Revenue Recognition

9 Months Ended

Sep. 30, 2021

Revenue from Contract with Customer [Abstract]

Revenue Recognition

Revenue Recognition

Beginning in the first quarter of 2021, we categorize our products, services and revenue among the following categories:

•Voice and Other, which include primarily local voice services, private line and other legacy services. This category also includes Universal Service Fund ("USF") and Connect America Fund Phase II ("CAF II") support payments and other operating revenue. We receive support payments from state USF programs and from the federal CAF II program. These support payments are government subsidies designed to compensate us for providing certain broadband and telecommunications services in high-cost areas or at discounts to low-income, educational, and healthcare customers. During the nine months ended September 30, 2021 we recorded approximately $109 million of revenue from the CAF II program that will end as of December 31, 2021.

•Fiber Infrastructure Services, which include high speed, fiber-based and lower speed DSL-based broadband services, and optical network services;

•IP and Data Services, which consist primarily of Ethernet services; and

•Affiliate Services, which are communications services that we also provide to external customers. In addition, we provide to our affiliates application development and support services, network support and technical services.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

The following tables provide our total revenue by product and service category as well as the amount of revenue that is not subject to ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), but is instead governed by other accounting standards:

	Three Months Ended September 30, 2021				Three Months Ended September 30, 2020
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Voice and Other	$	522	(83)	439	567	(87)	480
Fiber Infrastructure	495		(30)	465	505	(30)	475
IP and Data Services	118		—	118	128	—	128
Affiliate Services	595		(9)	586	601	(1)	600
Total revenue	$	1,730	(122)	1,608	1,801	(118)	1,683

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(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.

	Nine Months Ended September 30, 2021				Nine Months Ended September 30, 2020
	Total Revenue		Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers	Total Revenue	Adjustments for Non-ASC 606 Revenue (1)	Total Revenue from Contracts with Customers
	(Dollars in millions)
Voice and Other	$	1,595	(251)	1,344	1,726	(263)	1,463
Fiber Infrastructure	1,500		(90)	1,410	1,527	(94)	1,433
IP and Data Services	357		—	357	389	—	389
Affiliate Services	1,794		(18)	1,776	1,876	(3)	1,873
Total revenue	$	5,246	(359)	4,887	5,518	(360)	5,158

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(1)Includes regulatory revenue and lease revenue not within the scope of ASC 606.

Operating Lease Revenue

Qwest leases various data transmission capacity, office facilities, switching facilities and other network sites to third parties under operating leases. Lease and sublease revenue are included in operating revenue in our consolidated statements of operations.

For the three months ended September 30, 2021 and 2020, our gross rental income was $82 million and $77 million, which represents approximately 5% and 4%, respectively, of our operating revenue for the three months ended September 30, 2021 and 2020. For both the nine months ended September 30, 2021 and 2020, our gross rental income was $239 million and $234 million, which represents approximately 5% and 4%, respectively, of our operating revenue for the nine months ended September 30, 2021 and 2020.

Customer Receivables and Contract Balances

The following table provides balances of customer receivables, contract assets and contract liabilities as of September 30, 2021 and December 31, 2020:

	September 30, 2021		December 31, 2020
	(Dollars in millions)
Customer receivables (1)	$	333	346
Contract assets	11		13
Contract liabilities	321		300

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(1)Reflects gross customer receivables, including gross affiliate receivables, of $365 million and $396 million, net of allowance for doubtful accounts of $32 million and $50 million, at September 30, 2021 and December 31, 2020, respectively.

Contract liabilities consist of consideration we have received from our customers or billed in advance of providing goods or services promised in the future. We defer recognizing this consideration as revenue until we have satisfied the related performance obligation to the customer. Contract liabilities include recurring services billed one month in advance and installation and maintenance charges that are deferred and recognized over the actual or expected contract term, which ranges from one to five years depending on the service. Contract liabilities are included within deferred revenue in our consolidated balance sheets. During the three and nine months ended September 30, 2021, we recognized $12 million and $187 million, respectively, of revenue that was included in contract liabilities as of January 1, 2021. During the three and nine months ended September 30, 2020, we recognized $13 million and $210 million, respectively, of revenue that was included in contract liabilities as of January 1, 2020.

Performance Obligations

As of September 30, 2021, our estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $188 million. We expect to recognize approximately 91% of this revenue through 2023, with the balance recognized thereafter.

These amounts exclude (i) the value of unsatisfied performance obligations for contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed (for example, uncommitted usage or non-recurring charges associated with professional or technical services to be completed), and (ii) contracts that are classified as leasing arrangements that are not subject to ASC 606.

Contract Costs

The following tables provide changes in our contract acquisition costs and fulfillment costs:

	Three Months Ended September 30, 2021			Three Months Ended September 30, 2020
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	68	49	81	59
Costs incurred	12		7	12	6
Amortization	(14)		(9)	(15)	(8)
End of period balance	$	66	47	78	57

	Nine Months Ended September 30, 2021			Nine Months Ended September 30, 2020
	Acquisition Costs		Fulfillment Costs	Acquisition Costs	Fulfillment Costs
	(Dollars in millions)
Beginning of period balance	$	73	54	86	64
Costs incurred	36		19	39	18
Amortization	(43)		(26)	(47)	(25)
End of period balance	$	66	47	78	57

Acquisition costs include commission fees paid to employees as a result of obtaining contracts. Fulfillment costs include third party and internal costs associated with the provision, installation and activation of communications services to customers, including labor and materials consumed for these activities.

Deferred acquisition and fulfillment costs are amortized based on the transfer of services on a straight-line basis over the average customer life of 30 months for mass markets customers and average contract life of 29 months for business customers. Amortized fulfillment costs are included in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations. The amount of these deferred costs that are anticipated to be amortized in the next 12 months are included in other current assets on our consolidated balance sheets. The amount of deferred costs expected to be amortized beyond the next 12 months is included in other non-current assets on our consolidated balance sheets. Deferred acquisition and fulfillment costs are assessed for impairment on an annual basis.