Fair Value Measurements and Financial Instruments

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value Measurements and Financial Instruments

Note 9. Fair Value Measurements and Financial Instruments

Recurring Fair Value Measurements

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2021:

					(dollars in millions)
	Level 1(1)		Level 2(2)		Level 3(3)		Total
Assets:
Prepaid expenses and other:
Fixed income securities	$	—	$	18	$	—	$	18
Interest rate swaps	—		188		—		188
Cross currency swaps	—		9		—		9
Foreign exchange forwards	—		12		—		12
Other assets:
Fixed income securities	—		391		—		391
Interest rate swaps	—		285		—		285
Cross currency swaps	—		580		—		580
Interest rate caps	—		44		—		44
Total	$	—	$	1,527	$	—	$	1,527
Liabilities:
Other current liabilities:
Interest rate swaps	$	—	$	1	$	—	$	1
Forward starting interest rate swaps	—		302		—		302
Cross currency swaps	—		218		—		218
Contingent consideration	—		—		231		231
Other liabilities:
Interest rate swaps	—		665		—		665
Cross currency swaps	—		1,406		—		1,406
Interest rate caps	—		44		—		44
Contingent consideration	—		—		313		313
Total	$	—	$	2,636	$	544	$	3,180

The following table presents the balances of assets and liabilities measured at fair value on a recurring basis as of December 31, 2020:

					(dollars in millions)
	Level 1 (1)		Level 2 (2)		Level 3 (3)		Total
Assets:
Prepaid expenses and other:
Foreign exchange forwards	$	—	$	12	$	—	$	12
Other assets:
Fixed income securities	—		459		—		459
Interest rate swaps	—		787		—		787
Cross currency swaps	—		1,446		—		1,446
Total	$	—	$	2,704	$	—	$	2,704
Liabilities:
Other current liabilities:
Forward starting interest rate swaps	$	—	$	409	$	—	$	409
Foreign exchange forwards	—		2		—		2
Other liabilities:
Interest rate swaps	—		303		—		303
Cross currency swaps	—		196		—		196
Forward starting interest rate swaps	—		388		—		388
Total	$	—	$	1,298	$	—	$	1,298

(1) Quoted prices in active markets for identical assets or liabilities.

(2) Observable inputs other than quoted prices in active markets for identical assets and liabilities.

(3) Unobservable pricing inputs in the market.

Certain of our equity investments do not have readily determinable fair values and are excluded from the tables above. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer and are included in Investments in unconsolidated businesses in our consolidated balance sheets. As of December 31, 2021 and December 31, 2020, the carrying amount of our investments without readily determinable fair values were $808 million and $402 million, respectively. During 2021, there were approximately $66 million of adjustments due to observable price changes and insignificant impairment charges. Cumulative adjustments due to observable price changes and impairment charges were approximately $143 million and $63 million, respectively.

Verizon has a liability for contingent consideration related to its acquisition of Tracfone, completed in November 2021. The fair value is calculated using a probability-weighted discounted cash flow model and represents a Level 3 measurement. Level 3 instruments include valuation based on unobservable inputs reflecting our own assumptions, consistent with reasonably available assumptions made by other market participants. Subsequent to the acquisition date, at each reporting date, the contingent consideration liability is remeasured to fair value with changes recorded within Selling, general and administrative expense in our consolidated statements of income.

Fixed income securities consist primarily of investments in municipal bonds. The valuation of the fixed income securities are based on the quoted prices for similar assets in active markets or identical assets in inactive markets or models that apply inputs from observable market data. The valuation determines that these securities are classified as Level 2.

Derivative contracts are valued using models based on readily observable market parameters for all substantial terms of our derivative contracts and thus are classified within Level 2. We use mid-market pricing for fair value measurements of our derivative instruments. Our derivative instruments are recorded on a gross basis.

We recognize transfers between levels of the fair value hierarchy as of the end of the reporting period.

Fair Value of Short-term and Long-term Debt

The fair value of our debt is determined using various methods, including quoted prices for identical debt instruments, which is a Level 1 measurement, as well as quoted prices for similar debt instruments with comparable terms and maturities, which is a Level 2 measurement.

The fair value of our short-term and long-term debt, excluding finance leases, was as follows:

			Fair Value
(dollars in millions)	Carrying Amount		Level 1		Level 2		Level 3		Total
At December 31, 2020	$	127,778	$	103,967	$	52,785	$	—	$	156,752
At December 31, 2021	149,543		106,599		62,606		—		169,205

Derivative Instruments

We enter into derivative transactions primarily to manage our exposure to fluctuations in foreign currency exchange rates and interest rates. We employ risk management strategies, which may include the use of a variety of derivatives including interest rate swaps, cross currency swaps, forward starting interest rate swaps, treasury rate locks, interest rate caps, swaptions and foreign exchange forwards. We do not hold derivatives for trading purposes.

The following table sets forth the notional amounts of our outstanding derivative instruments:

			(dollars in millions)
At December 31,	2021		2020
Interest rate swaps	$	19,779	$	17,768
Cross currency swaps	32,502		26,288
Forward starting interest rate swaps	1,000		2,000
Foreign exchange forwards	932		1,405

The following tables summarize the activities of our designated derivatives:

	(dollars in millions)
At December 31,	2021		2020
Interest Rate Swaps:
Notional value entered into	$	6,050	$	10,168
Notional value settled	4,018		9,488
Ineffective portion gain recognized in Interest expense	2		46
Cross Currency Swaps:
Notional value entered into	6,214		4,817
Notional value settled	—		1,600
Pre-tax gain (loss) recognized in Other comprehensive loss	(2,285)		1,810
Forward Starting Interest Rate Swaps:
Notional value entered into	—		—
Notional value settled	1,000		1,000
Pre-tax gain (loss) recognized in Other comprehensive loss	258		(486)
Treasury Rate Locks:
Notional value entered into	4,650		5,500
Notional value settled	4,650		5,500
Pre-tax gain (loss) recognized in Other comprehensive loss	251		(41)

			(dollars in millions)
At December 31,	2021		2020
Other, net Cash Flows from Operating Activities:
Cash received for settlement of interest rate swaps	$	107	$	764
Cash paid for settlement of forward starting interest rate swaps	(237)		(293)
Cash received (paid) for settlement of treasury rate locks	251		(41)

Interest Rate Swaps

We enter into interest rate swaps to achieve a targeted mix of fixed and variable rate debt. We principally receive fixed rates and pay variable rates, resulting in a net increase or decrease to Interest expense. These swaps are designated as fair value hedges and hedge against interest rate risk exposure of designated debt issuances. We record the interest rate swaps at fair value in our consolidated balance sheets as assets and liabilities. Changes in the fair value of the interest rate swaps are recorded to Interest expense, which are offset by changes in the fair value of the hedged debt due to changes in interest rates.

In January 2022, we entered into interest rate swaps with a total notional value of $500 million.

The following amounts were recorded in Long-term debt in our consolidated balance sheets related to cumulative basis adjustments for fair value hedges:

	(dollars in millions)
At December 31,	2021		2020
Carrying amount of hedged liabilities	$	20,027	$	18,849
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities	(113)		557
Cumulative amount of fair value hedging adjustment remaining for which hedge accounting has been discontinued	575		627

Cross Currency Swaps

We have entered into cross currency swaps designated as cash flow hedges to exchange our British Pound Sterling, Euro, Swiss Franc, Canadian Dollar and Australian Dollar-denominated cash flows into U.S. dollars and to fix our cash payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses. A portion of the gains recognized in Other comprehensive income (loss) was reclassified to Other income (expense), net to offset the related pre-tax foreign currency transaction gain or loss on the underlying hedged item. See Note 14 for additional information.

Forward Starting Interest Rate Swaps

We have entered into forward starting interest rate swaps designated as cash flow hedges in order to manage our exposure to interest rate changes on future forecasted transactions. We hedge our exposure to the variability in future cash flows based on the expected maturities of the related forecasted debt issuance. We recognize gains and losses resulting from interest rate movements in Other comprehensive income (loss).

Treasury Rate Locks

We enter into treasury rate locks to mitigate our interest rate risk. We recognize gains and losses resulting from interest rate movements in Other comprehensive income (loss).

Net Investment Hedges

We have designated certain foreign currency debt instruments as net investment hedges to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. In March 2021, we de-designated the existing net investment hedge and designated a new net investment hedge using a different Euro-denominated note. The notional amount of Euro-denominated debt designated as a net investment hedge was €750 million as of both December 31, 2021 and 2020.

Undesignated Derivatives

We also have the following derivative contracts which we use as economic hedges but for which we have elected not to apply hedge accounting.

The following table summarizes the activity of our derivatives not designated in hedging relationships:

	(dollars in millions)
At December 31,	2021		2020
Foreign Exchange Forwards:
Notional value entered into	$	12,604	$	14,030
Notional value settled	13,077		13,755
Pre-tax gain (loss) recognized in Other income (expense), net	(62)		142
Treasury Rate Locks:
Notional value entered into	—		1,625
Notional value settled	—		1,625
Pre-tax gain recognized in Interest expense	—		15
Swaptions:
Notional value sold	2,000		—
Notional value settled	2,000		—
Pre-tax gain recognized in Interest expense	11		—

Foreign Exchange Forwards

We enter into British Pound Sterling and Euro foreign exchange forwards to mitigate our foreign exchange rate risk related to non-functional currency denominated monetary assets and liabilities of international subsidiaries.

Treasury Rate Locks

We enter into treasury rate locks to mitigate our interest rate risk.

Swaptions

We enter into swaptions to achieve a targeted mix of fixed and variable rate debt.

In January 2022, we sold payer swaptions with a notional amount of $1.0 billion to enter into future pay-floating interest rate swaps indexed to SOFR that were not designated in hedging relationships.

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of temporary cash investments, short-term and long-term investments, trade receivables, including device payment plan agreement receivables, certain notes receivable, including lease receivables, and derivative contracts.

Counterparties to our derivative contracts are major financial institutions with whom we have negotiated derivatives agreements (ISDA master agreements) and credit support annex (CSA) agreements which provide rules for collateral exchange. The CSA agreements contain rating based thresholds such that we or our counterparties may be required to hold or post collateral based upon changes in outstanding positions as compared to established thresholds and changes in credit ratings. We do not offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value. At December 31, 2021, we held and posted $0.1 billion and an insignificant amount, respectively, of collateral related to derivative contracts under collateral exchange agreements, which were recorded as Other current liabilities and Prepaid expenses and other, respectively, in our consolidated balance sheet. At December 31, 2020, we held $0.2 billion of collateral related to derivative contracts under collateral exchange arrangements, which were recorded as Other current liabilities in our consolidated balance sheet. While we may be exposed to credit losses due to the nonperformance of our counterparties, we consider the risk

remote and do not expect that any such nonperformance would result in a significant effect on our results of operations or financial condition due to our diversified pool of counterparties.