(3) ASC 606 Adoption and Revenue Recognition:

Frontier applied ASC 606 using the modified retrospective method – i.e., by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition.”

The following table includes information for the transition adjustment recorded as of January 1, 2018 to record the cumulative impact of adoption of ASC 606 for prior periods.



			(Unaudited)
	As Reported		ASC 606		Adjusted
($ in millions)	December 31, 2017		Transition Adjustment		January 1, 2018
Assets
Accounts receivable, net	$	819	$	(32)	$	787
Contract acquisition costs	$	-	$	87	$	87
Other current assets	$	64	$	4	$	68
Property, plant and equipment, net	$	14,377	$	15	$	14,392
Other assets	$	97	$	127	$	224

Liabilities and Equity
Other current liabilities	$	330	$	5	$	335
Other liabilities	$	317	$	(9)	$	308
Deferred income taxes	$	1,139	$	51	$	1,190
Accumulated deficit	$	(2,263)	$	154	$	(2,109)

The details of the significant changes are set out below.

Bundled Service and Allocation of Discounts

When customers purchase more than one service, the amount allocable to each service under ASC 606 is being determined based upon the relative stand-alone selling price of each service received. While this change results in different allocations to each of the services, it does not change total customer revenue.

Customer Incentives

When customers purchase more than one service, the amount allocable to each service under ASC 606 is determined based upon the relative stand-alone selling price of each service received. While this change results in different allocations to each of the services, it does not change total customer revenue. Under ASC 606, services, discounts, and other incentives offered to customers are considered separate performance obligations and a portion of consideration received from the customer over the contract will be allocated to them. Other customer revenue is recognized when the incentives are granted to the customer and our performance obligation is satisfied. The costs for these incentives will continue to be recognized as marketing expense and included in Selling, general and administrative expenses. Under ASC 606, cash equivalent customer incentives reduce the total contract value, which reduces revenue over the contract term, or in the case of a month-to-month contract over the expected contract term. When customer incentives issued exceed the reduction of revenue recorded over the contract term, a contract asset is generated. As part of the above transition adjustment, $40 million and $37 million of Short-term and Long-term contract assets were recorded, respectively. As of March 31, 2018, we have included $39 million of Short-term contract assets in Other current assets and $37 million of Long-term contract assets in Other assets on our consolidated balance sheet.

Upfront Fees

Under ASC 606, upfront non-refundable fees for carrier contracts that provide the customer with a material right to renew must be deferred and amortized into revenue over the typical contract term. Previously, these were recognized as revenue when billed. When upfront fees paid by customers exceeds the revenue recognized for the satisfaction of the performance obligations, a contract liability is generated. As part of the transition adjustment above, $13 million and $9 million of Short-term and Long-term contract liabilities were recorded, respectively, for carrier upfront fees. As of March 31, 2018, we have included $13 million of Short-term contract liabilities in Other current liabilities and $9 million of Long-term contract liabilities in Other liabilities on our consolidated balance sheet related to carrier upfront fees.

Contract Acquisition Costs

Under ASC 606, certain costs to acquire customers must be deferred and amortized over the related contract period or expected customer life (average of 3.8 years). For Frontier, this includes certain commissions paid to acquire new customers. Beginning January 1, 2018, commissions attributable to new customer contracts are being deferred and amortized into expense. Historically these acquisition costs were expensed as incurred. Frontier expects that the incremental commissions paid as a result of acquiring customers are recoverable and therefore, as part of the transition adjustment above, short-term acquisition costs of $87 million and long-term contract acquisition costs of $117 million were capitalized. For the three months ended March 31, 2018, Frontier capitalized and deferred $33 million of costs and amortized deferred costs of $25 million to Selling, general and administrative expense. As of March 31, 2018, we have recorded short-term contract acquisition costs of $91 million and included $121 million of long-term contract acquisition costs in Other assets on our consolidated balance sheet.

Reserves and Disputes

For carrier disputes, Frontier previously recorded a reserve as a reduction of commercial revenue on a case by case basis once the carrier claim was validated by Frontier. Under ASC 606, credits issued for disputes are variable consideration and an estimate for the credits to be issued is now being recorded at the time of customer billing and the related contract liability is reflected in our Allowance for doubtful accounts (see Note 4). Other than the transition adjustment, there was no impact to our operating results for the three months ended March 31, 2018 related to this change.

Switched Access

Under ASC 606, switched access revenue, which has been historically reflected in Other regulatory revenue, is considered revenue from a customer; therefore, will be reflected in commercial customer revenue on a prospective basis.

Contributions in Aid of Construction (CIAC)

It is customary for us to charge customers for certain construction activities requested by them. Historically, these amounts were reflected as offsets to the costs of construction and were recorded net in property, plant and equipment accounts. Under ASC 606, certain CIAC amounts will now be recognized as other customer revenue. For the three months ended March 31, 2018, we recognized $5 million in Revenue for performance obligations that were satisfied during the period.

USF Fees

Universal Service Fund Fees assessed to our customers were previously reflected in regulatory revenue. Under ASC 606, these amounts are being included in contract value and allocated to the services which have been delivered based on relative stand-alone selling price of each service.

The following tables summarize the impacts of adopting ASC 606 on Frontier’s consolidated balance sheet and statement of operations as of and for the three months ended March 31, 2018.



	March 31, 2018
			Impact of		Amounts Excluding
($ in millions)	As Reported		Adoption of ASC 606		adoption of ASC 606
Assets
Accounts receivable, net	$	778	$	32	$	810
Prepaid expenses	$	78	$	4	$	82
Contract acquisition costs	$	91	$	(91)	$	-
Other current assets	$	54	$	(2)	$	52
Property, plant and equipment, net	$	14,321	$	(24)	$	14,297
Other assets	$	228	$	(130)	$	98

Liabilities and Equity
Other current liabilities	$	334	$	(9)	$	325
Other liabilities	$	280	$	10	$	290
Deferred income taxes	$	1,217	$	(53)	$	1,164
Accumulated deficit	$	(2,089)	$	(159)	$	(2,248)



	For the three months ended March 31, 2018
			Impact of		Amounts Excluding
	As Reported		Adoption of ASC 606		Adoption of ASC 606
($ in millions)
Revenue	$	2,199	$	(6)	$	2,193

Operating expenses:
Network access expenses		372		(3)		369
Network related expenses		483		-		483
Selling, general and administrative expenses		469		4		473
Other operating expenses		509		-		509
Total operating expenses		1,833		1		1,834

Operating income	$	366	$	(7)	$	359

The impact of adoption of ASC 606 on net income, basic and diluted net loss per share, consolidated statement of comprehensive income, and the consolidated statement of cash flows were not material for the three months ended March 31, 2018.

We categorize our products, services and other revenues into the following categories:

Data and internet services include broadband services for residential and business customers. We provide data transmission services to high volume business customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”);

Voice services include traditional local and long distance wireline services, Voice over Internet Protocol (VoIP) services, as well as a number of unified messaging services offered to our residential and business customers. Voice services also include the long distance voice origination and termination services that we provide to our business customers and other carriers;

Video services include revenues generated from services provided directly to residential customers through the FiOS® and Vantage video brands, and through DISH® satellite TV services;

Other customer revenue includes switched access revenue, sales of customer premise equipment to our business customers, rents collected for collocation services, and revenue from other services and fees. Switched access revenue includes revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies; and

Subsidy and other regulatory revenue includes revenues generated from cost subsidies from state and federal authorities, including the Connect America Fund Phase II.

The following table provides a summary of revenues, by category. Because of limited comparability for historical periods, we have reflected the current period under both an ASC 606 basis as well as the historical ASC 605 basis.



	For the three months ended March 31,
	2018

			Impact		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017

Data and Internet services	$	985	$	(43)	$	942	$	993
Voice services		702		(32)		670		751
Video services		280		29		309		347
Other		135		(50)		85		68
Revenue from contracts
with customers		2,102		(96)		2,006		2,159
Subsidy and other regulatory revenue		97		90		187		197
Total revenue	$	2,199	$	(6)	$	2,193	$	2,356


	For the three months ended March 31,
	2018

			Impact of		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017


Consumer	$	1,128	$	(39)	$	1,089	$	1,164
Commercial		974		(57)		917		995
Revenue from contracts
with customers		2,102		(96)		2,006		2,159
Subsidy and other regulatory revenue		97		90		187		197
Total revenue	$	2,199	$	(6)	$	2,193	$	2,356

Frontier satisfies its obligations to customers by transferring goods and services in exchange for consideration received from the customer. The timing of Frontier’s performance often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. Frontier recognizes a contract asset or liability when the Company transfers goods or services to a customer and bills an amount which differs from the revenue allocated to the related performance obligations.

The opening and closing balances of Frontier’s contract asset, contract liability, receivables, and advanced billings balances for the three months ended March 31, 2018 are as follows:



($ in millions)	January 1, 2018		March 31, 2018		Increase/Decrease

Contract Assets:
Short-term contract assets	$	40	$	39	$	(1)
Long-term contract assets	$	37	$	37	$	-

Contract Liabilities:
Short-term contract liabilities	$	41	$	47	$	6
Long-term contract liabilities	$	19	$	19	$	-

Receivables	$	787	$	778	$	(9)

Advanced billings	$	270	$	271	$	1

The activity in contract assets included our recognition of reductions to revenue related to discounts and other customer incentives of $11 million and contract assets generated by issuance of new discounts and customer incentives to customers of $10 million.

The increase in contract liabilities was driven primarily by the deferral of revenue for $29 million exceeding the $24 million of revenue recognized for the satisfaction of the performance obligations related to the deferred revenue.

Short-term contract assets, Long-term contract assets, Short-term contract liabilities, and Long-term contract liabilities are included in other current assets, other assets, other current liabilities, and other liabilities, respectively, on our consolidated balance sheet.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.



($ in millions)	Revenue from contracts with customers
2018 (remaining nine months)	$	3,276
2019		2,202
2020		669
2021		316
2022		196
Thereafter		256
Total	$	6,915