If you were planning to disregard a Form 499-A instruction, would you report yourself to the FCC? That is exactly what AT&T and Verizon have now done with regard to their reporting of prepaid card revenues. Both AT&T and Verizon have told the FCC that retroactive to January 1, 2010, they will report the revenues actually received from selling prepaid cards to distributors or other carriers, rather than the face value of the cards. Since prepaid cards often are sold into the distribution chain at a 30-40% discount off the face value, this move will significantly reduce AT&T and Verizon’s USF obligations from the sale of prepaid calling cards.

Click the link for more background on the change.

At issue is the method by which telecommunications carriers must report their revenues from the sale of prepaid calling cards. For years, the Form 499-A Instructions have stated that prepaid calling card providers should report the “face value” of the cards that they sell for distribution to end users. Prepaid card providers are instructed to do so even though GAAP generally only permits carriers to report revenue actually received from these sales, and even though more general Form 499-A instructions use the same “revenues received” standard. In the prepaid industry, most cards are first sold to distributors, who often pay 60-70% of the face value to the carrier (keeping the remaining 30-40% as their compensation for distributing the cards). Prepaid card providers often do not know how much the cards are sold for at retail.

Requests to change or clarify the rule have been pending for years. In October, 2006, AT&T filed a USF appeal asserting the prepaid carriers should report the revenues received, not the face value of the cards. [IDT, for its part, contends that sales to distributors are not sales to “end users” and therefore should not be reported by IDT as USF revenue. See IDT’s 2006 and 2008 USF appeals.] More recently, USAC filed a request for guidance with the FCC, which has been put out for comment. The USF appeals and USAC’s request for guidance remain pending before the FCC.

AT&T and Verizon grew impatient with the FCC’s inaction and have now unilaterally changed their practices. As Verizon explained in its letter, “for this year and in future years, Verizon will report in its assessable base of universal service revenues only those revenues that Verizon actually received from selling prepaid calling cards -- not the ultimate retail price of those cards when they are resold.” This change will significantly reduce Verizon’s USF contributions for 2010 and in future years.

AT&T, Verizon Cease Reporting Face Value of Prepaid Cards Sold