Summary
This 8-K filing from Verizon Communications Inc. (VZ) details two significant accounting changes impacting its financial reporting. Firstly, the adoption of new revenue recognition standards (ASC 606) as of January 1, 2018, will affect how wireless subsidy contracts and commission costs are recognized. While total revenue over a contract term is expected to remain unchanged, there will be a shift in recognizing more equipment revenue upfront and less service revenue over time. This adoption will also lead to the deferral and amortization of commission costs. For 2018, Verizon anticipates an insignificant change to consolidated revenue but an estimated net decrease to operating expenses, resulting in a benefit to operating income that is expected to moderate in subsequent years. Secondly, the filing addresses the recently enacted Tax Cuts and Jobs Act (TCJA). Verizon estimates a significant, one-time reduction in net deferred income tax liabilities of approximately $16.8 billion due to the lower corporate tax rate. This will boost earnings for the fourth quarter and year ending December 31, 2017, by an estimated $4.10 per share, without impacting cash flows. The company does not currently foresee material impacts from other provisions of the TCJA, such as repatriation or territorial tax systems, and expects to fully deduct interest expense.
Key Highlights
- 1Verizon adopted ASC 606 (Revenue from Contracts with Customers) effective January 1, 2018, impacting revenue recognition for wireless subsidy contracts and commission costs.
- 2ASC 606 adoption will result in more equipment revenue recognized upfront and less service revenue over the contract term for wireless subsidies, with no change to total revenue or cash flows.
- 3Deferred commission costs for Wireless and Wireline businesses will now be recognized over the period of expected benefit, rather than expensed as incurred.
- 4For full-year 2018, Verizon expects an insignificant change to consolidated revenue but an estimated reduction in operating expenses of $0.9-$1.2 billion, leading to a benefit to consolidated operating income.
- 5The Tax Cuts and Jobs Act (TCJA) enactment is estimated to result in a one-time reduction in net deferred income tax liabilities of approximately $16.8 billion.
- 6The TCJA is expected to increase Verizon's 2017 earnings per share by approximately $4.10 due to the re-measurement of deferred tax liabilities at the new 21% corporate tax rate.
- 7The TCJA's impact on 2017 cash flows is not expected to be material, and Verizon anticipates full deductibility of interest expense.