8-KOther Events

AT&T INC. 8-K Report, Corporate Update (Mar 22, 2018)

Filed March 22, 2018For Securities:TT-PCTBBT-PA

Summary

AT&T Inc. (T) filed this 8-K on March 22, 2018, to provide updated information regarding the first quarter of 2018, primarily driven by the adoption of new accounting standards. The company adopted ASC 606, "Revenue from Contracts with Customers," effective January 1, 2018, using a modified retrospective method. This adoption results in a shift of revenue recognition for bundled service and equipment contracts, primarily impacting the wireless business, by recognizing more revenue upfront for equipment and less for service. Additionally, AT&T will now defer and amortize commission costs over the contract period or expected customer life, impacting operating expenses. Lastly, certain regulatory fees, such as Universal Service Fund (USF) fees, will now be recognized on a net basis, leading to lower reported revenue and operating expenses, but without impacting operating income. The filing also details adjustments due to the adoption of ASU No. 2017-07 concerning pension and postretirement benefit costs, which reclassifies certain components from operating expenses to "other income (expense) – net." While this impacts operating income, it does not affect net income or earnings per share. Furthermore, ASU No. 2016-15 related to the classification of cash flows has been adopted, reclassifying cash received from the sale of installment receivables from operating activities to investing activities, though the ongoing impact is expected to moderate due to changes in securitization programs.

Key Highlights

  • 1Adoption of ASC 606 "Revenue from Contracts with Customers" impacts revenue recognition for bundled contracts, shifting recognition from service to equipment.
  • 2ASC 606 adoption leads to deferral and amortization of commission costs, initially reducing operating expenses.
  • 3Netting of certain regulatory fees (e.g., USF) under ASC 606 will lower reported revenue and operating expenses.
  • 4Prior periods under ASC 606 adoption are not restated, limiting comparability between 2017 and 2018.
  • 5Adoption of ASU 2017-07 reclassifies pension/postretirement benefit costs, impacting operating income but not net income or EPS.
  • 6Adoption of ASU 2016-15 reclassifies cash from installment receivable sales from operating to investing activities.
  • 7The company reiterates that these accounting changes do not alter the annual guidance provided on January 31, 2018.

Frequently Asked Questions

ASC 606 changes how AT&T recognizes revenue for bundled service and equipment contracts. For contracts with promotional activities or subsidies, revenue previously attributed to service will now be attributed to equipment delivered, and the recognition of promotional discounts will be spread over the contract term instead of being recognized upfront. This results in a shift from service revenue to equipment revenue, though the total revenue recognized over the life of the contract is not expected to change. Additionally, netting certain regulatory fees (like USF) will lower both reported revenue and operating expenses.

Under ASC 606, AT&T will now defer commission costs related to new contracts and amortize them over the contract period or expected customer life. This deferral is expected to lead to a near-term improvement in operating margins. However, the filing also notes that netting certain regulatory fees will reduce operating expenses. The overall impact on operating expenses is influenced by the timing and volume of new contracts and subscriber additions.

Due to the adoption of ASC 606 using the modified retrospective method, prior period results (2017) are not restated to reflect the new standard. AT&T is providing illustrative impacts based on 2017 transactions to help investors understand the changes, but direct comparability between 2017 and 2018 operating results will be limited. The reclassification of pension costs and changes in cash flow reporting also alter the presentation of historical financials.

No, the accounting changes discussed, specifically the reclassification of pension and postretirement benefit costs (ASU 2017-07), do not impact AT&T's net income or earnings per share. The revenue recognition changes under ASC 606 and the cash flow reclassifications under ASU 2016-15 are presentation changes that do not alter the fundamental economics or overall profitability of the company.