(5) Revenue Recognition

Level 3 earns revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under ASC 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues that are not accounted for under Accounting Standards Codification ("ASC") 606 from leasing arrangements (primarily fiber capacity agreements).

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled in exchange for those goods or services. Revenue recognition is recognized based on the following five-step model:


•	Identification of the contract(s) with a customer;


•	Identification of the performance obligations in the contract;


•	Determination of the transaction price;


•	Allocation of the transaction price to the performance obligations in the contract; and,


•	Recognition of revenue when, or as, we satisfy a performance obligation.

We provide an array of communications services, including local voice, broadband, private line (including special access), network access, Ethernet, information technology, video and other ancillary services. Our customers include global/international, enterprise, wholesale, government and small and medium business customers. Certain contracts also include the sale of equipment, which is not significant to our business.

For access services, we generally bill fixed monthly charges one month in advance to customers and recognize revenue as service is provided over the enforceable contract term in alignment with the period of customer benefit. For usage, installation and other ancillary services, we generally bill in arrears and recognize revenue as usage or delivery occurs. In most cases, the amount invoiced for our service offerings constitutes the price that would be billed on a standalone basis. To the extent certain products or services are discounted as part of a bundle arrangement, the bundle discounts are included in our calculation of the total transaction price with the customer which is allocated to the various services in the bundled offering based on the estimated selling price of services included in each bundled combination.

Promotional or performance-based incentives are estimated at contract inception (and updated on a periodic basis as needed) and accounted for as variable consideration. In certain cases, customers may be permitted to modify their contracts without incurring a penalty. We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract. The impact of contract modifications is not typically significant to our results.

Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis. For certain products or services and customer types, payment is required before products or services are provided.

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the three months ended March 31, 2018 as well as a reconciliation of adjustments to revenue from the adoption of ASC 606 to ASC 605:



	Successor
	Three Months Ended March 31, 2018
	(Dollars in millions)
	Total Revenues		Adjustments⁽⁷⁾		Total Revenue from Contracts with Customers
Voice & Collaboration⁽¹⁾	$	381	—		381
IT and Managed Services⁽²⁾	1		—		1
Transport & Infrastructure⁽³⁾	675		(42	)	633
IP & Data Services⁽⁴⁾	1,003		—		1,003
Regulatory revenues⁽⁵⁾	2		(2	)	—
Affiliate revenues⁽⁶⁾	25		—		25
Total revenues	$	2,087	(44	)	2,043

Timing of revenue
Goods transferred at a point in time					$	—
Services performed over time					2,043
Total revenue from contracts with customers					$	2,043

(1) Includes local, long-distance and other ancillary revenues.

(2) Includes IT services and managed services revenues.

(3) Includes primarily broadband, private line (including business data services), colocation and data centers, wavelength and ancillary revenues.

(4) Includes primarily VPN data network, Ethernet, IP, video and ancillary revenues.

(5) Includes sublease rental income.

(6) Includes telecommunications and data services we bill to our affiliates.

(7) Includes sublease rental income and revenue from fiber capacity lease arrangements.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables and contract liabilities as of March 31, 2018 and December 31, 2017:



	Successor
	March 31, 2018		January 1, 2018
	(Dollars in millions)
Customer receivables⁽¹⁾	$	726	748
Contract liabilities	373		353

(1) Gross customer receivables of $730 and $751, net of allowance for doubtful accounts of $4 and $3, respectively.

Contract liabilities are consideration we have received from our customers in advance of providing the goods or services promised in the contract. We defer this consideration 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 sheet.

The following table provides information about revenues recognized for the three months ended March 31, 2018:



	Successor
	March 31, 2018
	(Dollars in millions)
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period	$	97
Performance obligations satisfied in previous periods	—

Performance Obligations

A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation as services are provided. Recognition of certain payments received in advance of services being provided is deferred until the service is provided. These advance payments include certain activation and certain installation charges, which we recognize as revenue over the actual or expected contract term, which ranges from one to five years depending on the service. Expected contract term periods are estimated using historical experience. In most cases, termination fees or other fees on existing contracts that are negotiated in conjunction with new contracts are deferred and recognized over the new contract term.

We periodically transfer optical capacity assets on our network to other telecommunications service carriers. These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 10 to 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity assets and on all of the other elements deliverable under the capacity IRU as lease revenue ratably over the term of the agreement. IRUs that are not classified as leases are accounted for as service contracts under ASC 605. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other optical capacity assets.

In connection with offering products and services provided by third-party vendors, we review the relationship between us, the vendor and the end customer to assess whether revenue should be reported on a gross or net basis. In assessing whether revenue should be reported on a gross or net basis, we consider whether we act as a principal in the transaction and control the goods or services used to fulfill the performance obligation(s) associated with the transaction.

We have service level commitments pursuant to contracts with certain of our customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a reduction to revenues in the period that the service level commitment was not met.

As of March 31, 2018, our estimated revenue expected to be recognized in the future related to performance obligations associated with customer contracts (including affiliates) that are unsatisfied (or partially satisfied) is approximately $7.5 billion. We expect to recognize approximately 56% of this revenue through 2019, with the balance recognized thereafter.

We do not disclose 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), or contracts that are classified as leasing arrangements that are not subject to ASC 606.

Contract Costs

The following table provides changes in our contract acquisition costs and fulfillment costs for the three months ended March 31, 2018:



	Successor
	Three Months Ended March 31, 2018
	(Dollars in millions)
	Acquisition Costs			Fulfillment Costs
Beginning of period balance	$	13		14
Costs incurred	15			23
Amortization	(2		)	(2	)
Impairments	—			—
End of period balance	$	26		35

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 telecommunications services to customers, including labor and materials consumed for these activities. The amount of these capitalized costs that are anticipated to be amortized in the next twelve months are included in other current assets on the consolidated balance sheet. The amount of capitalized costs expected to be amortized beyond the next twelve months is included on other assets on our consolidated balance. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.

Acquisition and fulfillment costs are amortized based on the transfer of services to which the assets relate to which typically range from 12 months to 60 months, and are included in cost of services and products and selling, general and administrative expenses in our consolidated statement of operations. A portion of these costs are amortized on a portfolio basis using an average expected contract term of 30 months.

Comparative Results

The following tables present our reported results under ASC 606 and a reconciliation to results using the historical accounting method:



	Three Months Ended March 31, 2018
	(Dollars in millions)
	Reported Balances as of March 31, 2018		Impact of 606		ASC 605 Historical Adjusted Balances
Operating revenues	$	2,087	—		$	2,087
Cost of services and products (exclusive of depreciation and amortization)	998		—		998
Selling, general and administrative	344		13		357
Income tax expense	102		(3	)	99
Net income	62		(10	)	52



	As of March 31, 2018
	(Dollars in millions)
	Reported Balances as of March 31, 2018		Impact of 606		ASC 605 Historical Adjusted Balances
Other current assets	$	183	(11	)	$	172
Other long-term assets, net	96		(15	)	81
Deferred income taxes, net	249		3		252
Member's Equity	18,924		(19	)	18,905