Credit Losses on Financial Instruments

12 Months Ended

Dec. 31, 2021

Credit Loss [Abstract]

Credit Losses on Financial Instruments

Credit Losses on Financial Instruments

In accordance with ASC 326, "Financial Instruments - Credit Losses", we aggregate financial assets with similar risk characteristics to align our expected credit losses with the credit quality or deterioration over the life of such assets. We periodically monitor certain risk characteristics within our aggregated financial assets and revise their composition accordingly, to the extent internal and external risk factors change. Financial assets that do not share risk characteristics with other financial assets are evaluated separately. Our financial assets measured at amortized cost primarily consist of accounts receivable.

We use a loss rate method to estimate our allowance for credit losses. Our determination of the current expected credit loss rate begins with our review of historical loss experience as a percentage of accounts receivable. We measure our historical loss period based on the average days to recognize accounts receivable as credit losses. When asset specific characteristics and current conditions change from those in the historical period, due to changes in our credit and collections strategy, certain classes of aged balances, or credit loss and recovery policies, we perform a qualitative and quantitative assessment to adjust our historical loss rate. We use regression analysis to develop an expected loss rate using historical experience and economic data over a forecast period. We measure our forecast period based on the average days to collect payment on billed accounts receivable. To determine our current allowance for credit losses, we combine the historical and expected credit loss rates and apply them to our period end accounts receivable.

If there is an unexpected deterioration of a customer's financial condition or an unexpected change in economic conditions (including changes caused by COVID-19 or other macroeconomic events), we assess the need to adjust the allowance for credit losses. Any such resulting adjustments would affect earnings in the period that adjustments are made.

The assessment of the correlation between historical observed default rates, current conditions and forecasted economic conditions requires judgment. Alternative interpretations of these factors could have resulted in different conclusions regarding the allowance for credit losses. The amount of credit loss is sensitive to changes in circumstances and forecasted economic conditions. Our historical credit loss experience, current conditions and forecast of economic conditions may also not be representative of the customers' actual default experience in the future, and we may use methodologies that differ from those used by other companies.

In conjunction with our January 2021 internal reorganization, as referenced in Note 17—Segment Information, we pooled certain assets with similar credit risk characteristics based on the nature of our customers, their industry, policies used to grant credit terms and their historical and expected credit loss patterns. Additionally, we reassessed our historical loss period for the segment portfolio reorganization.

The following tables present the activity of our allowance for credit losses by accounts receivable portfolio for the years ended December 31, 2021 and December 31, 2020:

	Business		Mass Markets	Total
	(Dollars in millions)
Beginning balance at January 1, 2021(1)	$	109	82	191
Provision for expected losses	50		55	105
Write-offs charged against the allowance	(76)		(101)	(177)
Recoveries collected	13		6	19
Reclassified as held for sale(2)	(8)		(16)	(24)
Ending balance at December 31, 2021	$	88	26	114

	Business		Consumer	Total
	(Dollars in millions)
Beginning balance at January 1, 2020(3)	$	58	37	95
Provision for expected losses	115		74	189
Write-offs charged against the allowance	(74)		(59)	(133)
Recoveries collected	24		18	42
Foreign currency exchange rate changes adjustment	(2)		—	(2)
Balance at December 31, 2020	$	121	70	191

______________________________________________________________________

(1)As described in Note 17—Segment Information, we completed an internal reorganization in January 2021. As a result of this change, allowance for credit losses previously included in the Consumer and Business portfolio of $70 million related to consumer and $12 million related to our small business group, respectively, were reclassified to the Mass Markets allowance for credit losses on January 1, 2021.

(2)Represents the amounts reclassified as held for sale related to our pending divestitures. See Note 2—Planned Divestiture of the Latin American and ILEC Businesses.

(3)The beginning balance for the year ended December 31, 2020 includes the cumulative effect of $11 million for the adoption of the new credit loss standard.

For the year ended December 31, 2021, we decreased our allowance for credit losses for our business and mass markets accounts receivable portfolios primarily due to higher write-off activity during 2021, along with the easing of prior delays due to COVID-19 related restrictions from 2020 and lower receivable balances.

For the year ended December 31, 2020, we increased our allowance for credit losses for our business and consumer accounts receivable portfolios due to an increase during the period in historical and expected loss experience in certain classes of aged balances, which were predominantly attributable to the COVID-19 induced economic slowdown. Decreased write-offs (net of recoveries) were driven by COVID-19 regulations and programs, which further contributed to the increase in our allowance for credit losses for the year ended December 31, 2020.