(4) Revenue Recognition

We earn most of our consolidated revenue from contracts with customers, primarily through the provision of telecommunications and other services. Revenue from contracts with customers is accounted for under Accounting Standards Codification ("ASC") 606, which we adopted on January 1, 2018 using the modified retrospective approach. We also earn revenues from leasing arrangements (primarily fiber capacity agreements) and governmental subsidy payments, neither of which are accounted for under ASC 606.

Under ASC 606, 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 to receive in exchange for those goods or services. Revenue is recognized based on the following five-step model:


•	Identification of the contract 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, VPN, Ethernet, data, broadband, private line (including special access), network access, Ethernet, transport, voice, information technology, video and other ancillary services. We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, 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 contract term in alignment with the customer's receipt of service. 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.

Under ASC 606, we recognize revenue for services when we provide the applicable service or when control is transferred. 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. If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which ranges from one year to seven years depending on the service. 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. 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.

A performance obligation is a promise in a contract with a customer to provide a good or service to the customer. We recognize revenue for services when we satisfy our performance obligation.

Promotional or performance-based incentive payments 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 has not been significant to our results in 2018.

Customer contracts are evaluated to determine whether the performance obligations are separable. If the performance obligations are deemed separable and separate earnings processes exist, the total transaction price that we expect to receive with the customer is allocated to each performance obligation based on its relative standalone selling price. The standalone selling price is the price we sell to similar customers. The revenue associated with each performance obligation is then recognized as earned. The portion of any advance payment allocated to the service based upon its relative selling price is recognized ratably over the contract term.

We periodically sell optical capacity on our network. 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 - 20 years. In most cases, we account for the cash consideration received on transfers of optical capacity as ASC 606 revenue which we recognize ratably over the term of the agreement. Cash consideration received on transfers of dark fiber is accounted for as non-ASC 606 lease revenue, which we also recognize ratably over the term of the agreement. We do not recognize revenue on any contemporaneous exchanges of our optical capacity assets for other non-owned optical capacity assets.

In connection with offering products and services provided to the end user by third-party vendors, we review the relationship between us, the vendor and the end user 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 and services used to fulfill the performance obligations 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 corresponding reduction to revenues in the period that the service level commitment was not met.

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.

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 September 30, 2018					Nine Months Ended September 30, 2018
	(Dollars in millions)
	Reported Balances as of September 30, 2018		Impact of ASC 606		ASC 605 Historical Adjusted Balances	Reported Balances as of September 30, 2018	Impact of ASC 606		ASC 605 Historical Adjusted Balances
Operating revenues	$	2,010	(4	)	2,006	6,149	(4	)	6,145
Cost of services and products (exclusive of depreciation and amortization)	976		—		976	2,954	—		2,954
Selling, general and administrative	311		12		323	1,043	32		1,075
Interest expense	137		(7	)	130	381	(7	)	374
Income tax expense	38		(2	)	36	184	(8	)	176
Net income	88		(7	)	81	190	(21	)	169

The following table presents a reconciliation of certain consolidated balance sheet captions under ASC 606 to the balance sheet results using the historical accounting method:



	September 30, 2018
	(Dollars in millions)
	Reported Balances as of September 30, 2018		Impact of ASC 606		ASC 605 Historical Adjusted Balances
Other current assets	$	290	(22	)	268
Other long-term assets, net	132		(22	)	110
Deferred revenue	1,469		(3	)	1,466
Deferred income tax assets, net	274		10		284
Member's equity	18,312		(31	)	18,281

Disaggregated Revenue by Service Offering

The following table provides disaggregation of revenue from contracts with customers based on service offering for the three and nine months ended September 30, 2018, respectively. It also shows the amount of revenue that is not subject to ASC 606, but is instead governed by other accounting standards.



	Successor						Successor
	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	(Dollars in millions)						(Dollars in millions)
	Total Revenues		Adjustments⁽⁷⁾		Total Revenue from Contracts with Customers		Total Revenues	Adjustments⁽⁷⁾		Total Revenue from Contracts with Customers
IP & Data Services ⁽¹⁾	$	969	—		969		2,959	—		2,959
Transport & Infrastructure ⁽²⁾	664		(45	)	619		2,012	(140	)	1,872
Voice & Collaboration ⁽³⁾	349		—		349		1,093	—		1,093
IT and Managed Services ⁽⁴⁾	1		—		1		3	—		3
Other revenues ⁽⁵⁾	1		(1	)	—		4	(3	)	1
Affiliate revenues ⁽⁶⁾	26		(26	)	—		78	(78	)	—
Total revenues	$	2,010	(72	)	1,938		6,149	(221	)	5,928

Timing of revenue
Goods transferred at a point in time					$	—				$	—
Services performed over time					1,938					5,928
Total revenue from contracts with customers					$	1,938				$	5,928

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

(2) Includes primarily broadband and equipment sales and professional services revenues.

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

(4) Includes IT services and managed services 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 which are not within the scope of ASC 606.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables and contract liabilities as of September 30, 2018 and January 1, 2018:



	Successor
	September 30, 2018		January 1, 2018
	(Dollars in millions)
Customer receivables ⁽¹⁾	$	715	748
Contract liabilities	413		353


(1)	Gross customer receivables of $725 and $751, net of allowance for doubtful accounts of $10 and $3, at September 30, 2018 and January 1, 2018, 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 recognizing 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 seven 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 and nine months ended September 30, 2018:



	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
	(Dollars in millions)
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period (January 1, 2018)	$	22	135
Performance obligations satisfied in previous periods	—		—

Performance Obligations

As of September 30, 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 $6.3 billion. We expect to recognize approximately 67% of this revenue through 2020, with the balance recognized thereafter.

We do not disclose the amount of unsatisfied performance obligations for contracts under which we are contractually entitled to bill pre-determined amounts for future services (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 and nine months ended September 30, 2018:



	Successor
	Three Months Ended September 30, 2018					Nine Months Ended September 30, 2018
	(Dollars in millions)
	Acquisition Costs			Fulfillment Costs		Acquisition Costs		Fulfillment Costs
Beginning of period balance	$	34		52		13		14
Costs incurred	16			22		42		70
Amortization	(5		)	(8	)	(10	)	(18	)
End of period balance	$	45		66		45		66

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. Acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis to which the assets relate 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. The amounts of these capitalized costs that are anticipated to be amortized in the next twelve months are included in other current assets on our consolidated balance sheets. We recognize incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets is less than one year. Deferred acquisition and fulfillment costs are assessed for impairment on a quarterly basis.

(7) Products and Services Revenues

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


•	IP and data services, which include primarily VPN data networks, Ethernet, IP, video (including our facilities-based video services, CDN services and Vyvx broadcast services) and other ancillary services;


•	Transport and infrastructure, which include broadband, private line (including business data services), data center facilities and services, including cloud, hosting and application management solutions, wavelength, equipment sales and professional services, network security services, dark fiber services and other ancillary services;


•	Voice and collaboration, which includes primarily local voice, including wholesale voice, and other ancillary services;


•	IT and managed services, which include information technology services and managed services, which may be purchased in conjunction with our other network services;


•	Other, which includes sublease rental income; and


•	Affiliates services, we provide to our affiliates, telecommunication services that we also provide to external customers. In addition, we provide to our affiliates computer system development and support services, network support and technical services.

From time to time, we may change the categorization of our products and services.

Our operating revenues for our products and services consisted of the following categories:



	Successor			Predecessor
	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018	Three Months Ended September 30, 2017	Nine Months Ended September 30, 2017
	(Dollars in millions)
IP and data services	$	969	2,959	988	2,947
Transport and infrastructure	664		2,012	677	2,042
Voice and collaboration	349		1,093	392	1,174
IT and managed services	1		3	—	—
Other	1		4	2	6
Affiliate	26		78	—	—
Total revenues	$	2,010	6,149	2,059	6,169

We recognize revenues in our consolidated statements of operations for certain USF surcharges and transaction taxes that we bill to our customers. Our consolidated statements of operations also reflect the offsetting expense for the amounts we remit to the government agencies. The total amount of such surcharges and transaction taxes that we included in revenues aggregated $96 million and $97 million for the successor three months ended September 30, 2018 and the predecessor three months ended September 30, 2017, respectively, and $301 million and $295 million for the successor nine months ended September 30, 2018 and the predecessor nine months ended September 30, 2017, respectively. These USF surcharges, where we record revenue and transaction taxes, are assigned to the products and services categories based on the underlying revenues. We also act as a collection agent for certain other USF and transaction taxes that we are required by government agencies to bill our customers, for which we do not record any revenue or expense because we only act as a pass-through agent.