Device Payment Plan Agreement and Wireless Service Receivables

6 Months Ended

Jun. 30, 2020

Receivables [Abstract]

Device Payment Plan and Wireless Service Receivables

Note 6. Device Payment Plan Agreement and Wireless Service Receivables

The following table presents information about accounts receivable, net of allowances, recorded in our condensed consolidated balance sheet:

	At June 30, 2020
(dollars in millions)	Device payment plan agreement		Wireless service		Other receivables(1)		Total
Accounts receivable(2)	$	12,017	$	5,089	$	6,636	$	23,742
Less Allowance for credit losses	584		234		252		1,070
Accounts receivable, net of allowance	$	11,433	$	4,855	$	6,384	$	22,672

⁽¹⁾ Other receivables primarily include wireline receivables, Verizon Media receivables and other receivables, the allowances for which are individually insignificant.

⁽²⁾ Following the adoption of Topic 326 on January 1, 2020, accounts receivable are measured at amortized cost.

Under the Verizon device payment program, our eligible wireless customers purchase wireless devices under a device payment plan agreement. Customers that activate service on devices purchased under the device payment program pay lower service fees as compared to those under our fixed-term service plans, and their device payment plan charge is included on their wireless monthly bill. As of January 2017, we no longer offer Consumer customers new fixed-term, subsidized service plans for phones; however, we continue to offer subsidized plans to our Business customers. We also continue to service existing plans for customers who have not yet purchased and activated devices under the Verizon device payment program.

The following table displays device payment plan agreement receivables, net, recognized in our condensed consolidated balance sheets:

	At June 30,		At December 31,
(dollars in millions)	2020		2019(1)
Device payment plan agreement receivables, gross	$	17,079	$	19,493
Unamortized imputed interest	(429)		(454)
Device payment plan agreement receivables, at amortized cost	16,650		19,039
Allowance (2)	(795)		(472)
Device payment plan agreement receivables, net	$	15,855	$	18,567
Classified in our condensed consolidated balance sheets:
Accounts receivable, net	$	11,433	$	13,045
Other assets	4,422		5,522
Device payment plan agreement receivables, net	$	15,855	$	18,567

⁽¹⁾ Balances reflected are prior to the adoption of Topic 326 on January 1, 2020.

⁽²⁾ Includes allowance for both short-term and long-term device payment plan agreement receivables. The allowance as of June 30, 2020 and December 31, 2019 relate to our provision for credit losses and doubtful accounts, respectively.

Included in our device payment plan agreement receivables at June 30, 2020 and December 31, 2019, are net device payment plan agreement receivables of $13.5 billion and $14.3 billion, respectively, which have been transferred to ABS Entities and continue to be reported in our condensed consolidated balance sheets. See Note 5 for additional information. We believe the carrying value of these receivables approximate their fair value using a Level 3 expected cash flow model.

For indirect channel wireless contracts with customers, we impute risk adjusted interest on the device payment plan agreement receivables. We record the imputed interest as a reduction to the related accounts receivable. Interest income, which is included within Service revenues and other in our condensed consolidated statements of income, is recognized over the financed device payment term.

Promotions

We may offer certain promotions that allow a customer to trade in their owned device in connection with the purchase of a new device. Under these types of promotions, the customer receives a credit for the value of the trade-in device. In addition, we may provide the customer with additional future credits that will be applied against the customer’s monthly bill as long as service is maintained. We recognize a liability measured at fair value, for the customer’s right to trade-in the device which is determined by considering several factors, including the weighted-average selling prices obtained in recent resales of similar devices eligible for trade-in. Future credits are recognized when earned by the customer. Device payment plan agreement receivables, net, does not reflect the trade-in device liability. At June 30, 2020 and December 31, 2019, the amount of trade-in liability was $55 million and $103 million, respectively.

From time to time, we offer certain marketing promotions that allow our customers to upgrade to a new device after paying down a certain specified portion of the required device payment plan agreement amount as well as trading in their device in good working order. When a

customer enters into a device payment plan agreement with the right to upgrade to a new device, we account for this trade-in right as a guarantee obligation.

Origination of Device Payment Plan Agreements

When originating device payment plan agreements, we use internal and external data sources to create a credit risk score to measure the credit quality of a customer and to determine eligibility for the device payment program. Verizon’s experience has been that the payment attributes of longer tenured customers are highly predictive for estimating their reliability to make future payments. Customers with longer tenures tend to exhibit similar risk characteristics to other customers with longer tenures, and receivables due from customers with longer tenures tend to perform better than receivables from customers that have not previously been Verizon customers. As a result of this experience, we make initial lending decisions based upon whether the customers are "established customers" or "short-tenured customers." If a Consumer customer has been a customer for 45 days or more, or if a Business customer has been a customer for 12 months or more, the customer is considered an "established customer." For established customers, the credit decision and ongoing credit monitoring processes rely on a combination of internal and external data sources. If a Consumer customer has been a customer less than 45 days, or a Business customer has been a customer for less than 12 months, the customer is considered a "short-tenured customer." For short-tenured customers, the credit decision and credit monitoring processes rely more heavily on external data sources.

Internal data and/or external credit data are obtained from the credit reporting agencies, if available, to create a custom credit risk score for Consumer customers. The custom credit risk score is generated automatically from the applicant’s credit data using proprietary custom credit models. The credit risk score measures the likelihood that the potential customer will become severely delinquent and be disconnected for non-payment. For a small portion of short-tenured customer applications, a traditional credit report is not available from one of the national credit reporting agencies because the potential customer does not have sufficient credit history. In those instances, alternative credit data is used for the risk assessment. For Business customers, we also verify the existence of the business with external data sources.

Based on the custom credit risk score, we assign each customer to a credit class, each of which has specified offers of credit including an account level spending limit and either a maximum amount of credit allowed per device or a required down payment percentage. During the fourth quarter 2018, we moved all Consumer customers, short-tenured and established, from a required down payment percentage, between zero and 100%, to a maximum amount of credit per device.

Credit Quality Information

Subsequent to origination, we assess indicators for the quality of our wireless device payment plan agreement portfolio using two models, one for new customers and one for existing customers. The model for new customers pools all Consumer and Business wireless customers based on 210 days and 12 months or less, respectively, as "new customers." The model for existing customers pools all Consumer and Business wireless customers based on 210 days and 12 months or more, respectively, as "existing customers."

The following table presents device payment plan agreement receivables, at amortized cost, as of June 30, 2020, by credit quality indicator and year of origination:

	Year of Origination
(dollars in millions)	2020		2019		2018		Prior to 2018		Total
New customers	$	1,042	$	1,360	$	169	$	43	$	2,614
Existing customers	4,964		7,857		1,186		29		14,036
Total	$	6,006	$	9,217	$	1,355	$	72	$	16,650

The data presented in the table above was last updated on June 30, 2020.

We assess indicators for the quality of our wireless service receivables portfolio as one overall pool. As of June 30, 2020, wireless service receivables, at amortized cost, originating in 2020 and 2019 were $5.0 billion and an insignificant amount, respectively.

Allowance for Credit Losses

The credit quality indicators are used in determining the estimated amount and the timing of expected credit losses for the device payment plan agreement and wireless service receivables portfolios.

Activity in the allowance for credit losses by portfolio segment of receivables were as follows:

(dollars in millions)	Device Payment Plan Agreement Receivables(1)		Wireless Service Plan Receivables
Balance at January 1, 2020	$	472	$	156
Opening balance sheet adjustment related to Topic 326 adoption	265		—
Adjusted opening balance, January 1, 2020	737		156
Current period provision for expected credit losses	449		252
Write-offs charged against the allowance	(415)		(208)
Recoveries collected	24		34
Balance at June 30, 2020	$	795	$	234

⁽¹⁾ Includes allowance for both short-term and long-term device payment plan agreement receivables.

We monitor delinquency and write-off experience based on the quality of our device payment plan agreement and wireless service receivables portfolios. The extent of our collection efforts with respect to a particular customer are based on the results of our proprietary custom internal scoring models that analyze the customer’s past performance to predict the likelihood of the customer falling further delinquent. These custom scoring models assess a number of variables, including origination characteristics, customer account history and payment patterns. Since our customers’ behaviors may be impacted by general economic conditions, we analyzed whether changes in macroeconomic conditions impact our credit loss experience and have concluded that our credit loss estimates are generally not materially impacted by reasonable and supportable forecasts of future economic conditions. Based on the score derived from these models, accounts are grouped by risk category to determine the collection strategy to be applied to such accounts. For device payment plan agreement receivables, we consider an account to be delinquent and in default status if there are unpaid charges remaining on the account on the day after the bill’s due date. For wireless service receivables, an account is considered delinquent 34 days after the bill cycle date. The risk class determines the speed and severity of the collections effort including initiatives taken to facilitate customer payment.

As of June 30, 2020, our allowance for credit losses considered the current and potential future impacts caused by COVID-19 based on available information to date. The impacts also include the Company's commitment to the FCC's "Keep Americans Connected" pledge, through which we pledged to waive late fees for, and not terminate service to, any of our consumer or small business customers who informed us that they had been impacted financially by the COVID-19 crisis through May 13, which we extended to June 30, 2020.

The balance and aging of the device payment plan agreement receivables, at amortized cost, were as follows:

	At June 30,
(dollars in millions)	2020
Unbilled	$	15,720
Billed:
Current	832
Past due	98
Device payment plan agreement receivables, at amortized cost	$	16,650