(3) ASC 606 Adoption and Revenue Recognition:

Frontier applied ASC 606 using the modified retrospective method – i.e., by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition.”

The following table includes information for the transition adjustment recorded as of January 1, 2018 to record the cumulative impact of adoption of ASC 606 for prior periods.



			(Unaudited)
	As Reported		ASC 606		Adjusted
($ in millions)	December 31, 2017		Transition Adjustment		January 1, 2018
Assets
Accounts receivable, net	$	819	$	(32)	$	787
Contract acquisition costs	$	-	$	87	$	87
Other current assets	$	64	$	4	$	68
Property, plant and equipment, net	$	14,377	$	15	$	14,392
Other assets	$	97	$	127	$	224

Liabilities and Equity
Other current liabilities	$	330	$	5	$	335
Other liabilities	$	317	$	(9)	$	308
Deferred income taxes	$	1,139	$	51	$	1,190
Accumulated deficit	$	(2,263)	$	154	$	(2,109)

The details of the significant changes are set out below.

Bundled Service and Allocation of Discounts

When customers purchase more than one service, the revenue allocable to each service under ASC 606 is determined based upon the relative stand-alone selling price of each service received. While this change results in different allocations to each of the services, it does not change total customer revenue. We frequently offer service discounts as an incentive to customers. Service discounts reduce the total transaction price allocated to the performance obligations that are satisfied over the term of the customer contract. We may also offer incentives which are considered cash equivalents (e.g. Visa gift cards) that similarly result in a reduction of the total transaction price as well as lower revenue over the term of the contract. A contract asset is often created during the beginning of the contract term when the term of the incentive is shorter than the contract term. These contract assets are realized over the term of the contract as our performance obligations are satisfied and customer consideration is received.

Customer Incentives

In the process of acquiring and/or retaining customers, we may issue a variety of incentives aside from service discounts or cash equivalent incentives. Those incentives that have stand-alone value (e.g. gift cards not considered cash equivalents or free goods/services) are considered a separate performance obligation under ASC606. As a result, while these incentives are free to the customer, a portion of the consideration received from the customer over the contract term is ascribed to them based upon their relative stand-alone selling price. The revenue, reflected in “Other revenue” and costs, reflected in “Network access expense”, for these incentives are recognized when they are delivered to the customer and the performance obligation is satisfied. Similar to discounts, these types of incentives generally result in the creation of a contract asset during the beginning of the contract term. As part of the above transition adjustment, $40 million and $37 million of Short-term and Long-term contract assets were recorded, respectively. As of September 30, 2018, we have included $38 million of Short-term contract assets in Other current assets and $37 million of Long-term contract assets in Other assets on our consolidated balance sheet.

Upfront Fees

All non-refundable upfront fees provide our customers with a material right to renew and therefore must be deferred and amortized into revenue over the expected period for which related services are provided. With upfront fees assessed at the beginning of a contract, a contract liability is often created, which is reduced over the term of the contract as the performance obligations are satisfied. As part of the transition adjustment above, $13 million and $9 million of Short-term and Long-term contract liabilities were recorded, respectively, for carrier upfront fees. As of September 30, 2018, we have included $13 million of Short-term contract liabilities in Other current liabilities and $9 million of Long-term contract liabilities in Other liabilities on our consolidated balance sheet related to carrier upfront fees.

Contract Acquisition Costs

Under ASC 606, certain costs to acquire customers must be deferred and amortized over the related contract period or expected customer life (average of 3.8 years). For Frontier, this includes certain commissions paid to acquire new customers. Beginning January 1, 2018, commissions attributable to new customer contracts are being deferred and amortized into expense. Historically these acquisition costs were expensed as incurred. Frontier expects that the incremental commissions paid as a result of acquiring customers are recoverable and therefore, as part of the transition adjustment above, short-term acquisition costs of $87 million and long-term contract acquisition costs of $117 million were deferred. For the nine months ended September 30, 2018, Frontier deferred $106 million of costs and amortized deferred costs of $80 million to Selling, general and administrative expense. As of September 30, 2018, we have recorded short-term contract acquisition costs of $102 million and included $128 million of long-term contract acquisition costs in Other assets on our consolidated balance sheet.

Reserves and Disputes

For carrier disputes, Frontier previously recorded a reserve as a reduction of commercial revenue on a case by case basis once the carrier claim was validated by Frontier. Under ASC 606, credits issued for disputes are variable consideration and an estimate for the credits to be issued is now being recorded at the time of customer billing and the related contract liability is reflected in our Allowance for doubtful accounts (see Note 4). Other than the transition adjustment, there was no impact to our operating results for the nine months ended September 30, 2018 related to this change.

Switched Access

Under ASC 606, switched access revenue, which has been historically reflected in Other regulatory revenue, is considered revenue from a customer; therefore, will be reflected in commercial customer revenue on a prospective basis.

Contributions in Aid of Construction (CIAC)

It is customary for us to charge customers for certain construction activities requested by them. Historically, these amounts were reflected as offsets to the costs of construction and were recorded net in property, plant and equipment accounts. Under ASC 606, certain CIAC amounts will now be recognized as other customer revenue. For the nine months ended September 30, 2018, we recognized $26 million in Revenue for performance obligations that were satisfied during the period.

USF Fees

Universal Service Fund Fees assessed to our customers were previously reflected in regulatory revenue. Under ASC 606, these amounts are being included in contract value and allocated to the services which have been delivered based on relative stand-alone selling price of each service.

The following table summarizes the impacts of adopting ASC 606 on Frontier’s consolidated balance sheet as of September 30, 2018.



	September 30, 2018
			Impact of		Amounts Excluding
($ in millions)	As Reported		Adoption of ASC 606		Adoption of ASC 606
Assets
Accounts receivable, net	$	744	$	38	$	782
Contract acquisition costs	$	102	$	(102)	$	-
Prepaid expenses	$	95	$	5	$	100
Other current assets	$	103	$	4	$	107
Property, plant and equipment, net	$	14,268	$	(47)	$	14,221
Other assets	$	233	$	(132)	$	101

Liabilities and Equity
Other current liabilities	$	324	$	(4)	$	320
Other liabilities	$	296	$	3	$	299
Deferred income taxes	$	1,204	$	(52)	$	1,152
Accumulated deficit	$	(2,533)	$	(181)	$	(2,714)

The following tables summarize the impacts of adopting ASC 606 on Frontier’s statement of operations for the three and nine months ended September 30, 2018.



	For the three months ended September 30, 2018
			Impact of		Amounts Excluding
	As Reported		Adoption of ASC 606		Adoption of ASC 606
($ in millions)
Revenue	$	2,126	$	(6)	$	2,120

Operating expenses:
Network access expenses		353		1		354
Network related expenses		476		-		476
Selling, general and administrative expenses		445		2		447
Other operating expenses		885		-		885
Total operating expenses		2,159		3		2,162

Operating loss	$	(33)	$	(9)	$	(42)

	For the nine months ended September 30, 2018
			Impact of		Amounts Excluding
	As Reported		Adoption of ASC 606		Adoption of ASC 606
($ in millions)
Revenue	$	6,487	$	(14)	$	6,473

Operating expenses:
Network access expenses		1,094		(5)		1,089
Network related expenses		1,437		-		1,437
Selling, general and administrative expenses		1,374		15		1,389
Other operating expenses		1,882		-		1,882
Total operating expenses		5,787		10		5,797

Operating income (loss)	$	700	$	(24)	$	676

The impact of adoption of ASC 606 on net income, basic and diluted net loss per share, consolidated statement of comprehensive income, and the consolidated statement of cash flows were not material for the three and nine months ended September 30, 2018.

We categorize our products, services and other revenues into the following categories:

Data and Internet services include broadband services for residential and business customers. We provide data transmission services to high volume business customers and other carriers with dedicated high capacity circuits (“nonswitched access”) including services to wireless providers (“wireless backhaul”);

Voice services include traditional local and long distance wireline services, Voice over Internet Protocol (VoIP) services, as well as a number of unified messaging services offered to our residential and business customers. Voice services also include the long distance voice origination and termination services that we provide to our business customers and other carriers;

Video services include revenues generated from services provided directly to residential customers through the FiOS® and Vantage video brands, and through DISH® satellite TV services;

Other customer revenue includes switched access revenue, sales of customer premise equipment to our business customers, rents collected for collocation services, and revenue from other services and fees. Switched access revenue includes revenues derived from allowing other carriers to use our network to originate and/or terminate their local and long distance voice traffic (“switched access”). These services are primarily billed on a minutes-of-use basis applying tariffed rates filed with the FCC or state agencies; and

Subsidy and other regulatory revenue includes revenues generated from cost subsidies from state and federal authorities, including the Connect America Fund Phase II.

The following tables provide a summary of revenues, by category. Because of limited comparability for historical periods, we have reflected the current period under both an ASC 606 basis as well as the historical ASC 605 basis.


	For the three months ended September 30,
	2018

			Impact of		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017

Data and Internet services	$	961	$	(23)	$	938	$	956
Voice services		669		(35)		634		702
Video services		260		27		287		318
Other		141		(53)		88		84
Revenue from contracts
with customers		2,031		(84)		1,947		2,060
Subsidy and other regulatory revenue		95		78		173		191
Total revenue	$	2,126	$	(6)	$	2,120	$	2,251


	For the three months ended September 30,
	2018

			Impact of		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017


Consumer	$	1,069	$	(22)	$	1,047	$	1,102
Commercial		962		(62)		900		958
Revenue from contracts
with customers		2,031		(84)		1,947		2,060
Subsidy and other regulatory revenue		95		78		173		191
Total revenue	$	2,126	$	(6)	$	2,120	$	2,251



	For the nine months ended September 30,
	2018

			Impact of		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017

Data and Internet services	$	2,919	$	(91)	$	2,828	$	2,923
Voice services		2,053		(101)		1,952		2,177
Video services		810		83		893		994
Other		416		(157)		259		231
Revenue from contracts
with customers		6,198		(266)		5,932		6,325
Subsidy and other regulatory revenue		289		252		541		586
Total revenue	$	6,487	$	(14)	$	6,473	$	6,911


	For the nine months ended September 30,
	2018

			Impact of		Amounts Excluding
			Adoption of		Adoption of
($ in millions)	As reported		ASC 606		ASC 606		2017


Consumer	$	3,292	$	(88)	$	3,204	$	3,390
Commercial		2,906		(178)		2,728		2,935
Revenue from contracts
with customers		6,198		(266)		5,932		6,325
Subsidy and other regulatory revenue		289		252		541		586
Total revenue	$	6,487	$	(14)	$	6,473	$	6,911

Frontier satisfies its obligations to customers by transferring goods and services in exchange for consideration received from the customer. The timing of Frontier’s satisfaction of the performance obligation often differs from the timing of the customer’s payment, which results in the recognition of a contract asset or a contract liability. Frontier recognizes a contract asset or liability when the Company transfers goods or services to a customer and bills an amount which differs from the revenue allocated to the related performance obligations.

The opening and closing balances of Frontier’s contract asset, contract liability, receivables, and advanced billings balances for the nine months ended September 30, 2018 are as follows:


	Contract			Contract
($ in millions)	Assets			Liabilities

Balance January 1, 2018	$	77	(1)	$	(60)	(3)
Revenue recognized included
in opening contract balance		(38)			90
Cash received, excluding amounts
recognized as revenue		-			(109)
Credits granted, excluding amounts
recognized as revenue		36			-
Other		-			6
Balance September 30, 2018	$	75	(2)	$	(73)	(4)

(1) Includes $40 million in other current assets and $37 million in other assets.

(2) Includes $38 million in other current assets and $37 million in other assets.

(3) Includes $41 million in other current liabilities and $19 million in other liabilities.

(4) Includes $45 million in other current liabilities and $28 million in other liabilities.

Short-term contract assets, Long-term contract assets, Short-term contract liabilities, and Long-term contract liabilities are included in other current assets, other assets, other current liabilities, and other liabilities, respectively, on our consolidated balance sheet.

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period.



($ in millions)	Revenue from contracts with customers
2018 (remaining three months)	$	1,359
2019		2,713
2020		1,001
2021		386
2022		220
Thereafter		262
Total	$	5,941