Revenue Recognition

9 Months Ended

Sep. 30, 2022

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

We categorize our products, services and revenue among the following categories:

•Voice and Other, which include primarily local voice services, private line and other legacy services. This category also includes federal and state support payments. These support payments are government subsidies designed to compensate us for providing certain broadband and communications services in high-cost areas or at discounts to low-income, educational, and healthcare customers. This revenue included the FCC's Connect America Fund Phase II ("CAF II") support payments, which we received through December 31, 2021, when the program ended.

•Fiber Infrastructure Services, which include high speed, fiber-based and lower speed DSL-based broadband services to residential and small business customers, and optical network services;

•IP and Data Services, which consist primarily of Ethernet services; and

•Affiliate Services, which are communications services that we also provide to external customers. In addition, we provide to our affiliates application development and support services, network support and technical services.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following table provides our total revenue by product and service category as well as the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:

	Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Fiber Infrastructure	$	487	(33)	454	495	(30)	465
Voice and Other	429		(46)	383	522	(83)	439
IP and Data Services	108		—	108	118	—	118
Affiliate Services	594		(11)	583	595	(9)	586
Total Revenue	$	1,618	(90)	1,528	1,730	(122)	1,608

	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Fiber Infrastructure	$	1,481	(100)	1,381	1,500	(90)	1,410
Voice and Other	1,331		(152)	1,179	1,595	(251)	1,344
IP and Data Services	336		—	336	357	—	357
Affiliate Services	1,758		(34)	1,724	1,794	(18)	1,776
Total revenue	$	4,906	(286)	4,620	5,246	(359)	4,887

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(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.

Operating Lease Revenue

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease revenue are included in operating revenue in our consolidated statements of operations.

For the three months ended September 30, 2022 and 2021, our gross rental income was $87 million and $82 million, respectively, which represents approximately 5% of our operating revenue for both periods. For the nine months ended September 30, 2022 and 2021, our gross rental income was $263 million and $239 million, which represents approximately 5% of our operating revenue for both periods.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2022 and December 31, 2021:

	September 30, 2022		December 31, 2021
	(Dollars in millions)
Customer receivables (1)	$	278	298
Contract assets	9		10
Contract liabilities	341		317

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(1)Reflects gross customer receivables, including gross affiliate receivables, of $305 million and $328 million, net of allowance for credit losses of $27 million and $30 million, at September 30, 2022 and December 31, 2021, respectively.

Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2022, we recognized $14 million and $178 million, respectively, of revenue that was included in contract liabilities of $317 million as of January 1, 2022. During the three and nine months ended September 30, 2021, we recognized $12 million and $187 million, respectively, of revenue that was included in contract liabilities of $300 million as of January 1, 2021.

Performance Obligations

As of September 30, 2022, we expect to recognize approximately $194 million of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied. We expect to recognize approximately 91% of this revenue through 2024.

These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.

Contract Costs

The following tables provide changes in our contract acquisition costs and fulfillment costs:

	Three Months Ended September 30, 2022			Three Months Ended September 30, 2021
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	62	47	68	49
Costs incurred	13		9	12	7
Amortization	(13)		(10)	(14)	(9)
End of period balance	$	62	46	66	47

	Nine Months Ended    September 30, 2022				Nine Months Ended    September 30, 2021
	Acquisition Costs		Fulfillment Costs		Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning Balance	$	64	$	47	73	$	54
Cost Incurred	38		28		36	19
Amortization	(40)		(29)		(43)	(26)
Ending Balances	$	62	46		66	47

Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average contract life of 32 months for mass markets customers and average contract life of 30 months for business customers. Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next 12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.