Fair Value Measurements and Derivative Instruments

12 Months Ended

Dec. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurements and Derivative Instruments

Note 6 – Fair Value Measurements and Derivative Instruments

Derivative Financial Instruments

Interest Rate Swaps

Prior to the closing of the business combination, T-Mobile managed interest rate risk related to its long-term debt to affiliates by entering into interest rate swap agreements. T-Mobile held seven interest rate swaps with a total notional amount of $3.6 billion as of December 31, 2012. These interest rate swap agreements were not designated as hedging instruments.

Interest rate swaps were valued using discounted cash flow techniques. These techniques incorporated market-based observable inputs such as interest rates and credit spreads, considering each instrument’s term, notional amount, discount rate and credit risk. T-Mobile’s interest rate swaps were classified as Level 2 in the fair value hierarchy.

Prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included the interest rate swaps. The related balance in accumulated other comprehensive income was reclassified into net income (loss). As of December 31, 2013, there were no outstanding interest rate swaps.

Cross Currency Interest Rate Swaps

Prior to the closing of the business combination, T-Mobile managed foreign currency risk along with interest rate risk through cross currency interest rate swap agreements related to its intercompany Euro denominated long-term debt to affiliates, which were entered into upon assumption of the notes to fix the future interest and principal payments in U.S. dollars, as well as to mitigate the impact of foreign currency transaction gains or losses over the terms of the long-term debt to affiliates extending to 2025. T-Mobile had three cross currency interest rate swaps with a total notional amount of $2.3 billion as of December 31, 2012. These cross currency interest rate swaps were designated as cash flow hedges and met the criteria for hedge accounting. The hedges were evaluated as highly effective prior to the closing of the business combination with MetroPCS, thus no gains (losses) were recognized due to hedge ineffectiveness.

Cross currency interest rate swaps were valued using discounted cash flow techniques. These techniques incorporated market-based observable inputs such as interest rates and credit spreads, considering each instrument’s term, notional amount, discount rate and credit risk. T-Mobile’s cross currency interest rate swaps were classified as Level 2 in the fair value hierarchy.

Prior to the closing of the business combination with MetroPCS, Deutsche Telekom recapitalized T-Mobile by retiring the existing T-Mobile long-term debt to affiliates and all related derivative instruments, which included cross currency interest rate swaps. The related balance in accumulated other comprehensive income was reclassified into net income (loss). As of December 31, 2013, there were no outstanding cross currency interest rate swaps.

Fair value of derivative financial instruments measured on a recurring basis by level were as follows:

	Balance Sheet Location	December 31, 2012
(in millions)		Level 1		Level 2		Level 3		Total
Assets
Interest rate swaps	Other current assets	$	—	$	106	$	—	$	106
Cross currency interest rate swaps	Other assets	—		144		—		144

The following table summarizes the activity related to derivatives instruments:

	Year Ended December 31,
(in millions)	2013		2012	2011
Gain (loss) recognized in other comprehensive income (loss):
Cross currency interest rate swaps	(17	)	139	(79	)
Gain recognized in interest expense to affiliates:
Interest rate swaps	8		71	73
Cross currency interest rate swaps	53		10	2

Long-term Debt

The fair value of the Company’s long-term debt to affiliates was determined based on a discounted cash flow approach which considers the future cash flows discounted at current rates. The approach includes an estimate for the stand-alone credit risk of T-Mobile. The Company’s long-term debt to affiliates were classified as Level 2 in the fair value hierarchy. The fair value of the Company’s long-term debt to third parties was determined based on quoted market prices in active markets, and therefore are classified as Level 1 in the fair value hierarchy. In October 2013, Deutsche Telekom sold senior unsecured notes to third parties, and therefore the aggregate principal amount of $5.6 billion of the senior unsecured notes were transferred from Level 2 and are now classified as Level 1 in the fair value hierarchy.

The carrying amounts and fair values of the Company’s long-term debt were as follows:

	December 31, 2013				December 31, 2012
(in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt to affiliates	$	5,600	$	5,866	$	14,945	$	14,721
Long-term debt to third parties principal, excluding capital leases	13,600		14,251		—		—

Although the Company has determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop fair value estimates for the long-term debt. The fair value estimates are based on information available as of December 31, 2013 and 2012. As such, the Company’s estimates are not necessarily indicative of the amount that the Company could realize in a current market exchange.