Management’s Discussion and Analysis
of Financial Condition and Results of Operations

CRITICAL ACCOUNTING ESTIMATES AND RECENT ACCOUNTING PRONOUNCEMENTS

Critical Accounting Estimates

A summary of the critical accounting estimates used in preparing our financial statements is as follows:

  • Goodwill and Other intangible assets, net are a significant component of our consolidated assets. At December 31, 2008, goodwill at Wireline and Domestic Wireless was $4,738 million and $1,297 million, respectively. As required by SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), goodwill is periodically evaluated for impairment. The evaluation of goodwill for impairment is primarily based on a discounted cash flow model that includes estimates of future cash flows. There is inherent subjectivity involved in estimating future cash flows, which can have a material impact on the amount of any potential impairment. Wireless licenses of $61,974 million represent the largest component of our intangible assets. Our wireless licenses are indefinite-lived intangible assets, and as required by SFAS No. 142, are not amortized but are periodically evaluated for impairment. Any impairment loss would be determined by comparing the aggregated fair value of the wireless licenses with the aggregated carrying value. The direct value approach is used to determine fair value by estimating future cash flows.
  • We maintain benefit plans for most of our employees, including pension and other postretirement benefit plans. At December 31, 2008, in the aggregate, pension plan benefit obligations exceeded the fair value of pension plan assets which will result in higher future pension plan expense. Other postretirement benefit plans have larger benefit obligations than plan assets, resulting in expense. Significant benefit plan assumptions, including the discount rate used, the long-term rate of return on plan assets and health care trend rates are periodically updated and impact the amount of benefit plan income, expense, assets and obligations. A sensitivity analysis of the impact of changes in these assumptions on the benefit obligations and expense (income) recorded as of December 31, 2008 and for the year then ended pertaining to Verizon’s pension and postretirement benefit plans is provided in the table below.

(dollars in millions)

 

Percentage
point change

 

Benefit obligation increase
(decrease) at December 31, 2008

 

Expense increase (decrease) for the
year ended December 31, 2008

 

Pension plans discount rate*

 

+ 0.50

 

 

$

(1,281

)

 

$

(29

)

 

 

- 0.50

 

 

 

1,399

 

 

 

41

 

 

Long-term rate of return

on pension plan assets

 

+ 1.00

 

 

 

 

 

 

(375

)

 

 

- 1.00

 

 

 

 

 

 

375

 

 

Postretirement plans

discount rate*

 

+ 0.50

 

 

 

(1,401

)

 

 

(99

)

 

 

- 0.50

 

 

 

1,547

 

 

 

110

 

Long-term rate of return

on postretirement plan assets

 

+ 1.00

 

 

 

 

 

 

(39

)

 

 

- 1.00

 

 

 

 

 

 

39

 

 

Health care trend rates

 

+ 1.00

 

 

 

2,891

 

 

 

460

 

 

 

- 1.00

 

 

 

(2,399

)

 

 

(318

)

*The discount rate assumptions at December 31, 2008 were determined from hypothetical double A yield curves represented by a series of annualized individual discount rates developed using actual bonds available in the market. From the yield curves a single equivalent discount rate is determined at which the future stream of benefit payments could be settled. Each bond issue included in developing the yield curves is required to have a rating of double A or better by a nationally recognized rating agency and be non-callable with at least $150 million par outstanding.

  • Our current and deferred income taxes, and associated valuation allowances, are impacted by events and transactions arising in the normal course of business as well as in connection with the adoption of new accounting standards, acquisitions of businesses and non-recurring items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. We account for tax benefits taken or expected to be taken in our tax returns in accordance with FIN 48, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Actual collections and payments may materially differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.
  • Verizon’s plant, property and equipment balance represents a significant component of our consolidated assets. Depreciation expense on Verizon’s local telephone operations is principally based on the composite group remaining life method and straight-line composite rates, which provides for the recognition of the cost of the remaining net investment in telephone plant, less anticipated net salvage value, over the remaining asset lives. We depreciate other plant, property and equipment generally on a straight-line basis over the estimated useful life of the assets. Changes in the remaining useful lives of assets as a result of technological change or other changes in circumstances, including competitive factors in the markets where we operate, can have a significant impact on asset balances and depreciation expense.
Recent Accounting Pronouncements

In December 2008, the FASB issued FSP FAS No. 132 (R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (FSP 132 (R)-1). FSP 132 (R)-1 requires Verizon, as plan sponsor, to provide improved disclosures about plan assets, including categories of plan assets, nature and amount of concentrations of risk and disclosure about fair value measurements of plan assets, similar to those required by SFAS No. 157, Fair Value Measurements. FAS 132 (R)-1 is effective for fiscal years ending after December 15, 2009. We do not expect that the adoption of FSP 132 (R)-1 will have a significant impact on our consolidated financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 removes the requirement under SFAS No. 142, Goodwill and Other Intangible Assets to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. FSP 142-3 also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangement. We were required to adopt FSP 142-3 effective January 1, 2009 on a prospective basis. The adoption of FSP 142-3 on January 1, 2009 did not have an impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133, (SFAS No. 161). This statement requires additional disclosures for derivative instruments and hedging activities that include how and why an entity uses derivatives, how these instruments and the related hedged items are accounted for under SFAS No. 133 and related interpretations, and how derivative instruments and related hedged items affect the entity’s financial position, results of operations and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of SFAS No. 161 on January 1, 2009 did not have an impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS No. 141(R)), to replace SFAS No. 141, Business Combinations. SFAS No. 141(R) requires the use of the acquisition method of accounting, defines the acquirer, establishes the acquisition date and broadens the scope to all transactions and other events in which one entity obtains control over one or more other businesses. This statement is effective for business combinations or transactions entered into for fiscal years beginning on or after December 15, 2008. Upon the adoption of SFAS No. 141(R) we will be required to expense certain transaction costs and related fees associated with business combinations that were previously capitalized. This will result in additional expenses being recognized relating to the 2009 closing of the Alltel transaction. In addition, with the adoption of SFAS No. 141(R) changes to valuation allowances for deferred income tax assets and adjustments to unrecognized tax benefits generally will be recognized as adjustments to income tax expense rather than goodwill.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51, (SFAS No. 160). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the retained interest and gain or loss when a subsidiary is deconsolidated. This statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 which will be applied prospectively, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. Upon the initial adoption of this statement we will change the classification and presentation of Noncontrolling Interest in our financial statements, which we currently refer to as minority interest. Additionally, we conduct certain business operations in certain markets through non-wholly owned entities. Any changes in these ownership interests may be required to be measured at fair value and recognized as a gain or loss, if any, in earnings. SFAS No. 160 will also result in a lower effective income tax rate for the Company due to the inclusion of income attributable to noncontrolling interest in income before the provision for income taxes. However, the income tax provision will not be adjusted as a result of SFAS No. 160.

Refer to Note 1 in the consolidated financial statements for a discussion of the accounting pronouncements adopted during 2008.