2.	REVENUE RECOGNITION

Revenue Recognition Policies

Revenue Accounted for in Accordance with ASC

606

The Company adopted the provisions of ASC

606

effective in the

first

quarter of

2018

on a modified retrospective basis. Refer to Note

“

Summary of Significant Accounting Policies

” for a summary of the effect of initial adoption on the Company’s consolidated financial statements.

The Company applied the provisions of ASC

606

to its contracts with customers that had

not

been completed as of

January 1, 2018.

Adoption of ASC

606

did

not

have a material effect on the Company’s recognition of revenue. Adoption resulted in a net decrease in “Selling, general and administrative expenses” of

$676

and

$772

in the

three

and

nine

-month periods ended

September 30, 2018,

respectively, reflecting the net effect of the deferral of sales commissions incurred in

2018

offset by the amortization of deferred sales commissions incurred in prior years. The following tables provide the effect of adoption of ASC

606

on the Company’s statement of comprehensive income for

three

and

nine

-month periods ended

September 30, 2018

and balance sheet at

September 30, 2018.

	Three Months
	As Reported		Effect of Adoption of ASC 606			Excluding Adoption of ASC 606

Operating revenues	$	58,229	$	-		$	58,229
Total operating expenses		52,466		676			53,142
Operating income		5,763		(676	)		5,087
Income before income tax expense		2,579		(676	)		1,903
Net income attributable to Alaska Communications		1,817		(484	)		1,333
Net income per share attributable to Alaska
Communications:
Basic	$	0.03	$	(0.00	)	$	0.03
Diluted	$	0.03	$	(0.01	)	$	0.02

	Nine Months
	As Reported		Effect of Adoption of ASC 606			Excluding Adoption of ASC 606

Operating revenues	$	173,779	$	-		$	173,779
Total operating expenses		154,385		772			155,157
Operating income		19,394		(772	)		18,622
Income before income tax expense		9,356		(772	)		8,584
Net income attributable to Alaska Communications		7,360		(553	)		6,807
Net income per share attributable to Alaska
Communications:
Basic	$	0.14	$	(0.01	)	$	0.13
Diluted	$	0.14	$	(0.01	)	$	0.13

	September 30, 2018
	As Reported		Effect of Adoption of ASC 606			Excluding Adoption of ASC 606

Deferred income taxes	$	820	$	1,460		$	2,280
Other assets		19,330		(7,670	)		11,660
Total assets		449,969		(6,210	)		443,759
Deferred income taxes		2,233		(719	)		1,514
Total liabilities		281,931		(719	)		281,212
Retained earnings		8,719		(5,491	)		3,228
Total liabilities and stockholders' equity		449,969		(6,210	)		443,759

At contract inception, the Company assesses the goods and services promised to the customer and identifies the performance obligation for each promise to transfer a good or service that is distinct. The Company considers all obligations whether they are explicitly stated in the contract or are implied by customary business practices.

The Company’s broadband and voice revenue includes service, installation and equipment charges. The primary performance obligation in contracts for broadband and voice services is the provision of that service over time to the customer and revenue is recognized as that service is provided to the customer. The Company also charges certain of its broadband and voice service customers for equipment installed on the customers’ premise, physical possession, control and ownership of which pass to the customer upon installation. Revenue is recognized for these obligations at the point of installation. The contract price is allocated between the service, installation and equipment components based on their relative standalone selling prices. Installation and equipment revenue is

not

a significant component of broadband and voice revenue. Revenue associated the Company’s Lifeline customer base (included in the Consumer voice and other category) is less certain and is therefore recognized on a cash basis as payments are received.

Managed IT revenues include the sale, configuration and installation of equipment and the subsequent provision of ongoing IT services. Revenue is recognized on the sale, configuration and installation of equipment when physical possession, control and ownership of the equipment has been passed to the customer. The customer is typically billed for equipment separately from the subsequent IT services. Revenue associated with ongoing IT services is recognized as that service is provided. The contract price is allocated to each of these performance obligations based on their relative standalone selling prices. Revenue and cost of sales is recognized on the resale of equipment and other products only when the Company has control of the product, inventory risk and the discretion to establish pricing prior to transfer to the customer. For the resale of products where the Company does

not

meet these criteria, revenue is recognized at the net of the selling price to the customer and the Company’s cost.

The Company enters into contracts with its rural health care customers and is subject to various regulatory requirements associated with the provision of these services. Revenues associated with rural health care customers are recognized based on the amount the Company expects to collect as evidenced in its contract with the customer and the Company’s and customer’s agreement with the Federal Communications Commission (“FCC”) as the relevant service is provided. Payment for the services is made, in part, by the customer. The Company also receives funding support for these services through the FCC’s rural health care universal service support mechanism. Funding through the FCC represents the predominant portion of the total funding. The amount expected to be collected from the FCC is based on program funding levels and actual or recent historical approval levels of customer applications. In

March 2018,

the Universal Service Administrative Company (“USAC”) announced that demand for rural health care support had exceeded the program’s

$400

million annual cap in Funding Year

2017,

which began on

July 1, 2017

and ended on

June 30, 2018,

and that individual applicants that filed successful funding requests would receive approximately

84.4%

of the funding for which they were otherwise eligible. In

June 2018,

the FCC announced that it was addressing the current funding shortfall in the rural health care program by raising the annual program funding cap to

$571

million from its prior cap of

$400

million. The revised cap was applied to Funding Year

2017

to fully fund eligible funding requests for that year. The FCC’s order also adopted measures to address the increased demand for funding from the rural health care program by (i) providing for an annual adjustment to the annual funding cap to reflect inflation beginning with Funding Year

2018

(

July 1, 2018

through

June 30, 2019);

and (ii) establishing a process to carry-forward unused funds from past funding years for use in future funding years. The FCC’s funding increase from

84.4%

of approved contracts to

100%

of approved contracts resulted in a modification of the relevant contracts. The modification consisted of a change in pricing only, and did

not

result in the delivery of additional distinct goods or services. The Company’s remaining performance obligations under the contract are

not

distinct from services delivered prior to modification. Accordingly, the modification was accounted for as a continuation of the original contract and a cumulative adjustment of

$2,082

was recorded to revenue in the

second

quarter of

2018

for the pricing change associated with services provided prior to the modification in the

third

and

fourth

quarters of

2017

and the

first

quarter of

2018.

During the

third

quarter of

2018,

the applications associated with Funding Year

2017

for essentially all of the Company’s rural health care customers were approved or denied. Resolution of customer applications did

not

have a material effect on revenue recognized through

June 30, 2018.

As of

September 30, 2018,

USAC had

not

approved the Company’s rural health care rates or customer applications for Funding Year

2018.

Rural health care revenue recognized during the

third

quarter of

2018

was based on expected rate and customer application approval levels, which are generally consistent with the assumptions applied to revenue recorded for Funding Year

2017,

and assumes

100%

funding of all approved applications. Rural health care revenues are a component of business broadband revenue.

Regulatory access revenue includes (i) special access, which is primarily access to dedicated circuits sold to wholesale customers, substantially all of which is generated from interstate services; and (ii) cellular access, which is the transport of tariffed local network services between switches for cellular companies based on individually negotiated contracts. Regulatory access revenue is recognized as the service is provided to the customer.

Certain contracts with customers provide for customer payment in advance of or subsequent to the Company providing the associated goods or services. Such payments include customer funding of enhancements or additions to the Company’s network and other related assets. As provided for under ASC

606,

a financing component has

not

been applied if the time between payment by the customer and provision of the goods or services by the Company is

one

year or less. The Company has also

not

applied a financing component to certain contracts which include an advance customer payment associated with service to be provided over a period extending beyond

one

year. The advance payments provided for in these contracts is

not

material individually or in the aggregate.

Substantially all recurring non-usage sensitive service revenues are billed

one

month in advance and are deferred until the service has been provided to the customer. Non-recurring and usage sensitive revenues are billed in arrears and are recognized when the relevant service is provided. Equipment sales and installation are billed following customer acceptance. Payment terms for the contracts discussed above are typically

thirty

days.

Revenue Accounted for in Accordance with Other Guidance

Deferred revenue capacity liabilities are established for indefeasible rights of use (“IRUs”) on the Company’s network provided to

third

parties and are typically accounted for as operating leases. A deferred revenue liability is established at fair value and amortized to revenue on a straight-line basis over the contractual life of the relevant contract. Exchanges of IRUs with other carriers are accounted for as operating leases if the arrangement has commercial substance.

The Company has also established deferred revenue liabilities for other agreements outside the scope of ASC

606,

including business combinations and non-monetary transactions. Revenue associated with these agreements is recognized in accordance with the relevant accounting guidance.

Regulatory access revenue includes interstate and intrastate switched access, consisting of services based primarily on originating and terminating access minutes from other carriers. The Company assess its customers for surcharges, typically on a monthly basis, as required by various state and federal regulatory agencies, and remits these surcharges to these agencies. These pass-through surcharges include Federal Universal Access and State Universal Access. These surcharges vary from year to year, and are primarily recognized as revenue, and the subsequent remittance to the state or federal agency as a cost of sale and service. The charges are assessed on only a portion of the services provided. Other non-pass-through surcharges are collected from customers as authorized by the regulatory body. The amount charged is based on the type of line: single line business, multi-line business, consumer or lifeline. The rates are established based on federal or state orders. These charges are recorded as revenue and do

not

have a direct associated cost. Rather, they represent a revenue recovery mechanism established by the FCC or the Regulatory Commission of Alaska.

High-cost support revenue consists of interstate and intrastate universal support funds and similar revenue streams structured by federal and state regulatory agencies that allow the Company to recover its cost of providing universal service in Alaska. The FCC released the Connect America Fund (“CAF”) Phase II order specific to Alaska Communications which transitioned from CAF Phase I frozen support to CAF Phase II. Funding under the new program will generally require the Company to provide broadband service to unserved locations throughout the designated coverage area by the end of a specified build-out period, and meet interim milestone build-out obligations. In addition to federal high cost support, the Company is designated by the State of Alaska as a Carrier of Last Resort (“COLR”) in

five

of the

six

study areas. In addition to COLR, the Company receives Carrier Common Line (“CCL”) support. As a COLR the Company is required to provide services essential for retail and carrier-to-carrier telecommunication throughout the applicable coverage area. High-cost support revenue is recognized when cash is received.

The Company collects sales and other similar taxes from its customers on behalf of various governmental authorities, and remits these taxes to the appropriate authorities. The collection of such taxes is

not

recognized as revenue.

Disaggregation of Revenue

The following table provides the Company’s revenue disaggregated on the basis of its primary markets, customers, products and services for the

three

and

nine

-month periods ended

September 30, 2018

	Three Months						Nine Months
	Accounted for Under ASC 606		Accounted for Under Other Guidance		Total Revenue		Accounted for Under ASC 606		Accounted for Under Other Guidance		Total Revenue
Business and Wholesale Revenue
Business broadband	$	15,309	$	-	$	15,309	$	45,859	$	-	$	45,859
Business voice and other		7,199		-		7,199		21,088		-		21,088
Managed IT services		1,480		-		1,480		3,936		-		3,936
Equipment sales and installations		1,488		-		1,488		3,870		-		3,870
Wholesale broadband		7,624		-		7,624		23,475		-		23,475
Wholesale voice and other		1,525		-		1,525		4,455		-		4,455
Operating leases and other deferred revenue		-		1,740		1,740		-		4,923		4,923

Total Business and Wholesale Revenue		34,625		1,740		36,365		102,683		4,923		107,606

Consumer Revenue
Broadband		6,539		-		6,539		19,726		-		19,726
Voice and other		2,719		-		2,719		8,355		-		8,355

Total Consumer Revenue		9,258		-		9,258		28,081		-		28,081

Regulatory Revenue
Access (1)		5,944		-		5,944		18,203		-		18,203
Access (2)		-		1,738		1,738		-		5,118		5,118
High-cost support		-		4,924		4,924		-		14,771		14,771

Total Regualtory Revenue		5,944		6,662		12,606		18,203		19,889		38,092

Total Revenue	$	49,827	$	8,402	$	58,229	$	148,967	$	24,812	$	173,779

(

)

Includes customer ordered service and special access.

(

)

Includes carrier of last resort and carrier common line.

Business broadband revenue includes revenue associated with rural health care customers. Consumer voice and other revenue includes revenue associated with the FCC’s Lifeline program.

Timing of Revenue Recognition

Revenue accounted for in accordance with ASC

606

consisted of the following for the

three

and

nine

-month periods ended

September 30, 2018:

	Three		Nine
	Months		Months

Services transferred over time	$	42,395	$	126,894
Goods transferred at a point in time		1,488		3,870
Regulatory access revenue (1)		5,944		18,203

Total revenue	$	49,827	$	148,967

(

)

Includes customer ordered service and special access.

Transaction Price Allocated to Remaining Performance Obligations

The aggregate amount of the transaction price allocated to the remaining performance obligations for contracts with customers that are unsatisfied, or partially unsatisfied, accounted for in accordance with ASC

606

was approximately

$104,022

September 30, 2018.

Revenue will be recognized as the Company satisfies the associated performance obligations. For equipment delivery, installation and configuration, and certain managed IT services, which comprise approximately

$1,118

of the total, the performance obligation is currently expected to be satisfied during the next

twelve

months. For business broadband, voice and other managed IT services, which comprise approximately

$102,904

of the total, the performance obligation will be satisfied as the service is provided over the terms of the contracts, which range from

one

ten

years. The Company’s agreements with its consumer customers are typically on a month-to-month basis. Therefore, the Company’s provision of future service to these customers is

not

reflected in the above discussion of future performance obligations.

Contract Assets and Liabilities

The Company incurs certain incremental costs to obtain contracts that it expects to recover. These costs consist primarily of sales commissions and other directly related incentive compensation payments (reported as contract additions in the table below) which are dependent upon, and paid upon, successfully entering into individual customer contracts. The resulting contract asset is amortized to expense over the relevant contract life consistent with recognition of the associated revenue. In the event a contract with a customer is cancelled or modified, the unamortized portion of the associated contract asset is written off or adjusted as required. The Company does

not

incur material contract fulfillment costs associated with is contracts with customers. The cost of the Company’s network and related equipment, and enhancements to the network required under customer contracts, is accounted for in accordance with ASC

360

Property, Plant and Equipment. As described above, customer premise equipment constitutes a separate performance obligation under the contract and is sold to the customer. Modems are sold to the customer upon installation and are accounted for in accordance with ASC

330,

Inventory.

Certain contracts allow customers to modify their contract. When a contract is modified, the Company evaluates the change in scope or price of the contract to determine if the modification should be treated as a separate contract, if there is a termination of the existing contract and creation of a new contract, or if the modification should be considered a change associated with the existing contract. When a customer adds a distinct service to an existing contract for the standalone selling price of that service, the new service is treated as a separate contract.

The table below provides a reconciliation of the contract assets associated with contracts with customers accounted for in accordance with ASC

606

for the

nine

-month period ended

September 30, 2018.

Contract modifications and cancellations did

not

have a material effect on contract assets in the

nine

-month period ended

September 30, 2018.

Contract assets are classified as “Other assets” on the consolidated balance sheet.

Balance at beginning of period	$	6,898
Contract additions		3,531
Amortization		(2,759	)

Balance at end of period	$	7,670

The Company recorded a provision for uncollectible accounts receivable of

$2,371

in the

nine

-month period ended

September 30, 2018

associated with its contracts with customers. See Note

“

Accounts Receivable

.”

The table below provides a reconciliation of the contract liabilities associated with contracts with customers accounted for in accordance with ASC

606

for the

nine

-month period ended

September 30, 2018.

Contract liabilities consist of deferred revenue and are included in “Accounts payable, accrued and other current liabilities” and “Other long-term liabilities, net of current portion.”

Balance at beginning of period	$	1,150
Contract additions		1,569
Revenue recognized		(555	)
Balance at end of period	$	2,164