Note 3 Equipment Installment Plans

TDS sells devices to customers, through its owned and agent distribution channels, under equipment installment contracts over a specified time period. For certain equipment installment plans (“EIP”), after a specified period of time or amount of payments, the customer may have the right to upgrade to a new device and have the remaining unpaid equipment installment contract balance waived, subject to certain conditions, including trading in the original device in good working condition and signing a new equipment installment contract. TDS values this trade-in right as a guarantee liability. The guarantee 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 fair value of the device being traded-in at the time of trade-in. As of September 30, 2016 and December 31, 2015, the guarantee liability related to these plans was $44 million and $93 million, respectively, and is reflected in Customer deposits and deferred revenues in the Consolidated Balance Sheet.

TDS equipment installment plans do not provide for explicit interest charges. For equipment installment plans with a duration of greater than twelve months, TDS imputes interest. TDS records imputed interest as a reduction to the related accounts receivable and it is recognized over the term of the installment agreement. Equipment installment plan receivables had a weighted average effective imputed interest rate of 10.7% and 9.7% as of September 30, 2016 and December 31, 2015, respectively.

The following table summarizes unbilled equipment installment plan receivables as of September 30, 2016 and December 31, 2015. Such amounts are included in the Consolidated Balance Sheet as Accounts receivable – customers and agents and Other assets and deferred charges, where applicable.

	September 30, 2016		December 31, 2015
(Dollars in millions)
Short-term portion of unbilled equipment installment plan receivables, gross	$	339	$	279
Short-term portion of unbilled deferred interest		(33)		(21)
Short-term portion of unbilled allowance for credit losses		(22)		(14)
Short-term portion of unbilled equipment installment plan receivables, net	$	284	$	244

Long-term portion of unbilled equipment installment plan receivables, gross	$	165	$	76
Long-term portion of unbilled deferred interest		(9)		(2)
Long-term portion of unbilled allowance for credit losses		(13)		(6)
Long-term portion of unbilled equipment installment plan receivables, net	$	143	$	68

TDS assesses the collectability of the equipment installment plan receivables based on historical payment experience, account aging and other qualitative factors and provides an allowance for estimated losses. The credit profiles of TDS customers on equipment installment plans are similar to those of TDS customers with traditional subsidized plans. Customers with a higher risk credit profile are required to make a down payment for equipment purchased through an installment contract.

TDS recorded out-of-period adjustments during the three and nine months ended September 30, 2016 due to errors related to equipment installment plan transactions occurring in 2015 and 2016 (“2016 EIP adjustments”). For the three months ended September 30, 2016, the 2016 EIP adjustments had the impact of increasing Equipment and product sales revenues by $4 million, decreasing bad debts expense, which is a component of Selling, general and administrative expense, by $2 million and increasing Income before income taxes by $6 million. For the nine months ended September 30, 2016, the 2016 EIP adjustments had the impact of increasing Equipment and product sales revenues by $2 million, decreasing bad debts expense by $2 million and increasing Income before income taxes by $4 million. Additionally, TDS recorded out-of-period adjustments during the nine months ended September 30, 2015 due to errors related to equipment installment plan transactions (“2015 EIP adjustments”) that were attributable to 2014. The 2015 EIP adjustments had the impact of reducing Equipment and product sales revenues and Income before income taxes by $6 million for the nine months ended September 30, 2015. The 2015 EIP adjustments were made in the first six months of 2015. TDS has determined that these adjustments were not material to any of the periods impacted.