What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2024-02-22 compared with 2023-02-23 · 346 added, 196 removed, 865 unchanged (39% of the section changed)

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to those charged with governance and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to those charged with governance and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which it relates.

Testing of revenue

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We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed, including the relevance and reliability of evidence obtained.

Goodwill impairment

As discussed in Note 2 to the consolidated financial statements, the Company recorded a non-cash impairment charge of $2.4 billion for the year ended December 31, 2023.

The Company assesses goodwill for impairment at least annually, or more frequently, if events or circumstances indicate the carrying value of a reporting unit likely exceeds its fair value.

On the annual goodwill impairment assessment date, the Company estimated the fair value of its reporting unit using a market approach.

The annual goodwill impairment test determined the carrying value of the Company’s reporting unit exceeded its estimated fair value.

We identified the assessment of the Company’s annual impairment testing of goodwill as a critical audit matter.

Subjective auditor judgment was required in evaluating the earnings before interest, taxes, depreciation, and amortization (“EBITDA”) market multiple assumption used to estimate the fair value of the reporting unit.

The evaluation of this assumption was challenging as differences in judgment used to determine this assumption could have had a significant effect on the reporting unit’s estimated fair value.

Specialized skills and knowledge were required in the assessment of the EBITDA market multiple assumption.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the goodwill impairment test.

This included controls related to the Company’s determination of the EBITDA market multiple assumption.

We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the EBITDA market multiple assumption by:

• comparing to an EBITDA market multiple range developed using publicly available market data for comparable entities

• performing sensitivity analysis that considered a range of EBITDA market multiples.

We have served as the Company’s auditor since 2002.

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Depreciation and amortization 823 860 1,009

Goodwill impairment

Total operating expenses 6,110 3,694 3,843

OPERATING INCOME 2,755 3,108 2,711

OPERATING (LOSS) INCOME

( 195 ) 2,755 3,108

OTHER (EXPENSE) INCOME

Interest expense ( 95 ) ( 112 ) ( 181 )

Interest expense - affiliate, net ( 60 ) ( 105 ) ( 74 )

Interest income (expense) - affiliate, net

15 ( 60 ) ( 105 )

Other income (expense), net 5 7 ( 6 )

Total other expense, net ( 75 ) ( 165 ) ( 292 )

INCOME BEFORE INCOME TAXES 2,590 2,816 2,302

(LOSS) INCOME BEFORE INCOME TAXES

( 270 ) 2,590 2,816

Income tax expense 561 671 709

NET INCOME $ 1,919 2,107 1,707

NET (LOSS) INCOME

$ ( 831 ) 1,919 2,107

See accompanying notes to consolidated financial statements.

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OPERATING ACTIVITIES

Net income $ 1,919 2,107 1,707

Adjustments to reconcile net income to net cash provided by operating activities:

Net (loss) income

$ ( 831 ) 1,919 2,107

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 823 860 1,009

Goodwill impairment

Deferred income taxes 22 20 27

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Proceeds from sale of property, plant and equipment and other assets 27 76 46

Net cash (used in) provided by investing activities ( 1,349 ) ( 751 ) 754

Net cash used in investing activities

( 466 ) ( 1,349 ) ( 751 )

FINANCING ACTIVITIES

Net proceeds from issuance of long-term debt — — 115

Payment of note payable - affiliate — ( 1,215 ) —

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Sale of property, plant and equipment in exchange for receivable $ — — 56

Supplemental noncash information of financing activities:

Dividend to parent in exchange for advances to affiliates

$ ( 1,980 ) — —

Cash, cash equivalents and restricted cash:

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Balance at beginning of period 3,517 1,598 61

Net income 1,919 2,107 1,707

Cumulative effect of adoption of ASU 2016-13 , Measurement of Credit losses, net of $( 1 ) tax

Net (loss) income

( 831 ) 1,919 2,107

Dividends declared and paid to Qwest Services Corporation ( 1,980 ) — ( 570 )

Other — — ( 4 )

Balance at end of period 706 3,517 1,598

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(1) Background and Summary of Significant Accounting Policies

We are an integrated facilities-based communications company focused on providing our business and mass markets customers with a broad array of communications products and services.

We are a facilities-based technology and communications company that provides a broad array of integrated communications products and services to our business and mass markets customers.

Our specific products and services are detailed in Note 3—Revenue Recognition of this report.

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See Note 3—Revenue Recognition for additional information.

These changes had no impact on total operating revenue, total operating expenses or net income for any period.

These changes had no impact on total operating revenue, total operating expenses or net (loss) income for any period.

Operating Expenses

Our current definitions of operating expenses are as follows:

• Cost of services and products (exclusive of depreciation and amortization) are expenses incurred in providing products and services to our customers.

These expenses include:

employee-related expenses directly attributable to operating and maintaining our network (such as salaries, wages, benefits and professional fees);

facilities expenses (which include third-party telecommunications expenses we incur for using other carriers' networks to provide services to our customers);

rents and utilities expenses;

equipment sales expenses (such as data integration and modem expenses);

and other expenses directly related to our operations;

• Selling, general and administrative expenses are corporate overhead and other operating expenses.

These expenses include:

employee-related expenses (such as salaries, wages, internal commissions, benefits and professional fees) directly attributable to selling products or services and employee-related expenses for administrative functions;

marketing and advertising;

property and other operating taxes and fees;

external commissions;

litigation expenses associated with general matters;

bad debt expense;

and other selling, general and administrative expenses.

These expense classifications may not be comparable to those of other companies.

Our operations are integrated into and reported as part of Lumen Technologies.

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If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.

For matters related to income taxes, if we determine that the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained.

No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.

Interest is recognized on the amount of unrecognized benefit from uncertain tax positions.

For matters related to income taxes, if we determine the impact of an uncertain tax position is more likely than not to be sustained upon audit by the relevant taxing authority, then we recognize a benefit for the largest amount that is more likely than not to be sustained.

We do not recognize any portion of an uncertain tax position if the position has less than a 50% likelihood of being sustained.

We recognize interest on the amount of unrecognized benefit from uncertain tax positions.

For all of these and other matters, actual results could differ materially from our estimates.

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We provide an array of communications services to business and residential customers, including local voice, VPN, Ethernet, data, broadband, private line (including special access), network access, transport, voice, information technology, video and other ancillary services.

We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, small and medium business customers.

We provide these services to a wide range of businesses, including global/international, enterprise, wholesale, government, and small and medium business customers.

Certain contracts also include the sale of equipment, which is not significant to our business.

We recognize revenue for services when we provide the applicable service or when control is transferred.

We recognize revenue for services when we provide the applicable service or when control of a product is transferred.

Recognition of certain payments received in advance of services being provided is deferred.

These advance payments include certain activation and certain installation charges.

These advance payments may include certain activation and certain installation charges.

If the activation and installation charges are not separate performance obligations, we recognize them as revenue over the actual or expected contract term using historical experience, which typically ranges from one to five years depending on the service.

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In certain cases, customers may be permitted to modify their contracts.

We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, whether the modification is a termination of the existing contract and creation of a new contract, or if it is a change to the existing contract.

We evaluate the change in scope or price to identify whether the modification should be treated as a separate contract, as a termination of the existing contract and creation of a new contract, or as a change to the existing contract.

Customer contracts are evaluated to determine whether the performance obligations are separable.

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We periodically sell transmission capacity on our network.

These transactions are structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years.

These transactions are generally structured as indefeasible rights of use, commonly referred to as IRUs, which are the exclusive right to use a specified amount of capacity or fiber for a specified term, typically 20 years.

In most cases, we account for the cash consideration received on transfers of transmission capacity as ASC 606 revenue, which is adjusted for the time value of money and is recognized ratably over the term of the agreement.

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We have service level commitments pursuant to contracts with certain of our customers.

To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues or other service interruptions or conditions, we will estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met or may not be met.

To the extent that we determine that such service levels were not achieved or may not have been achieved, we estimate the amount of credits to be issued and record a corresponding reduction to revenue in the period that the service level commitment was not met or may not be met.

Customer payments are made based on billing schedules included in our customer contracts, which is typically on a monthly basis.

We defer (or capitalize) incremental contract acquisition and fulfillment costs and recognize (or amortize) such costs over the average contract life.

Our deferred contract costs for our customers have average amortization periods of approximately 32 months for mass markets and 30 months for business.

These deferred costs are monitored every period to reflect any significant change in assumptions.

Our deferred contract costs for our customers have average amortization periods of approximately 36 months for mass markets customers and 33 months for business customers.

These deferred costs are periodically monitored to reflect any significant change in assumptions.

See Note 3—Revenue Recognition for additional information.

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Advertising Costs

Costs related to advertising are expensed as incurred and included in selling, general and administrative expenses in our consolidated statements of operations.

Costs related to advertising are expensed as incurred and recorded as selling, general and administrative expenses in our consolidated statements of operations.

Our advertising expense was $ 17 million, $ 26 million and $ 24 million for the years ended December 31, 2023, 2022 and 2021, respectively.

In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters.

We expense these costs as the related services are received.

In the normal course of our business, we incur costs to hire and retain external legal counsel to advise us on finance, regulatory, litigation and other matters.

Subject to certain exceptions, we expense these costs as the related services are received.

Our results are included in the Lumen Technologies consolidated federal income tax return and certain combined state income tax returns.

Lumen Technologies allocates income tax expense to us based upon a separate return allocation method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity.

Our reported deferred tax assets and liabilities, as discussed below and in Note 12—Income Taxes, are primarily determined as a result of the application of the separate return allocation method and therefore the settlement of these amounts is dependent upon our parent, Lumen Technologies, Inc., rather than tax authorities.

Our current expectation is that the vast majority of deferred tax assets and liabilities will be settled through our general intercompany obligation based upon the current Lumen Technologies, Inc.

Lumen Technologies, Inc.

has the right to change their policy regarding settlement of these assets and liabilities at any time.

Lumen Technologies allocates income tax expense to us based upon a separate return method which results in income tax expense that approximates the expense that would result if we were a stand-alone entity.

Our reported deferred tax assets and liabilities, as discussed below and in Note 12—Income Taxes, are primarily determined as a result of the application of the separate return method and therefore the settlement of these amounts is dependent upon our parent, Lumen Technologies, Inc., rather than tax authorities.

The provision for income taxes consists of an amount for taxes currently payable, an amount for tax consequences deferred to future periods and adjustments to our liabilities for uncertain tax positions.

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has been reflected as advances to affiliates in our consolidated balance sheets.

Book overdrafts occur when checks have been issued but have not been presented to our controlled disbursement bank accounts for payment.

Book overdrafts occur when we have issued checks but have not yet been presented to our controlled disbursement bank accounts for payment.

Disbursement bank accounts allow us to delay funding of issued checks until the checks are presented for payment.

Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheet.

Until the issued checks are presented for payment, the book overdrafts are included in accounts payable on our consolidated balance sheets.

This activity is included in the operating activities section in our consolidated statements of cash flows.

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Under the straight-line group method, assets dedicated to providing telecommunications services (which comprise the majority of our property, plant and equipment) that have similar physical characteristics, use and expected useful lives are pooled for purposes of depreciation and tracking.

The equal life group procedure is used to establish each pool's average remaining useful life.

We use the equal life group procedure to establish each pool's average remaining useful life.

Generally, under the straight-line group method, when an asset is sold or retired in the course of normal business activities, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss.

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If the asset group's carrying value is not recoverable, we recognize an impairment charge for the amount by which the carrying amount of the asset group exceeds its estimated fair value.

Goodwill, Customer Relationships and Other Intangible Assets

Intangible assets arising from business combinations, such as goodwill, customer relationships and capitalized software are initially recorded at estimated fair value.

Prior to customer relationships becoming fully amortized in March 2021, we primarily amortized those assets over an estimated life of 10 years, using the sum-of-years digits method, depending on the type of customer.

We amortize capitalized software using the straight-line method over estimated lives ranging up to 7 years.

Goodwill and Other Intangible Assets

We initially record intangible assets arising from business combinations, such as goodwill and capitalized software at estimated fair value.

We amortize capitalized software using the straight-line method over estimated lives ranging up to seven years .

Other intangible assets not arising from business combinations are initially recorded at cost.

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We have determined that our operations consist of one reporting unit, consistent with our determination that our business consists of one operating segment.

See Note 2—Goodwill, Customer Relationships and Other Intangible Assets for additional information.

See Note 2—Goodwill and Other Intangible Assets for additional information.

Pension and Post-Retirement Benefits

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For further information on qualified pension, post-retirement and other post-employment benefit plans, see Note 11—Employee Benefits to the consolidated financial statements in Item 8 of Part II of Lumen's annual report on Form 10-K for the year ended December 31, 2023.

Correction of Immaterial Errors

During 2023, we identified errors in our previously reported consolidated financial statements related to accounts receivable and accounts payable.

The errors are the result of understated revenues from one of our legacy mainframe billing systems and understated network expenses for periods prior to 2021.

We have completed a quantitative and qualitative evaluation of the errors individually and in aggregate, and concluded the errors are immaterial to our previously issued consolidated financial statements.

Notwithstanding this evaluation, we have revised certain line items on our December 31, 2022 consolidated balance sheet for these errors.

The net effect of these adjustments was an increase in accounts receivable of $ 38 million and a decrease in advances to affiliates of $ 7 million for a total increase in assets of $ 31 million, and an increase in accounts payable and total liabilities of $ 18 million on our December 31, 2022 consolidated balance sheet.

In addition, we recorded an adjustment to increase our January 1, 2021 retained earnings by $ 13 million, which represents the cumulative correction of the immaterial errors prior to January 1, 2021.

The errors did not have an impact on our previously issued consolidated statements of operations, comprehensive (loss) income, or cash flows for the years ended December 31, 2022 or 2021, and did not, and are not expected to, have an impact on the economics of the Company's existing or future commercial arrangements.

Recently Adopted Accounting Pronouncements

During 2022, we adopted Accounting Standards Update ("ASU") 2021-10, " Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance ” (“ASU 2021-10”) and ASU 2021-05, “ Leases (Topic 842):

Lessors—Certain Leases with Variable Lease Payments ” (“ASU 2021-05”).

During 2021, we adopted ASU 2020-09 " Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No.

33-10762 ," ("ASU 2020-09"), ASU 2020-01 " Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815) " ("ASU 2020-01") and ASU 2019-12 " Simplifying the Accounting for Income Taxes (Topic 740).

("ASU 2019-12")" During 2020, we adopted ASU 2016-13, "Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13").

Each of these is described further below.

Supplier Finance Programs

On January 1, 2023, we adopted Accounting Standards Update ("ASU") 2022-04, “ Liabilities-Supplier Finance Program (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations ” (“ASU 2022-04”).

These amendments require that a company that uses a supplier finance program in connection with the purchase of goods or services disclose sufficient information about the program to allow a user of financial statements to understand the program’s nature, program activity during the period, changes from period to period and the potential magnitude of program transactions.

The adoption of ASU 2022-04 did not have a material impact to our consolidated financial statements.

Credit Losses

On January 1, 2023, we adopted ASU 2022-02, " Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings (“TDR”) and Vintage Disclosures ” (“ASU 2022-02”).

The ASU eliminates the TDR recognition and measurement guidance, enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

The adoption of ASU 2022-02 did not have any impact to our consolidated financial statements.

Government Assistance

On January 1, 2022, we adopted ASU 2021-10.

On January 1, 2022, we adopted ASU 2021-10 "Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance" ("ASU 2021-10").

This ASU requires business entities to disclose information about certain types of government assistance they receive.

Please refer to Note 3—Revenue Recognition for more information.

On January 1, 2022, we adopted ASU 2021-05.

This ASU (i) amends the lease classification requirements for lessors to align them with practice under ASC Topic 840, (ii) provides criteria for lessors to classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease, and (iii) provides guidance with respect to net investments by lessors under operating leases and other related topics.

On January 1, 2022, we adopted ASU 2021-05, “Leases (Topic 842):

Lessors—Certain Leases with Variable Lease Payments” (“ASU 2021-05”).

and (iii) provides guidance with respect to net investments by lessors under operating leases and other related topics.

The adoption of ASU 2021-05 did not have a material impact to our consolidated financial statements.

On January 1, 2021, we adopted ASU 2020-09.

On January 1, 2021, we adopted ASU 2020-09, "Debt (Topic 470) Amendments to SEC Paragraphs Pursuant to SEC Release No.

33-10762" ("ASU 2020-09") .

This ASU amends and supersedes various SEC guidance to reflect SEC Release No.

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The adoption of ASU 2020-09 did not have a material impact to our consolidated financial statements.

On January 1, 2021, we adopted ASU 2020-01.

On January 1, 2021, we adopted ASU 2020-01, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815)" ("ASU 2020-01") .

This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments - Equity Method and Joint Ventures , for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

As of December 31, 2022, we determined there was no application or discontinuation of the equity method during the reporting periods covered by this report.

The adoption of ASU 2020-01 did not have an impact to our consolidated financial statements.

On January 1, 2021, we adopted ASU 2019-12.

As of December 31, 2023, we determined there was no application or discontinuation of the equity method during the reporting periods covered in this report.

The adoption of ASU 2020-01 did not have a material impact to our consolidated financial statements.

On January 1, 2021, we adopted ASU 2019-12, "Simplifying the Accounting for Income Taxes (Topic 740)" ("ASU 2019-12") .

This ASU removes certain exceptions for investments, intra-period allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes.

The adoption of ASU 2019-12 did not have a material impact to our consolidated financial statements.

Measurement of Credit Losses on Financial Instruments

We adopted ASU 2016-13 on January 1, 2020, and recognized a cumulative adjustment to our retained earnings as of the date of adoption of $ 3 million, net of tax effect.

Please refer to Note 5—Credit Losses on Financial Instruments for more information.

Recently Issued Accounting Pronouncements

In December 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-09, “Income Taxes (Topic 740):

Improvements to Income Tax Disclosures” (“ASU 2023-09”).

This ASU requires that public business entities must annually “(1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate).” ASU 2023-09 will become effective for us in the annual period of fiscal 2025 and early adoption is permitted.

We have chosen not to early adopt this ASU.

In December 2023, the FASB issued ASU 2023-08, “Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60):

Accounting for and Disclosure of Crypto Assets” (“ASU 2023-08”).

This ASU is intended to improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income.

The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period.

This ASU will become effective for us in the first quarter of fiscal 2025 and early adoption is permitted.

As of December 31, 2023, we do not hold crypto assets and do not expect ASU 2023-08 will have any impact to our consolidated financial statements.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures” (“ASU 2023-07”).

This ASU is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

This ASU will become effective for us in annual period fiscal 2024 and early adoption is permitted.

As of December 31, 2023, we are evaluating its impact on our consolidated financial statements.

In October 2023, the FASB issued ASU 2023-06, “ Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative ” (“ASU 2023-06”).

This ASU incorporates certain SEC disclosure requirements into the FASB Accounting Standards Codification (“Codification”).

The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations.

ASU 2023-06 will become effective for each amendment on the effective date of the SEC's corresponding disclosure rule changes.

As of December 31, 2023, we do not expect ASU 2023-06 will have any impact to our consolidated financial statements.

In August 2023, the FASB issued ASU 2023-05, “ Business Combinations – Joint Venture Formations (Subtopic 805-60):

Recognition and initial Measurement ” (“ASU 2023-05”).

This ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture).

The amendments in the ASU require that a joint venture apply a new basis of accounting upon formation.

ASU 2023-05 will become effective for us in the first quarter of fiscal 2025 and early adoption is permitted.

As of December 31, 2023, we do not expect ASU 2023-05 will have any impact to our consolidated financial statements.

In August 2023, the FASB issued ASU 2023-04, “ Liabilities (Topic 405):

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

121 ” (“ASU 2023-04”).

This ASU amends and adds various SEC paragraphs to the FASB Codification to reflect guidance regarding the accounting for obligations to safeguard crypto assets an entity holds for platform users.

This ASU does not provide any new guidance.

ASU 2023-04 became effective for us once the addition to the FASB Codification was made available.

As of December 31, 2023, we do not expect ASU 2023-04 will have any impact to our consolidated financial statements.

In July 2023, the FASB issued ASU 2023-03, “ Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718):

Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No.

120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X:

Income or Loss Applicable to Common Stock ” (“ASU 2023-03”).

This ASU amends or supersedes various SEC paragraphs within the applicable codification to conform to past SEC staff announcements.

This ASU does not provide any new guidance.

ASU 2023-03 became effective for us once the addition to the FASB Codification was made available.

As of December 31, 2023, we do not expect ASU 2023-03 will have any impact to our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-02, “ Investments-Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method ” (“ASU 2023-02”).

These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits.

ASU 2023-02 will become effective for us in the first quarter of fiscal 2024 and early adoption is permitted.

As of December 31, 2023, we do not expect ASU 2023-02 will have any impact to our consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, “ Leases (Topic 842):

Common Control Arrangements ” (“ASU 2023-01”).

These amendments require all entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group.

ASU 2023-01 will become effective for us in the first quarter of fiscal 2024 and early adoption is permitted.

As of December 31, 2023, we do not expect ASU 2023-01 will have any impact to our consolidated financial statements.

In December 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-06, “Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848" ("ASU 2022-06") .

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ASU 2022-06 is effective upon issuance.

Based on our review of our key material contracts through December 31, 2022, we do not expect ASU 2022-06 to have a material impact to our consolidated financial statements.

In September 2022, the FASB issued ASU 2022-04, “ Liabilities-Supplier Finance Program (Subtopic 405-50):

Disclosure of Supplier Finance Program Obligations” (“ASU 2022-04”).

ASU 2022-04 will become effective for us in the first quarter of fiscal 2023.

As of December 31, 2022, we are reviewing our supplier finance agreements to determine the impact to disclosures in our consolidated financial statements.

Based on our review of our key material contracts through December 31, 2023, ASU 2022-06 does not have a material impact to our consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2022-03”).

These amendments clarify that a contractual restriction on the sales of an investment in equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

ASU 2022-03 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted.

As of December 31, 2022, we do not expect ASU 2022-03 to have an impact to our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”).

These amendments eliminate the TDR recognition and measurement guidance, enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

ASU 2022-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted.

As of December 31, 2022, we do not expect ASU 2022-02 to have an impact to our consolidated financial statements.

In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815):

Fair Value Hedging-Portfolio Layer Method” ("ASU 2022-01").

The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method.

ASU 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted.

As of December 31, 2022, we do not expect ASU 2022-01 to have an impact to our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which requires entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.

These amendments clarify that a contractual restriction on the sales of an investment in an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring its fair value.

ASU 2022-03 will become effective for us in the first quarter of fiscal 2024 and early adoption is permitted.

As of December 31, 2022, we do not expect ASU 2021-08 to have an impact to our consolidated financial statements.

As of December 31, 2023, we do not expect ASU 2022-03 will have any impact to our consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848):

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Based on our review of our key material contracts through December 31, 2023, ASU 2021-01 will not have a material impact to our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, " Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting " ("ASU 2020-04" or "Reference Rate Reform"), designed to ease the burden of accounting for contract modifications related to the global market-wide reference rate transition period.

Subject to certain criteria, ASU 2020-04 provides qualifying entities the option to apply expedients and exceptions to contract modifications and hedging accounting relationships made until December 31, 2022.

These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

ASU 2020-04 provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform.

Based on our review of our key material contracts through December 31, 2022, we do not expect ASU 2020-04 to have a material impact to our consolidated financial statements.

(2) Goodwill, Customer Relationships and Other Intangible Assets

Goodwill, customer relationships and other intangible assets consisted of the following:

(2) Goodwill and Other Intangible Assets

Goodwill and other intangible assets consisted of the following:

As of December 31,

(Dollars in millions)

Goodwill $ 9,360 9,360

Customer relationships, less accumulated amortization of $ — and $ 5,699 (1)

$ 6,955 $ 9,360

Other intangible assets, less accumulated amortization of $ 1,966 and $ 1,924

Total other intangible assets, net $ 138 199

______________________________________________________________________

(1) Customer relationships with a gross carrying value of $ 5.7 billion became fully amortized during 2021 and were retired during the first quarter of 2022.

As of December 31, 2022, the gross carrying amount of goodwill, customer relationships and other intangible assets was $ 11.4 billion.

(1) We recorded a cumulative non-cash, non-tax-deductible goodwill impairment charge of $ 2.4 billion during the year ended December 31, 2023.

As of December 31, 2023, the gross carrying amount of goodwill and other intangible assets was $ 9.0 billion.

Substantially all of our goodwill was derived from Lumen's acquisition of us where the purchase price exceeded the fair value of the net assets acquired.

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In reviewing the criteria for reporting units, we have determined that we are one reporting unit.

2023 Goodwill Impairment Analyses

At October 31, 2023, we performed our annual impairment analysis of our reporting unit.

Given the continued decline in Lumen's share price, we determined our quantitative impairment analysis would estimate the fair value of our reporting unit using only the market approach.

Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which supported a range of fair values derived from annualized revenue and Earnings Before Interest, Tax, Depreciation and Amortization ("EBITDA") multiples between 1.5 x and 3.5 x and 4.8 x and 8.4 x, respectively.

We selected a revenue multiple within and an EBITDA multiple below these comparable market multiples.

Based on our assessment performed, we concluded that the estimated fair value of our reporting unit was less than their carrying value of equity at October 31, 2023.

As a result, we recorded a non-cash, non-tax-deductible goodwill impairment charge of $ 2.4 billion on October 31, 2023.

During the second quarter of 2023, the Company determined circumstances existed indicating it was more likely than not that the carrying value of our reporting unit exceeded its fair value.

Given the continued erosion in Lumen's market capitalization, we determined our quantitative impairment analysis would estimate the fair value of our reporting unit using only the market approach.

Applying this approach, we utilized company comparisons and analyst reports within the telecommunications industry which supported a range of fair values derived from annualized revenue and EBITDA multiples between 1.5 x and 4.3 x and 4.6 x and 10.5 x, respectively.

We selected a revenue multiple within and an EBITDA multiple below these comparable market multiples.

Based on our assessment performed, the estimated fair value of our equity exceeded our carrying value of equity by approximately 11 % at June 30, 2023.

We concluded that goodwill was not impaired as of June 30, 2023.

The market approach that we used incorporated estimates and assumptions related to the forecasted results for the remainder of the year, including revenues, expenses, and the achievement of certain strategic initiatives.

In developing the market multiples, we considered observed trends of our industry participants.

Our assessment included many factors that required significant judgment.

Alternative interpretations of these factors could have resulted in different conclusions.

2022 and 2021 Goodwill Impairment Analysis

At October 31, 2022 and 2021, we estimated the fair value of equity by considering both a market approach and a discounted cash flow method.

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Alternative estimates, judgments, and interpretations of these factors could have resulted in different conclusions regarding the need for an impairment charge.

The following table shows the rollforward of goodwill from December 31, 2021 through December 31, 2023:

(Dollars in millions)

As of December 31, 2021

As of December 31, 2022

Impairment ( 2,405 )

As of December 31, 2023 (1)

______________________________________________________________________

(1) Goodwill at December 31, 2023 is net of accumulated impairment losses of $ 2.4 billion.

We annually review the estimated lives and methods used to amortize our other intangible assets.

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(3) Revenue Recognition

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 federal and state support payments.

These support payments are government subsidies designed to compensate us for providing certain broadband and communications services in high-cost areas or at discounts to low-income, educational, and healthcare customers.

This revenue included the FCC's Connect America Fund Phase II ("CAF II") support payments, which we received through December 31, 2021, when the program ended.

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

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

We categorize our revenue derived from our operations serving our mass markets customers, primarily within the first three categories listed below, and our revenue derived from our operations servicing our business customers, primarily in the 'Harvest', 'Nurture' and 'Grow' categories listed below:

• Other Broadband , under which we provide primarily lower speed broadband services to residential and small business customers utilizing our copper-based network infrastructure;

• Voice and Other, under which we derive revenues from (i) providing local and long-distance voice services, professional services, and other ancillary services, (ii) federal broadband and state support programs, and (iii) equipment, IT solutions and other services;

• Fiber Broadband , under which we provide high speed broadband services to residential and small business customers utilizing our fiber-based network infrastructure;

• Harvest , which includes our legacy services managed for cash flow, including Time Division Multiplexing ("TDM") voice, private line and other legacy services;

• Nurture , which includes our more mature offerings, including primarily ethernet;

• Grow , which includes products and services marketed to our business customers that we anticipate will grow, including dark fiber and wavelengths services;

• 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.

addition, we provide to our affiliates application development and support services and network support.

Reconciliation of Total Revenue to Revenue from Contracts with Customers

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(Dollars in millions)

Other Broadband $ 1,111 ( 95 ) 1,016

Voice and Other 589 ( 16 ) 573

Fiber Infrastructure 1,955 ( 131 ) 1,824

IP and Data Services 451 — 451

Fiber Broadband 470 ( 12 ) 458

Harvest 1,048 ( 139 ) 909

Nurture 393 ( 8 ) 385

Grow 145 — 145

Affiliate Services 2,159 ( 45 ) 2,114

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(Dollars in millions)

Other Broadband $ 1,275 ( 106 ) 1,169

Voice and Other 691 ( 31 ) 660

Fiber Infrastructure 1,990 ( 120 ) 1,870

IP and Data Services 473 — 473

Fiber Broadband 461 ( 12 ) 449

Harvest 1,134 ( 161 ) 973

Nurture 435 ( 9 ) 426

Grow 159 ( 9 ) 150

Affiliate Services 2,294 ( 45 ) 2,249

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(Dollars in millions)

Other Broadband $ 1,360 ( 107 ) 1,253

Voice and Other 985 ( 161 ) 824

Fiber Infrastructure 2,033 ( 123 ) 1,910

IP and Data Services 512 — 512

Fiber Broadband 408 — 408

Harvest 1,206 ( 167 ) 1,039

Nurture 450 ( 10 ) 440

Grow 153 ( 9 ) 144

Affiliate Services 2,389 ( 29 ) 2,360

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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.

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As of December 31, 2023, we expect to recognize approximately $ 2.0 billion of revenue in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied.

We expect to recognize approximately 91 % of this revenue through 2025.

As of December 31, 2023, the transaction price related to unsatisfied performance obligations that are expected to be recognized in 2024, 2025 and thereafter was $ 924 million, $ 571 million, and $ 457 million, respectively.

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 .

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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 contract life of 32 months for mass markets customers and average contract life of 30 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 a quarterly basis.

We amortize deferred acquisition and fulfillment costs based on the transfer of services on a straight-line basis over the average contract life of 36 months for mass markets customers and average contract life of 33 months for business customers.

We include amortized fulfillment costs in cost of services and products and amortized acquisition costs are included in selling, general and administrative expenses in our consolidated statements of operations.

We include the amount of these deferred costs that are anticipated to be amortized in the next 12 months in other current assets on our consolidated balance sheets.

We include the amount of deferred costs expected to be amortized beyond the next 12 months in other non-current assets on our consolidated balance sheets.

We assess deferred acquisition and fulfillment costs for impairment on a quarterly basis.

Governmental Funding

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federal and state programs under which government support payments are received to offset costs associated with providing services in targeted locations such as unserved or underserved high-cost or rural areas, or for certain types of customers, including non-profit organizations, educational institutions and local governmental bodies.

Support payments may be conditioned on specified infrastructure buildouts by milestone deadlines or provision of services at specified locations and speed requirements.

In certain instances, support payments are conditioned on specified infrastructure buildouts by milestone deadlines or provision of services at specified locations and speed requirements.

Commitments may be made annually, on a multi-year basis ranging from one to ten years or be on-going subject to periodic change or termination.

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Lumen evaluates each program and establishes a liability under the principles of ASC 450 if it is probable support payments will be recaptured or a penalty will be imposed.

For the year ended December 31, 2022, Lumen recorded non-customer revenue of $ 22 million under government assistance programs, of which 34 % was associated with state universal service fund support programs.

Between 2015 and 2021, Lumen received approximately $ 500 million annually through the FCC's Connect America Fund II ("CAF II"), a federal multi-year recurring subsidy program for more extensive broadband deployment in price-cap ILEC territories.

This program ended on December 31, 2021.

For the year ended December 31, 2023 and 2022, we recorded non-customer revenue of $ 36 million and $ 22 million, respectively, under government assistance programs, of which 24 % and 34 %, respectively, was associated with state universal service fund support programs.

Between 2015 and 2021, Lumen received approximately $ 500 million annually through the Federal Communications Commission (the "FCC")'s Connect America Fund II ("CAF II"), a program that ended on December 31, 2021.

Our share of this CAF II funding was approximately $ 145 million annually.

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The government has the right to audit our compliance with the CAF II program and the ultimate outcome of any remaining examinations is unknown, but could result in a liability to us in excess of our reserve accruals established for these matters.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”), which is a federal support program designed to replace the CAF II program.

On December 7, 2020, the FCC allocated in its RDOF Phase I auction $ 9.2 billion in support payments over 10 years to deploy high speed broadband to over 5.2 million unserved locations.

Lumen Technologies started receiving support payments under this program in the second quarter of 2022, but our share of these payments is not material.

In early 2020, the FCC created the Rural Digital Opportunity Fund (the “RDOF”) program, a federal support program designed to fund broadband deployment in rural America.

For the first phase of this program, RDOF Phase I, the FCC ultimately awarded $ 6.4 billion in support payments to be paid in equal monthly installments over 10 years.

Lumen Technologies was awarded RDOF funding in several of the states in which we operate and began receiving monthly support payments during the second quarter of 2022, our share of which is not material.

We participate in multiple state sponsored programs for broadband deployment in unserved and underserved areas for which the states have state universal service funds sourced from fees levied on telecommunications providers and passed on to consumers.

During the year ending December 31, 2022, we participated in these types of programs primarily in the states of Minnesota, Nebraska, and New Mexico .

During the years ending December 31, 2023 and December 31, 2022, we participated in these types of programs primarily in the states of Nebraska, New Mexico, and Minnesota .

We primarily lease to or from third parties various office facilities, colocation facilities and equipment.

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See "Revenue Recognition" in Note 1—Background and Summary of Significant Accounting Policies.

For the years ended December 31, 2022 , 2021 and 2020, our gross rental income was $ 346 million, $ 324 million and $ 312 million, respectively which represents 5 %, 5 % and 4 %, respectively, of our operating revenue for the years ended December 31, 2022, 2021 and 2020.

For the years ended December 31, 2023 , 2022 and 2021, our gross rental income was $ 304 million, $ 346 million and $ 324 million, respectively which represents 5 % of our operating revenue for the years ended December 31, 2023, 2022 and 2021.

(5) Credit Losses on Financial Instruments

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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.

The following table presents the activity of our allowance for credit losses by accounts receivable portfolio for the years ended December 31, 2022 and December 31, 2021:

The following table presents the activity of our allowance for credit losses by accounts receivable portfolio from December 31, 2021 through December 31, 2023:

Business Mass Markets Total

(Dollars in millions)

Beginning balance at January 1, 2021 (1)

Balance at January 1, 2021 (1)

Provision for expected losses 10 17 27

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Recoveries collected 3 1 4

Beginning balance at December 31, 2021 $ 19 19 38

Balance at December 31, 2021

Provision for expected losses 13 47 60

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Recoveries collected 2 — 2

Ending Balance at December 31, 2022 $ 20 16 36

______________________________________________________________________

Balance at December 31, 2022

Provision for expected losses 20 46 66

Write-offs charged against the allowance ( 26 ) ( 43 ) ( 69 )

Recoveries collected — 1 1

Balance at December 31, 2023

(1) Due to an internal reorganization of our reporting categories on January 1, 2021, our accounts receivable portfolios were changed to align with changes to how we manage our customers.

Allowance for credit losses previously included in the Consumer and Business portfolio of $ 32 million and $ 4 million, respectively, were reclassified to the Mass Markets allowance for credit losses on January 1, 2021, as a result of this change.

For the year ended December 31, 2023, we decreased our allowance for credit losses for our Business accounts receivable portfolio primarily due to higher write-off activity.

For the year ended December 31, 2022, we decreased our allowance for credit losses for our Mass Markets accounts receivable portfolio primarily due to higher write-off activity.

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

(6) Long-Term Debt and Note Payable - Affiliate

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Term loan (2)

LIBOR + 2.25 %

SOFR + 2.50 %

Finance lease and other Various Various 4 3

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(2) Qwest Corporation's Term Loan had interest rates of 7.970 % and 6.640 % as of December 31, 2023 and December 31, 2022.

On December 1, 2021, Qwest Corporation paid at maturity the $ 950 million principal amount of its 6.750 % Senior Notes.

Redemption of Senior Notes

On February 16, 2021, Qwest Corporation fully redeemed all $ 235 million aggregate principal amount of its outstanding 7.000 % Senior Notes due 2056.

This redemption resulted in a loss of $ 8 million.

In the fourth quarter of 2020, we borrowed $ 215 million under a variable-rate term loan with CoBank ACB.

The outstanding unpaid principal amount of this term loan plus any accrued and unpaid interest is due on October 23, 2027.

Interest is paid at least quarterly based upon either the LIBOR or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50 % to 2.50 % per annum for LIBOR loans and 0.50 % to 1.50 % per annum for base rate loans depending on Qwest Corporation's then current senior unsecured long-term debt rating.

Interest is paid at least quarterly based upon either the Secured Overnight Financing Rate ("SOFR") or the base rate (as defined in the credit agreement) plus an applicable margin between 1.50 % to 2.50 % per annum for SOFR loans and 0.50 % to 1.50 % per annum for base rate loans depending on Qwest Corporation's then current senior unsecured long-term debt rating.

Long-Term Debt Maturities

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("Lender"), that replaces the previous revolving promissory agreement that was scheduled to mature on June 30, 2022 ("Prior Note Payable - Affiliate").

The Note Payable - Affiliate, as amended, provides Qwest Corporation with a funding commitment of up to $ 2.0 billion.

The Note Payable - Affiliate, as amended, enables Qwest Corporation to borrow from Lumen up to $ 2.0 billion.

Any outstanding principal balance owed by Qwest Corporation under the Note Payable - Affiliate and the accrued interest thereon is due and payable on demand, but if no demand is made, then on the maturity date.

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On September 30, 2022, Qwest Corporation repaid the outstanding principal and interest on the Note Payable - Affiliate of approximately $ 1.2 billion and $ 43 million, respectively.

As of December 31, 2022, there was no outstanding principal or accrued interest under the Note Payable - Affiliate.

Since such payment, Qwest Corporation has not owed any amounts under the Note Payable - Affiliate.

Interest Expense

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Total interest expense $ 95 112 181

Interest expense-affiliates, net $ 60 105 74

Interest (income) expense-affiliates, net

$ ( 15 ) 60 105

Our senior notes were issued under indentures dated April 15, 1990 and October 15, 1999.

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At December 31, 2023 and 2022, we believe we were in compliance with the financial covenants contained in our material debt agreements in all material respects.

Subsequent Event

See Note 18—Subsequent Event, for information regarding certain debt restructuring transactions contemplated under our amended and restated transaction support agreement dated as of January 22, 2024.

(7) Accounts Receivable

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As of December 31,

2023 2022 (1)

(Dollars in millions)

Trade and purchased receivables $ 287 320

Earned and unbilled receivables 23 35

Earned and unbilled (credits) receivables

Total accounts receivable 295 383

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Accounts receivable, less allowance $ 261 347

______________________________________________________________________

(1) Amounts have been adjusted to reflect the immaterial correction of accounts receivable.

See Note 1—Background and Summary of Significant Accounting Policies under the header Correction of Immaterial Errors .

We are exposed to concentrations of credit risk from our customers.

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We have not experienced any significant loss associated with these purchased receivables.

The following table presents details of our allowance for credit losses:

Balance Additions Deductions Ending

(Dollars in millions)

2022 $ 38 60 ( 62 ) 36

2021 61 27 ( 50 ) 38

39 66 ( 44 ) 61

_______________________________________________________________________________

(1) On January 1, 2020, we adopted ASU 2016-13 "Measurement of Credit Losses on Financial Instruments" and recognized a cumulative adjustment to our accumulated deficit as of the date of adoption of $ 3 million, net of $ 1 million tax effect.

This adjustment is included within "Deductions".

Please refer to Note 5—Credit Losses on Financial Instruments for more information.

(8) Property, Plant and Equipment

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Construction in progress (4)

N/A 1,146 747

Gross property, plant and equipment 16,939 15,890

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Lumen Technologies did no t make a voluntary contribution to the LCPP in 2023 or 2022.

The unfunded status of Lumen's qualified and non-qualified pension plans for accounting purposes was approximately $ 615 million and $ 1.2 billion as of December 31, 2022 and 2021, which includes the merged QCII qualified pension plan.

The unfunded status of Lumen's qualified and non-qualified pension plans for accounting purposes was approximately $ 769 million and $ 615 million as of December 31, 2023 and 2022, which includes the merged QCII qualified pension plan.

The unfunded status of Lumen's post-retirement benefit plans for accounting purposes was $ 1.9 billion and $ 2.0 billion as of December 31, 2023 and 2022.

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however, the plan was amended to eliminate this benefit effective March 1, 2010 for retirees who retired prior to January 1, 2004 and whose deaths occur after February 28, 2010 and eliminate the death benefit for eligible beneficiaries of certain retirees who retired after December 31, 2003.

Lumen Technologies maintains post-retirement benefit plans that provide health care and life insurance benefits for certain eligible retirees.

Lumen Technologies maintains post-retirement benefit plans that provide health care and life insurance benefits primarily for certain eligible retirees.

The QCII post-retirement benefit plans were merged into Lumen's post-retirement benefit plans on January 1, 2012.

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In calculating this obligation, Lumen Technologies considers numerous assumptions, estimates and judgments, including but not limited to, discount rates, health care cost trend rates and plan amendments.

During the third quarter of 2019, we renewed a collective bargaining agreement which covers our unionized employees.

The terms of the new agreement had no material impact on the post-retirement benefit plans.

Effective January 1, 2024, new represented employees are not eligible for benefits as a result of new collective bargaining agreements.

New non-represented employees are also not eligible for benefits under the plan.

The terms of the post-retirement health care and life insurance plans between Lumen Technologies and its eligible non-represented employees and its eligible post-1990 non-represented retirees are established by Lumen Technologies and are subject to change at its discretion.

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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent and knowledgeable parties who are willing and able to transact for an asset or liability at the measurement date.

We use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value and then we rank the estimated values based on the reliability of the inputs used following the fair value hierarchy.

We determined the fair values of our long-term debt, including the current portion, based on quoted market prices where available or, if not available, based on inputs other than quoted market prices in active markets that are either directly or indirectly observable such as discounted future cash flows using current market interest rates.

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Level 3 Unobservable inputs in which little or no market data exists.

The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2022, as well as the input level used to determine the fair values indicated below:

The following table presents the carrying amounts and estimated fair values of our financial liabilities as of December 31, 2023 and 2022, as well as the input level used to determine the fair values indicated below:

As of December 31, 2023 As of December 31, 2022

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State income taxes-net of federal effect ( 31.3 ) % 4.3 % 3.7 %

Goodwill impairment

( 187.2 ) % — % — %

Change in liability for unrecognized tax position

( 8.9 ) % 0.6 % 0.4 %

Other ( 1.4 ) % — % 0.1 %

Effective income tax rate ( 207.8 ) % 25.9 % 25.2 %

For the years ended December 31, 2023 and 2022, our effective income tax rate was ( 207.8 )% and 25.9 %, respectively.

The effective tax rate for the year ended December 31, 2023 includes a $ 505 million unfavorable aggregate impact of non-deductible goodwill impairment.

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:

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At December 31, 2023, we had no established valuation allowance based on our assessment of whether it is not more likely than not that our deferred tax assets will be realized.

As of both December 31, 2022 and 2021, the $ 1.3 billion net deferred tax liabilities are included in long-term liabilities on our consolidated balance sheet.

As of December 31, 2023 and 2022, the $ 1.3 billion and $ 1.3 billion net deferred tax liabilities are included in long-term liabilities on our consolidated balance sheet.

With few exceptions, we are no longer subject to U.S.

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The Internal Revenue Service and state and local taxing authorities reserve the right to audit any period where net operating loss carryforwards are available.

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 st to December 31 st for 2022 and 2021 are as follows:

A reconciliation of the change in our gross unrecognized tax benefits (excluding both interest and any related federal benefit) from January 1 to December 31 for 2023 and 2022 are as follows:

Years ended December 31,

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Decrease due to tax positions taken in a prior year ( 1 ) ( 28 )

Decrease due to tax positions taken in a current year ( 14 ) —

Unrecognized tax benefits at end of period $ 317 332

The total amount of unrecognized tax benefits (including interest and net of federal benefit) that, if recognized, would impact the effective income tax rate was $ 397 million and $ 407 million as of December 31, 2022 and 2021, respectively.

As of December 31, 2023, the total amount of unrecognized tax benefits that, if recognized, would impact the effective income tax rate is immaterial .

The unrecognized tax benefits also includes tax positions that, if recognized, would result in adjustments to other tax accounts, primarily deferred taxes, that would not impact the effective tax rate but could impact cash tax amounts payable to taxing authorities.

Our policy is to reflect interest expense associated with unrecognized tax benefits in income tax expense.

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We paid $ 509 million, $ 673 million, and $ 697 million related to income taxes for the years ended December 31, 2023, 2022, and 2021, respectively.

In August 2022, the Inflation Reduction Act was signed into law and which, among other things, implemented a corporate alternative minimum tax (“CAMT”) on adjusted financial statement income effective for tax periods occurring after December 31, 2022.

The CAMT had no material impact on our financial results as of December 31, 2023.

In addition, the Organization for Economic Co-operation and Development has issued Pillar Two model rules introducing a new global minimum tax of 15% intended to be effective on January 1, 2024.

While the US has not yet adopted the Pillar Two rules, various other governments around the world are enacting legislation, some of which are effective for tax periods after December 31, 2023.

While the global minimum tax will increase our administrative and compliance burdens, it is expected to have an immaterial impact to our financial statements.

(13) Affiliate Transactions

We provide telecommunications service to our affiliates that we also provide to external customers.

In addition, we provide to our affiliates, application development and support services and network support and technical services.

Below are details of the services we provide to our affiliates:

• Telecommunications services.

Data, broadband and voice services in support of our affiliates' service offerings;

• Application development and support services.

Information technology services primarily include the labor cost of developing, testing and implementing the system changes necessary to support order entry, provisioning, billing, network and financial systems, as well as the cost of improving, maintaining and operating our operations support systems and shared internal communications networks;

• Network support and technical services.

Network support and technical services relate to forecasting demand volumes and developing plans around network utilization and optimization, developing and implementing plans for overall product development, provisioning and customer care.

We charge our affiliates for services that we also provide to external customers, while other services that we provide only to our affiliates are priced by applying a fully distributed cost ("FDC") methodology.

FDC rates include salaries and wages, payroll taxes, employee related benefits, miscellaneous expenses, and charges for the use of our buildings, computing and software assets.

Whenever possible, costs are directly assigned to our affiliates for the services they use.

If costs cannot be directly assigned, they are allocated among all affiliates based upon cost causative measures;

or if no cost causative measure is available, these costs are allocated based on a general allocator.

These cost allocation methodologies are reasonable.

From time to time, we adjust the basis for allocating the costs of a shared service among affiliates.

Such changes in allocation methodologies are generally billed prospectively.

We also purchase services from our affiliates including telecommunication services, insurance, flight services and other support services such as legal, regulatory, finance and accounting, tax, human resources and executive support.

Our affiliates charge us for these services based on FDC.

We provide incumbent local exchange carrier telecommunications services to our affiliates that we also provide to external customers.

These services are priced at regulated rates, where applicable, or otherwise at rates we believe are consistent with non-regulated market-based rates charged to external customers.

We also provide to our affiliates shared services in the form of application development and support services, as well as network support and technical services, and administrative and corporate support.

In this regard, we function as a service company to other Lumen affiliates, and correspondingly recognize affiliate revenue based on the costs for the services that we provide to those affiliates.

Whenever possible, costs for shared services are incurred directly by our affiliates for the services they use.

When these shared costs are not directly incurred, they are allocated among all affiliates based upon what we determine to be the most reasonable method, first using cost causative measures, or, if no cost causative measure is available, using a general allocator.

From time to time, we may adjust the basis for allocating the costs of a shared service among affiliates.

As applicable any such changes in allocation methodologies are applied prospectively.

For the years ended December 31, 2023, 2022, and 2021, direct affiliate revenue was $ 1.6 billion, $ 1.7 billion, and $ 1.7 billion, respectively, and allocated affiliate revenue was $ 537 million, $ 597 million, and $ 661 million, respectively.

Our affiliates charge us for these services using the allocation methodology described above.

(14) Commitments, Contingencies and Other Items

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As a matter of course, we are prepared to both litigate these matters to judgment as needed, as well as to evaluate and consider reasonable settlement opportunities.

Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and could cause significant expenditure and diversion of management attention.

We review our litigation accrual liabilities on a quarterly basis, but in accordance with applicable accounting guidelines only establish accrual liabilities when losses are deemed probable and reasonably estimable and only revise previously-established accrual liabilities when warranted by changes in circumstances, in each case based on then-available information.

As such, as of any given date we could have exposure to losses under proceedings as to which no liability has been accrued or as to which the accrued liability is inadequate.

Amounts accrued for our litigation and non-income tax contingencies for both December 31, 2022 and December 31, 2021 aggregated to approximately $ 19 million, and are included in "Other" current liabilities and "Other Liabilities" in our consolidated balance sheet as of such date.

Subject to these limitations, at December 31, 2023 and December 31, 2022, we had accrued $ 15 million and $ 19 million, respectively, in the aggregate for our litigation and non-income tax contingencies, which is included in "Other" current liabilities and "Other Liabilities" in our consolidated balance sheet as of such date.

We cannot at this time estimate the reasonably possible loss or range of loss in excess of this $ 15 million accrual due to the inherent uncertainties and speculative nature of contested proceedings.

The establishment of an accrual does not mean that actual funds have been set aside to satisfy a given contingency.

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CenturyLink Sales Practices and Securities Litigation.

Lumen Technologies has settled the consumer and securities investor class actions.

Those settlements are final.

The derivative actions remain pending.

Lumen Technologies has settled the consumer and securities investor class actions, and the derivative actions.

Lumen has engaged in discussions regarding related claims with a number of state attorneys general, and has entered into agreements settling certain of the consumer practices claims asserted by state attorneys general.

While Lumen Technologies does not agree with allegations raised in these matters, it has been willing to consider reasonable settlements where appropriate.

AT&T Proceedings

In August 2022, certain of our indirect affiliates filed a complaint in federal district court in Colorado captioned Central Telephone Company of Virginia, et al, v.

AT&T Corp., et al.

The suit seeks relief and damages for AT&T’s failure to pay amounts for services it receives.

AT&T disputes those claims and has asserted counterclaims alleging breach of contract and seeking declaratory relief.

It has requested the court to enjoin the plaintiffs (including us) from terminating services for its failure to pay, and it has requested the court transfer the case to federal court in the southern district of New York for further proceedings.

Also in August 2022, AT&T filed a separate lawsuit in federal court in the western district of Louisiana against Central Telephone Company of Virginia, us, and other of our indirect affiliates alleging, among other claims, breach of contract provisions pertaining to network architecture.

We and the other plaintiff entities dispute AT&T’s claims.

Huawei Network Deployment Investigations

Lumen has received requests from the following federal agencies for information relating to the use of equipment manufactured by Huawei Technologies Company ("Huawei") in Lumen’s networks.

Lumen has received a civil investigative demand from the U.S.

Department of Justice in the course of a False Claims Act investigation alleging that Lumen Technologies, Inc.

and Lumen Technologies Government Solutions, Inc.

failed to comply with the requirements in federal contracts concerning their use of Huawei equipment.

The FCC’s Enforcement Bureau issued a Letter of Inquiry to Lumen Technologies, Inc.

regarding its written certifications to the FCC that Lumen has complied with FCC rules governing the use of resources derived from the High Cost Program, Lifeline Program, Rural Health Care Program, E-Rate Program, Emergency Broadband Benefit Program, and the Affordable Connectivity Program.

Under these programs federal, funds may not be used to facilitate the deployment or maintenance of equipment or services provided by Huawei, a company the FCC has determined poses a national security threat to the integrity of communications networks or the communications supply chain.

• Team Telecom.

The Committee for the Assessment of Foreign Participation in the United States Telecommunications Service Sector (comprised of the U.S.

Attorney General, and the Secretaries of the Department of Homeland Security, and the Department of Defense), commonly referred to as Team Telecom, issued questions and requests for information relating to Lumen’s FCC licenses and its use of Huawei equipment.

We are cooperating with the investigations.

Marshall Fire Litigation.

On December 30, 2021, a wildfire referred to as the Marshall Fire ignited near Boulder, Colorado.

The Marshall Fire killed two people, and it burned thousands of acres, including entire neighborhoods.

Approximately 300 lawsuits naming various defendants and asserting various claims for relief have been filed.

To date, three of those name Qwest Corp.

Allstate Fire and Casualty Insurance Company, et al., v.

Qwest Corp., et al., Case No.

2023-cv-3048, and Wallace, et al.

v, Qwest Corp., et al, Case No.

2023-cv-30488, both of which have been consolidated with Kupfner et al v Public Service Company of Colorado, et al.

2022-cv-30195.

The consolidated proceeding is pending in Colorado District Court, Boulder, Colorado, Preliminary estimates of potential damage claims exceed $ 2 billion.

Qwest is vigorously defending the claims.

911 Surcharge

In June 2021, the Company was served with a complaint filed in the Santa Fe County District Court by Phone Recovery Services, LLC (“PRS”), acting on behalf of the State of New Mexico.

The complaint claims Qwest Corporation and CenturyTel of the Southwest have violated the New Mexico Fraud Against Taxpayers Act since 2004 by failing to bill, collect and remit certain 911 surcharges from customers.

Through pre-trial proceedings, the Court has narrowed the issues to be resolved by jury, ruling that Lumen bears the burden of proving that its actions were reasonable or known and approved by the State.

Qwest is defending the New Mexico claims vigorously, as it has done successfully with other 911 claims involving PRS in other states.

Other Proceedings, Disputes and Contingencies

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Several such proceedings are currently pending, but none is reasonably expected to exceed $ 300,000 in fines and penalties.

In addition, in the past we acquired companies that had installed lead-sheathed cables several decades earlier, or had operated certain manufacturing companies in the first part of the 1900s.

Under applicable environmental laws, we could be named as a potentially responsible party for a share of the remediation of environmental conditions arising from the historical operations of our predecessors.

The outcome of these other proceedings described under this heading is not predictable.

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Contract fulfillment costs 28 30

Receivable for sale of land — 56

Assets held for sale

Total other current assets $ 144 120

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As of December 31, 2023, approximately 43 % of our employees were represented by the Communication Workers of America ("CWA") or the International Brotherhood of Electrical Workers ("IBEW").

Approximately 1 % of our represented employees are subject to collective bargaining agreements that are scheduled to expire within the 12 month period ending December 31, 2023.

None of our represented employees are subject to collective bargaining agreements that are scheduled to expire within the 12 month period ending December 31, 2024.

We believe relations with our employees continue to be generally good.

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Cash dividend paid to QSC (1)

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(1) In 2023, we declared a dividend of advances to affiliate to our parent.

The timing of cash payments for declared dividends to QSC is at our discretion in consultation with QSC.

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Dividends paid are reflected on our consolidated statement of cash flows as financing activities.

(18) Subsequent Event

Transaction Support Agreement

On January 22, 2024, the Company, Lumen, Level 3, and a group of creditors holding a majority of Lumen's consolidated debt (the "TSA Parties") amended and restated the transaction support agreement that we originally entered into with a subset of the TSA Parties on October 31, 2023 (as amended and restated, the “Transaction Support Agreement”).

The Transaction Support Agreement defines the parties’ commitments to effect a series of transactions (the “TSA Transactions”) set forth in the term sheet attached thereto (the “Term Sheet”).

Among other things and subject to the terms and conditions set forth therein, the Transaction Support Agreement, including the Term Sheet, contemplates:

• the incurrence by Level 3 Financing of $ 1.325 billion in new money long term senior secured first lien indebtedness, which indebtedness will be backstopped by certain of the consenting lenders;

• a new revolving credit facility at Lumen in an amount expected to be approximately $ 1 billion;

• the extension of maturities, covenant modifications and rate increases of certain secured and unsecured indebtedness at Lumen and Level 3 through a series of exchanges and other debt transactions with certain consenting lenders as set forth in the Term Sheet;

• the repayment of certain indebtedness of Lumen and Qwest.

The outside date for completion of the TSA Transactions under the Transaction Support Agreement is February 29, 2024, which Lumen may unilaterally extend at its discretion to March 31, 2024.

The Company expects to consummate the TSA Transactions in the first quarter of 2024, subject to the satisfaction of remaining closing conditions.

Following consummation of the TSA Transactions, Level 3 Financing and our other affiliates may assess potential follow-on transactions with respect to non-participating creditors.

Additional information about the Transaction Support Agreement and the TSA Transactions is available in our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2024, and Exhibit 10.10 to this annual report.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk