2.	REVENUE RECOGNITION

Revenue Recognition Policies

Revenue Accounted for in Accordance with ASC

606

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 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. As of

December 31, 2019,

the Universal Service Administrative Company (“USAC”) had issued funding commitment letters for all of the Company’s rural health care customer applications for Funding Year

2018

(

July 1, 2018

through

June 30, 2019).

For Funding Year

2019

(

July 1, 2019

through

June 30, 2020),

the FCC had approved the Company’s cost-based rural rates for the majority of its customers and USAC began issuing funding commitment letters in

February 2020.

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 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. Funding under the FCC Connect America Fund (“CAF”) Phase II order specific to Alaska Communications generally requires 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 was 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. Effective in

2019,

the COLR and CCL funding mechanisms were eliminated and replaced with the Essential Network Support (“ENS”) funding mechanism. Funding levels under ENS are approximately half of those under the prior mechanisms.

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 years ended

December 31, 2019

and

2018:

	2019						2018
	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	$	61,549	$	-	$	61,549	$	60,697	$	-	$	60,697
Business voice and other		27,394		-		27,394		28,429		-		28,429
Managed IT services		6,494		-		6,494		5,742		-		5,742
Equipment sales and installations		4,698		-		4,698		5,127		-		5,127
Wholesale broadband		36,408		-		36,408		31,931		-		31,931
Wholesale voice and other		5,617		-		5,617		6,000		-		6,000
Operating leases and other deferred revenue		-		8,404		8,404		-		6,668		6,668

Total Business and Wholesale Revenue		142,160		8,404		150,564		137,926		6,668		144,594

Consumer Revenue
Broadband		26,589		-		26,589		26,144		-		26,144
Voice and other		10,431		-		10,431		11,158		-		11,158

Total Consumer Revenue		37,020		-		37,020		37,302		-		37,302

Regulatory Revenue
Access (1)		19,942		-		19,942		23,982		-		23,982
Access (2)		-		4,474		4,474		-		6,896		6,896
High-cost support		-		19,694		19,694		-		19,694		19,694

Total Regulatory Revenue		19,942		24,168		44,110		23,982		26,590		50,572

Total Revenue	$	199,122	$	32,572	$	231,694	$	199,210	$	33,258	$	232,468

(

)

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 years ended

December 31, 2019

and

2018:

	2019		2018

Services transferred over time	$	174,482	$	170,101
Goods transferred at a point in time		4,698		5,127
Regulatory access revenue (1)		19,942		23,982

Total revenue	$	199,122	$	199,210

(

)

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

$83,915

December 31, 2019.

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

$1,090

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

$82,825

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. Incremental costs of obtaining contracts for which the term is

one

year or less are expensed as incurred. The Company does

not

incur material contract fulfillment costs associated with its 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 years ended

December 31, 2019

and

2018.

Contract modifications and cancellations did

not

have a material effect on contract assets in the years ended

December 31, 2019

and

2018.

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

	2019			2018

Balance at beginning of period	$	8,052		$	6,898
Contract additions		3,070			4,881
Amortization		(3,797	)		(3,727	)
Impairments		(83	)		-
Balance at end of period	$	7,242		$	8,052

The Company recorded a charge for uncollectible accounts receivable of

$258

and

$2,745

in the years ended

December 31, 2019

and

2018,

respectively, 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 years ended

December 31, 2019

and

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.”

	2019			2018

Balance at beginning of period	$	2,766		$	1,150
Contract additions		2,575			2,407
Revenue recognized		(1,438	)		(791	)
Balance at end of period	$	3,903		$	2,766