomplished in two closings. The first closing occurred in the second quarter of 2016, at which time U.S. Cellular received $13 million of cash and recorded a gain of $9 million. The second closing occurred in the first quarter of 2017, at which time U.S. Cellular received $15 million of cash and recorded a gain of $17 million.
In July 2016, the FCC announced U.S. Cellular as a qualified bidder in the FCC’s forward auction of 600 MHz spectrum licenses, referred to as Auction 1002. Prior to commencement of the forward auction, U.S. Cellular made an upfront payment to the FCC of $143 million in June 2016 to establish its initial bidding eligibility. In April 2017, the FCC announced by way of public notice that U.S. Cellular was the winning bidder for 188 licenses for an aggregate purchase price of $329 million. U.S. Cellular paid the remaining $186 million to the FCC and was granted the licenses during the second quarter of 2017.
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Note 6 Intangible Assets
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(Dollars in millions) |
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Balance December 31, 2016 | $ | 1,886 | ||
| Acquisitions |
| 331 | |
| Transferred to Assets held for sale |
| (4) | |
| Exchanges - Licenses received |
| 14 | |
| Exchanges - Licenses surrendered |
| (1) | |
Balance June 30, 2017 | $ | 2,226 |
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Note 7 Investments in Unconsolidated Entities
Investments in unconsolidated entities consist of amounts invested in wireless entities in which U.S. Cellular holds a noncontrolling interest. These investments are accounted for using either the equity or cost method.
Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
(Dollars in millions) |
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Revenues | $ | 1,630 |
| $ | 1,636 |
| $ | 3,239 |
| $ | 3,318 |
Operating expenses |
| 1,224 |
|
| 1,168 |
|
| 2,435 |
|
| 2,398 |
Operating income |
| 406 |
|
| 468 |
|
| 804 |
|
| 920 |
Other expense, net |
| (1) |
|
| (3) |
|
| (1) |
|
| (6) |
Net income | $ | 405 |
| $ | 465 |
| $ | 803 |
| $ | 914 |
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Note 8 Variable Interest Entities
Consolidated VIEs
During the first quarter of 2017, U.S. Cellular formed USCC EIP LLC, a special purpose entity (SPE), to facilitate a potential securitized borrowing using its equipment installment plan receivables in the future. Under a Receivables Sale Agreement, U.S. Cellular wholly-owned, majority-owned and unconsolidated entities, collectively referred to as “affiliated entities”, transfer device equipment installment contracts to USCC EIP LLC. This SPE will aggregate device equipment installment plan contracts for further transfer into a separate bankruptcy remote securitization trust structure, perform servicing, collection and all other administrative activities related to accounting for equipment installment plan contracts.
USCC EIP LLC’s sole business consists of the acquisition of the receivables from U.S. Cellular affiliated entities for the future transfer of receivables into a trust. Given that U.S. Cellular has the power to direct the activities of this SPE, and that this SPE lacks sufficient equity to finance its activities, U.S. Cellular is deemed to have a controlling financial interest in the SPE and, therefore, consolidates it.
During the six months ended June 30, 2017, net equipment installment plan receivables totaling $883 million were transferred to the newly formed SPE from affiliated entities. There were no receivables transferred as of December 31, 2016. Because U.S. Cellular fully consolidates USCC EIP LLC, the transfer of receivables into this SPE did not have a material impact to the consolidated financial statements of U.S. Cellular. As of June 30, 2017, U.S. Cellular had not executed a securitized borrowing from a third party specific to its equipment installment plan receivables.
The following VIEs were formed to participate in FCC auctions of wireless spectrum and to fund, establish, and provide wireless service with respect to any FCC licenses won in the auctions:
These particular VIEs are collectively referred to as designated entities. The power to direct the activities that most significantly impact the economic performance of these VIEs is shared. Specifically, the general partner of these VIEs has the exclusive right to manage, operate and control the limited partnerships and make all decisions to carry on the business of the partnerships. The general partner of each partnership needs the consent of the limited partner, an indirect U.S. Cellular subsidiary, to sell or lease certain licenses, to make certain large expenditures, admit other partners or liquidate the limited partnerships. Although the power to direct the activities of these VIEs is shared, U.S. Cellular has the most significant level of exposure to the variability associated with the economic performance of the VIEs, indicating that U.S. Cellular is the primary beneficiary of the VIEs. Therefore, in accordance with GAAP, these VIEs are consolidated.
In January 2017, Sunshine Spectrum and the other owner of Frequency Advantage (the previous general partner of Advantage Spectrum) completed a series of transactions whereby Frequency Advantage was dissolved and Sunshine Spectrum became the new general partner of Advantage Spectrum. Consistent with its previous treatment of Frequency Advantage and in accordance with GAAP, U.S. Cellular consolidates Sunshine Spectrum in its financial statements.
U.S. Cellular also consolidates other VIEs that are limited partnerships that provide wireless service. A limited partnership is a variable interest entity unless the limited partners hold substantive participating rights or kick-out rights over the general partner. For certain limited partnerships, U.S. Cellular is the general partner and manages the operations. In these partnerships, the limited partners do not have substantive kick-out or participating rights and, further, such limited partners do not have the authority to remove the general partner. Therefore, these limited partnerships are also recognized as VIEs and are consolidated under the variable interest model.
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| June 30, |
| December 31, | |||
|
|
| 2017 |
| 2016 | ||
(Dollars in millions) |
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|
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|
| ||
Assets |
|
|
|
|
| ||
| Cash and cash equivalents | $ | 2 |
| $ | 2 | |
| Accounts receivable |
| 404 |
|
| 44 | |
| Other current assets |
| 6 |
|
| 6 | |
| Assets held for sale |
| – |
|
| 2 | |
| Licenses |
| 655 |
|
| 652 | |
| Property, plant and equipment, net |
| 98 |
|
| 105 | |
| Other assets and deferred charges |
| 242 |
|
| 16 | |
|
| Total assets | $ | 1,407 |
| $ | 827 |
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|
|
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Liabilities |
|
|
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|
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| Current liabilities | $ | 42 |
| $ | 21 | |
| Deferred liabilities and credits |
| 13 |
|
| 13 | |
|
| Total liabilities | $ | 55 |
| $ | 34 |
Unconsolidated VIEs
U.S. Cellular manages the operations of and holds a variable interest in certain other limited partnerships, but is not the primary beneficiary of these entities and, therefore, does not consolidate them under the variable interest model.
U.S. Cellular’s total investment in these unconsolidated entities was $4 million and $6 million at June 30, 2017 and December 31, 2016, respectively, and is included in Investments in unconsolidated entities in U.S. Cellular’s Consolidated Balance Sheet. The maximum exposure from unconsolidated VIEs is limited to the investment held by U.S. Cellular in those entities.
U.S. Cellular made contributions, loans and/or advances to its VIEs totaling $676 million, of which $659 million is related to USCC EIP LLC as discussed above, and $26 million during the six months ended June 30, 2017 and June 30, 2016, respectively. U.S. Cellular may agree to make additional capital contributions and/or advances to these or other VIEs and/or to their general partners to provide additional funding for operations or the development of licenses granted in various auctions. U.S. Cellular may finance such amounts with a combination of cash on hand, borrowings under its revolving credit agreement and/or other long-term debt. There is no assurance that U.S. Cellular will be able to obtain additional financing on commercially reasonable terms or at all to provide such financial support.
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The accounting policies of U.S. Cellular conform to accounting principles generally accepted in the United States of America (GAAP) as set forth in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). The consolidated financial statements include the accounts of U.S. Cellular, subsidiaries in which it has a controlling financial interest, general partnerships in which U.S. Cellular has a majority partnership interest and certain entities in which U.S. Cellular has a variable interest that require consolidation under GAAP. All material intercompany accounts and transactions have been eliminated.
The unaudited consolidated financial statements included herein have been prepared by U.S. Cellular pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, U.S. Cellular believes that the disclosures included herein are adequate to make the information presented not misleading. Certain numbers included herein are rounded to millions for ease of presentation; however, calculated amounts and percentages are determined using the unrounded numbers. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in U.S. Cellular’s Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2016.
The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items, unless otherwise disclosed) necessary for the fair statement of U.S. Cellular’s financial position as of June 30, 2017 and December 31, 2016, its results of operations for the three and six months ended June 30, 2017 and 2016, and its cash flows and changes in equity for the six months ended June 30, 2017 and 2016. The Consolidated Statement of Comprehensive Income was not included because comprehensive income for the three and six months ended June 30, 2017 and 2016, equaled net income. These results are not necessarily indicative of the results to be expected for the full year. U.S. Cellular has not changed its significant accounting and reporting policies from those disclosed in its Form 10-K for the year ended December 31, 2016, except as described below.
U.S. Cellular equipment revenue under equipment installment plan contracts is recognized at the time the device is delivered to the end-user customer for the selling price of the device, net of any deferred imputed interest or trade-in right, if applicable. Imputed interest is reflected as a reduction to the receivable balance and recognized over the duration of the plan as Service revenues. See Note 3 — Equipment Installment Plans. Effective January 1, 2017, U.S. Cellular elected to change the classification of interest income on equipment installment plan contracts from Interest and dividend income to Service revenues in the Consolidated Statement of Operations. U.S. Cellular believes this classification is preferable because financing of devices as part of enrolling customers for service is an activity that is central to U.S. Cellular’s operations, and it is consistent with the presentation by others in the industry. Comparative financial statements of prior years have been adjusted to apply the new classification retrospectively. As a result of this change in classification, Service revenues for the three and six months ended June 30, 2016, increased by $12 million and $24 million, respectively, from previously reported amounts, with a corresponding decrease in Interest and dividend income. In comparison, Service revenues for the three and six months ended June 30, 2017, include $17 million and $33 million, respectively, of equipment installment plan interest income. This change did not have an impact on Income before income taxes, Net income, or Earnings per share for the three or six months ended June 30, 2016, nor did it have a cumulative impact to Retained earnings as of any date presented.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09) and has since amended the standard with Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, Accounting Standards Update 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), Accounting Standards Update 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, Accounting Standards Update 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, and Accounting Standards Update 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. These standards replace existing revenue recognition rules with a single comprehensive model to use in accounting for revenue arising from contracts with customers. U.S. Cellular is required to adopt ASU 2014-09, as amended, on January 1, 2018. Early adoption as of January 1, 2017, is permitted; however, U.S. Cellular did not adopt early. ASU 2014-09, as amended, impacts U.S. Cellular’s revenue recognition related to the allocation of contract revenues between various services and equipment, and the timing of when those revenues are recognized. In addition, ASU 2014-09 requires deferral of incremental contract acquisition and fulfillment costs and subsequent expense recognition over the contract period or expected customer life. U.S. Cellular has identified that new systems, processes and controls are required to adopt ASU 2014-09, as amended. U.S. Cellular has substantially completed the design and development of new systems to perform revenue recognition accounting under the provisions of ASU 2014-09, as amended, and is currently engaged in the process of testing these new systems. U.S. Cellular expects to transition to the new standard under the modified retrospective transition method whereby a cumulative effect adjustment to retained earnings is recognized upon adoption and the guidance is applied prospectively. Upon adoption, the cumulative effect adjustment is expected to include the establishment of contract asset and contract liability accounts with a corresponding adjustment to retained earnings to reflect the reallocation of revenues between service and equipment performance obligations for which control is transferred to customers in different periods. Reallocation impacts generally arise when bundle discounts are provided in a contract arrangement that includes equipment and service performance obligations. In these cases, the revenue will be reallocated according to the relative stand-alone selling prices of the performance obligations included in the bundle and this may be different than how the revenue is billed to the customer and recognized under current guidance. In addition, contract cost assets will be established to reflect costs that will be deferred as incremental contract acquisition costs. Incremental contract acquisition costs generally relate to commissions paid to sales associates. U.S. Cellular is evaluating the effects that adoption of ASU 2014-09, as amended, will have on its financial position and results of operations.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to record a right-of-use asset and lease liability for almost all leases. This ASU does not substantially impact the lessor accounting model. However, some changes to the lessor accounting guidance were made to align with lessee accounting changes within Accounting Standards Codification (ASC) 842, Leases and certain key aspects of ASC 606, Revenue from Contracts with Customers. U.S. Cellular is required to adopt ASU 2016-02 on January 1, 2019. Early adoption is permitted. Upon adoption of ASU 2016-02, U.S. Cellular expects a substantial increase to assets and liabilities on its balance sheet. U.S. Cellular is evaluating the effects that adoption of ASU 2016-02 will have on its results of operations.
In June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires entities to use a new forward-looking, expected loss model to estimate credit losses. It also requires additional disclosure relating to the credit quality of trade and other receivables, including information relating to management’s estimate of credit allowances. U.S. Cellular is required to adopt ASU 2016-13 on January 1, 2020. Early adoption as of January 1, 2019 is permitted. U.S. Cellular is evaluating the effects that adoption of ASU 2016-13 will have on its financial position, results of operations and disclosures.
In December 2016, the FASB issued Accounting Standards Update 2016-19 Technical Corrections and Improvements (ASU 2016-19). ASU 2016-19 includes an amendment to Accounting Standards Codification Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software, which clarifies that a software license within the scope of the Subtopic will be accounted for as the acquisition of an intangible asset and the incurrence of a liability to the extent that the license fees are not fully paid at acquisition. U.S. Cellular adopted this standard prospectively for all arrangements entered into or materially modified after January 1, 2017.
In January 2017, the FASB issued Accounting Standards Update 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 eliminates Step 2 of the current goodwill impairment test. Goodwill impairment loss will be measured as the amount by which a reporting unit’s carrying amount exceeds its fair value. U.S. Cellular is required to adopt ASU 2017-04 on January 1, 2020. Early adoption is permitted. U.S. Cellular is assessing whether it will early adopt ASU 2017-04.
In February 2017, the FASB issued Accounting Standards Update 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets: Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (ASU 2017-05). ASU 2017-05 clarifies how entities account for the derecognition of a nonfinancial asset and adds guidance for partial sales of nonfinancial assets. U.S. Cellular is required to adopt ASU 2017-05 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-05 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
In May 2017, the FASB issued Accounting Standards Update 2017-09, Compensation – Stock Compensation (ASU 2017-09). ASU 2017-09 clarifies when changes to the terms or conditions of share-based payment awards must be accounted for as modifications. U.S. Cellular is required to adopt ASU 2017-09 on January 1, 2018. Early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a significant impact on U.S. Cellular’s financial position or results of operations.
U.S. Cellular consolidates variable interest entities (VIEs) in which it has a controlling financial interest as defined by GAAP and is therefore deemed the primary beneficiary. A controlling financial interest will have both of the following characteristics: (a) the power to direct the VIE activities that most significantly impact economic performance and (b) the obligation to absorb the VIE losses and right to receive benefits that are significant to the VIE. U.S. Cellular reviews these criteria initially at the time it enters into agreements and subsequently when events warranting reconsideration occur. These VIEs have risks similar to those described in the “Risk Factors” in U.S. Cellular’s Form 10-K for the year ended December 31, 2016.
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U.S. Cellular has applied the provisions of fair value accounting for purposes of computing the fair value of financial instruments for disclosure purposes as displayed below.
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| Level within the Fair Value Hierarchy |
| June 30, 2017 |
| December 31, 2016 | |||||||||
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| Book Value |
| Fair Value |
| Book Value |
| Fair Value | |||||
(Dollars in millions) |
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Cash and cash equivalents | 1 |
| $ | 472 |
| $ | 472 |
| $ | 586 |
| $ | 586 | ||
Long-term debt |
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| Retail | 2 |
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| 917 |
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| 966 |
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| 917 |
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| 929 | |
| Institutional | 2 |
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| 533 |
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| 552 |
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| 533 |
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| 532 | |
| Other | 2 |
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| 197 |
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| 197 |
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| 203 |
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| 203 | |
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The following table summarizes equipment installment plan receivables as of June 30, 2017 and December 31, 2016.
| June 30, 2017 |
| December 31, 2016 | |||
(Dollars in millions) |
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Equipment installment plan receivables, gross |
| $ | 722 |
| $ | 628 |
Deferred interest |
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| (63) |
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| (53) |
Equipment installment plan receivables, net of deferred interest |
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| 659 |
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| 575 |
Allowance for credit losses |
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| (57) |
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| (50) |
Equipment installment plan receivables, net |
| $ | 602 |
| $ | 525 |
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Net balance presented in the Consolidated Balance Sheet as: |
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Accounts receivable — Customers and agents (Current portion) |
| $ | 363 |
| $ | 345 |
Other assets and deferred charges (Non-current portion) |
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| 239 |
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| 180 |
Equipment installment plan receivables, net |
| $ | 602 |
| $ | 525 |
The balance and aging of the equipment installment plan receivables on a gross basis by credit category were as follows:
| June 30, 2017 |
| December 31, 2016 | |||||||||||||||
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| Lower Risk |
| Higher Risk |
| Total |
| Lower Risk |
| Higher Risk |
| Total | ||||||
(Dollars in millions) |
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Unbilled |
| $ | 636 |
| $ | 48 |
| $ | 684 |
| $ | 553 |
| $ | 38 |
| $ | 591 |
Billed — current |
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| 25 |
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| 2 |
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| 27 |
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| 23 |
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| 2 |
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| 25 |
Billed — past due |
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| 9 |
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| 2 |
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| 11 |
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| 10 |
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| 2 |
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| 12 |
Equipment installment plan receivables, gross |
| $ | 670 |
| $ | 52 |
| $ | 722 |
| $ | 586 |
| $ | 42 |
| $ | 628 |
Activity for the six months ended June 30, 2017 and 2016, in the allowance for credit losses balance for the equipment installment plan receivables was as follows:
| June 30, 2017 |
| June 30, 2016 | |||
(Dollars in millions) |
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Allowance for credit losses, beginning of period |
| $ | 50 |
| $ | 26 |
Bad debts expense |
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| 31 |
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| 28 |
Write-offs, net of recoveries |
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| (24) |
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| (17) |
Allowance for credit losses, end of period |
| $ | 57 |
| $ | 37 |
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Activity related to Licenses for the six months ended June 30, 2017, is presented below. There were no changes to Goodwill during the six months ended June 30, 2017.
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(Dollars in millions) |
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Balance December 31, 2016 | $ | 1,886 | ||
| Acquisitions |
| 331 | |
| Transferred to Assets held for sale |
| (4) | |
| Exchanges - Licenses received |
| 14 | |
| Exchanges - Licenses surrendered |
| (1) | |
Balance June 30, 2017 | $ | 2,226 |
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The following table, which is based in part on information provided by third parties, summarizes the combined results of operations of U.S. Cellular’s equity method investments.
Three Months Ended June 30, |
| Six Months Ended June 30, | |||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
(Dollars in millions) |
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Revenues | $ | 1,630 |
| $ | 1,636 |
| $ | 3,239 |
| $ | 3,318 |
Operating expenses |
| 1,224 |
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| 1,168 |
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| 2,435 |
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| 2,398 |
Operating income |
| 406 |
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| 468 |
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| 804 |
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| 920 |
Other expense, net |
| (1) |
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| (3) |
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| (1) |
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| (6) |
Net income | $ | 405 |
| $ | 465 |
| $ | 803 |
| $ | 914 |
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The following table presents the classification and balances of the consolidated VIEs’ assets and liabilities in U.S. Cellular’s Consolidated Balance Sheet.
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| June 30, |
| December 31, | |||
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| 2017 |
| 2016 | ||
(Dollars in millions) |
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Assets |
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| Cash and cash equivalents | $ | 2 |
| $ | 2 | |
| Accounts receivable |
| 404 |
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| 44 | |
| Other current assets |
| 6 |
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| 6 | |
| Assets held for sale |
| – |
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| 2 | |
| Licenses |
| 655 |
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| 652 | |
| Property, plant and equipment, net |
| 98 |
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| 105 | |
| Other assets and deferred charges |
| 242 |
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| 16 | |
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| Total assets | $ | 1,407 |
| $ | 827 |
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Liabilities |
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| Current liabilities | $ | 42 |
| $ | 21 | |
| Deferred liabilities and credits |
| 13 |
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| 13 | |
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| Total liabilities | $ | 55 |
| $ | 34 |
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