US Cellular 2014 Annual Report Download - page 34

United States Cellular Corporation
Management’s Discussion and Analysis of Financial Condition and Results of Operations
income tax assets will be realized based on future taxable income and, to the extent management
believes that realization is not likely, establish a valuation allowance. Management’s judgment is required
in determining the provision for income taxes, deferred income tax assets and liabilities and any
valuation allowance that is established for deferred income tax assets.
U.S. Cellular recognizes the tax benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities, based on the technical merits
of the position. The tax benefits recognized in the financial statements from such a position are
measured based on the largest benefit that has a greater than 50% likelihood of being realized upon
ultimate resolution.
See Note 4—Income Taxes in the Notes to Consolidated Financial Statements for details regarding U.S.
Cellular’s income tax provision, deferred income taxes and liabilities, valuation allowances and
unrecognized tax benefits, including information regarding estimates that impact income taxes.
Loyalty Reward Program
See the Revenue Recognition section of Note 1—Summary of Significant Accounting Policies and Recent
Accounting Pronouncements in the Notes to Consolidated Financial Statements for additional description
of this program and the related accounting.
U.S. Cellular follows the deferred revenue method of accounting for its loyalty reward program. Under
this method, revenue allocated to loyalty reward points is deferred. The amount allocated to the loyalty
points is based on the estimated retail price of the products and services for which points may be
redeemed, as well as U.S. Cellular’s estimate of the percentage of loyalty points that will be redeemed
for each product or service. A significant change in any of the aforementioned assumptions used would
impact the amount of revenue deferred and recognized under the loyalty reward program.
Revenue is recognized at the time of customer redemption or when such points have been depleted via
an account maintenance charge. As a result of the accumulation of historical experience, beginning in
the fourth quarter of 2013, U.S. Cellular began recognizing breakage under the proportional model. Prior
to the fourth quarter of 2013, breakage was not recognized until incurred. Under the proportional model,
U.S. Cellular allocates a portion of the estimated future breakage to each redemption and records
revenue proportionally.
U.S. Cellular periodically reviews and if necessary, revises the redemption and depletion rates under this
model as appropriate based on history and related future expectations. In 2014 and 2013, U.S. Cellular
recognized $20.6 million and $16.8 million, respectively, in revenues related to estimated and actual
breakage.
Equipment Installment Plans
U.S. Cellular offers customers the option to purchase certain devices under installment contracts over a
period of up to 24 months and, under certain of these plans, offers the customer a trade-in right.
Customers on an installment contract that elect to trade-in their device, will receive a credit in the amount
of the outstanding balance of the installment contract, provided the subscriber trades-in an eligible used
device in good working condition and purchases a new device from U.S. Cellular. Equipment revenue
under these contracts is recognized at the time the device is delivered to the end-user customer for the
selling price of the device, net of any deferred imputed interest or trade-in right, if applicable.
Trade-In Right
U.S. Cellular values the trade-in right as a guarantee liability. This liability is initially measured at fair value
and is determined based on assumptions including the probability and timing of the customer upgrading
to a new device and the estimated fair value of the used device eligible for trade-in. U.S. Cellular
reevaluates its estimate of the guarantee liability at each reporting date. A significant change in any of
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