Barry County Services Companybarrycountyservicescompany.com/BCSC_Annual_Report_2018.pdf · 2019. 4. 26. · first-out (FIFO) method. Securities Certain debt securities that management

Barry County Services Company

Independent Auditor’s Report and Consolidated Financial Statements

December 31, 2018 and 2017

Barry County Services Company December 31, 2018 and 2017

Contents

Officers and Directors............................................................................................................ 1

Independent Auditor’s Report ............................................................................................... 2

Consolidated Financial Statements

Consolidated Balance Sheets .............................................................................................................. 4

Consolidated Statements of Income ................................................................................................... 6

Consolidated Statements of Comprehensive Income ......................................................................... 7

Consolidated Statements of Stockholders’ Equity ............................................................................. 8

Consolidated Statements of Cash Flows ............................................................................................ 9

Notes to Consolidated Financial Statements .................................................................................... 10

Barry County Services Company December 31, 2018 and 2017

1

Officers and Directors

Mark Herbert President Gary Gibson Secretary Harry Doele Treasurer Cindy Buckland Mark Hewitt David Stoll General Manager & CEO Deborah Cusack CFO

Independent Auditor’s Report

Board of Directors Barry County Services Company and Subsidiaries Delton, Michigan We have audited the accompanying consolidated financial statements of Barry County Services Company and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Board of Directors Barry County Services Company and Subsidiaries Page 3

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Barry County Services Company and subsidiaries as of December 31, 2018 and 2017, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

West Des Moines, Iowa April 22, 2019

Barry County Services Company Consolidated Balance Sheets


See Notes to Consolidated Financial Statements

2018 2017Current Assets

Cash and cash equivalents 4,206,172$ 3,168,798$ Accounts receivable:

Due from customersLess allowance of $12,296 and $32,680, respectively 233,486 287,747

OtherLess allowance of $15,000 and $13,343, respectively 199,278 200,500

Materials and supplies 238,468 242,120 Prepayments 86,982 84,700 Prepaid income taxes 82,809 297,942

5,047,195 4,281,807

Other Noncurrent AssetsAvailable-for-sale securities 2,094,329 2,276,378 Other investments 150,138 177,326

2,244,467 2,453,704

Property, Plant and EquipmentTelephone plant in service 24,862,015 23,956,390 Other plant in service 3,449,278 3,447,607

28,311,293 27,403,997 Less accumulated depreciation 21,626,743 20,770,530

6,684,550 6,633,467 Plant under construction 20,887 223,590

6,705,437 6,857,057

Total assets 13,997,099$ 13,592,568$

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2018 2017Current Liabilities

Dividends payable 436,495$ 443,353$ Accounts payable 148,709 237,899 Advance billing and payments 113,377 109,835 Accrued taxes 66,357 62,283 Other 674,096 651,035

1,439,034 1,504,405

Other Noncurrent Liabilities and Deferred CreditsDeferred income taxes 232,100 322,426 Deferred compensation 398,303 363,503

630,403 685,929

Stockholders’ EquityCommon stock - no stated or par value, authorized 80,000 shares;

issued and outstanding, 48,527 and 49,263, shares, respectively - - Accumulated Other Comprehensive Income:

Unrealized gains (losses) on certain investments (110,471) 88,021 Retained earnings 12,038,133 11,314,213

11,927,662 11,402,234

Total liabilities and stockholders’ equity 13,997,099$ 13,592,568$

Barry County Services Company Consolidated Statements of Income

Years Ended December 31, 2018 and 2017

See Notes to Consolidated Financial Statements 6

2018 2017

Operating RevenuesLocal network services 1,804,274$ 1,796,799$ Network access services 2,189,812 2,073,908 Long distance services 834,737 843,210 Internet services 1,889,829 1,729,795 Billing services 740,975 869,889 Miscellaneous revenue 214,284 191,617

7,673,911 7,505,218

Operating ExpensesPlant specific operations 1,244,557 1,167,519 Plant nonspecific operations 727,203 730,188 Cost of services 759,080 744,623 Depreciation 971,680 937,283 Customer operations 861,511 923,855 Corporate operations 1,433,185 1,072,002 General taxes 166,768 167,733

6,163,984 5,743,203

Operating Income 1,509,927 1,762,015

Other Income (Expense)Investment income 40,126 46,729 Gains from disposition of certain property 16,792 7,752 Other, net 85,080 37,714

141,998 92,195

Income Before Income Taxes 1,651,925 1,854,210

Income Tax Expense (including impact of enactedchanges in tax laws of $0 and $140,000, respectively) 336,652 499,065

Net Income $ 1,315,273 $ 1,355,145

Barry County Services Company Consolidated Statements of Comprehensive Income



2018 2017

Net Income 1,315,273$ 1,355,145$

Other Comprehensive Income, net of tax:Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising during the periodnet of taxes of ($68,826) and $43,769, respectively (198,492) 109,666

Comprehensive Income 1,116,781$ 1,464,811$

Barry County Services Company Consolidated Statements of Stockholders’ Equity



Accumulated Other

Comprehensiv RetainedTotal

Stockholders’Shares Amount Income Earnings Equity

Balance, December 31, 2016 49,464 -$ (21,645)$ 10,459,700$ 10,438,055$

Net income - - - 1,355,145 1,355,145 Dividends declared ($9.00 per share) - - - (444,001) (444,001) Unrealized holding gains

arising during the period - - 109,666 (14,471) 95,195 Common stock redeemed (454) - - (95,340) (95,340) Common stock issued 253 - - 53,180 53,180

Balance, December 31, 2017 49,263 - 88,021 11,314,213 11,402,234

Net income - - - 1,315,273 1,315,273 Dividends declared ($9 per share) - - - (436,743) (436,743) Unrealized holding losses

arising during the period - - (198,492) (198,492) Common stock redeemed (972) - - (204,120) (204,120) Common stock issued 236 - - 49,510 49,510

Balance, December 31, 2018 48,527 -$ (110,471)$ 12,038,133$ 11,927,662$

Common Stock

Barry County Services Company Consolidated Statements of Cash Flows



2018 2017

Operating ActivitiesNet income $ 1,315,273 $ 1,355,145 Adjustments to reconcile net income

to net cash provided by operating activities:Depreciation 971,680 937,283 Deferred income taxes (21,500) (1,970) Realized gain on sale of available-for-sale securities (38,359) (21,144) Realized loss on sale of property - 3,657

Changes in assets and liabilities:(Increase) Decrease in:

Accounts receivable 55,483 (40,082) Materials and supplies 3,652 (30,066) Prepayments 212,851 (152,401)

Increase (Decrease) in:Accounts payable (72,524) 45,114 Accrued taxes 4,074 12,870 Other 61,403 104,377

Net cash provided by operating activities 2,492,033 2,212,783

Investing ActivitiesCapital expenditures (836,726) (1,292,889) Purchases of available-for-sale securities (647,788) (398,823) Proceeds from sale of other investments 27,188 - Proceeds from sale of available-for-sale securities 600,878 332,451 Salvage - 37,500

Net cash used in investing activities (856,448) (1,321,761)

Financing ActivitiesDividends paid (443,601) (495,041) Common stock redeemed, net of reissued (154,610) (42,160)

Net cash used in financing activities (598,211) (537,201)

Increase in Cash and Cash Equivalents 1,037,374 353,821

Cash and Cash Equivalents, Beginning of Year 3,168,798 2,814,977

Cash and Cash Equivalents, End of Year 4,206,172$ 3,168,798$

Barry County Services Company Notes to Consolidated Financial Statements


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Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

Barry County Services Company and subsidiaries (herein referred to as “the Company”) are providers of telecommunications exchange, local access, long distance, internet, and rental real estate in a service area located in southern Michigan.

The accounting policies of the Company conform to accounting principles generally accepted in the United States of America. Telephone operations reflect practices appropriate to the telephone industry. The accounting records of the telephone company are maintained in accordance with the Uniform System of Accounts for Telephone Companies prescribed by the Federal Communications Commission (FCC) as modified by the state regulatory authority.

Principles of Consolidation

The consolidated financial statements include the accounts of the parent company, Barry County Services Co, and its 100%-owned subsidiaries, Barry County Telephone Company, Barry County Realty Company, Lake Michigan Telephone Company, MEI Telecom Services, and Southern Michigan Cellular Company. All material intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 2018 and 2017, cash equivalents consisted primarily of money market accounts with brokers.

At December 31, 2018, the Company’s cash accounts exceeded federally insured limits by approximately $2,390,000.



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Accounts Receivable

Accounts receivable are stated at the amount billed to customers plus any accrued and unpaid interest. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts receivable are ordinarily due 30 days after the issuance of the invoice. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer.

Materials and Supplies

Materials and supplies is stated at the lower of cost or market with cost determined by the first-in, first-out (FIFO) method.

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Investments in private equity funds and hedge funds are recorded at net asset value (NAV), as a practical expedient, to determine fair value of the investments. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Nonmarketable equity investments over which the Company has significant influence are reflected on the equity method. Other nonmarketable equity investments are stated at cost.

Property, Plant and Equipment

Property, plant and equipment acquisitions are recorded at original cost less accumulated depreciation and amortization. Original cost includes the capitalized cost such as salaries and wages, materials, certain payroll taxes, and employee benefits.

The Company provides for depreciation for financial reporting purposes on the straight-line method by the application of rates based on the estimated service lives of the various classes of depreciable property. These estimates are subject to change in the near term.



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The estimated useful lives for each major depreciable classification of property and equipment are as follows:

Buildings 35-40 years Furniture and office equipment 5-10 years Vehicles and other equipment 7-10 years Switching equipment 12 years Outside plant 20-25 years Other equipment 25 years Towers 15-20 years

Renewals and betterments of units of telephone property are charged to telephone plant in service. When telephone plant is retired, its cost is removed from the asset account and charged against accumulated depreciation less any salvage realized. No gains or losses are recognized in connection with routine retirements of depreciable telephone property. Repairs and renewals of minor items of telephone property are included in plant specific operations expense.

Repairs of other property, as well as renewals of minor items, are charged to plant specific operations expense. A gain or loss is recognized when other property is sold or retired.

Long-lived Asset Impairment

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

No asset impairment was recognized for the years ended December 31, 2018 and 2017.

Asset Retirement Obligations

Accounting principles generally accepted in the United States of America require that an asset retirement obligation (ARO) associated with the retirement of a tangible long-lived asset be recognized as a liability in the period in which it is incurred or becomes determinable (as defined by the standard) even when the timing and/or method of settlement may be conditional on a future event.

When the liability is initially recorded, the entity capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset.

The Company has determined it does not have a material legal obligation to remove long-lived assets, and accordingly, there have been no liabilities recorded for the years ended December 31, 2018 and 2017.



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Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Significant components of the Company’s deferred taxes arise from differences between the basis of plant and certain liabilities.

Tax positions are recognized if it is more-likely-than-not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

Revenue Recognition

The Company recognizes revenues when earned regardless of the period in which they are billed. The Company is required to provide telephone service to subscribers within its defined service territory.

Local network service and internet revenues are recognized over the period a subscriber is connected to the network.

Network access and long distance service revenues are derived from charges for access to the Company’s local exchange network. The interstate portion of access revenues is based on an average schedule company formula administered by the National Exchange Carrier Association (NECA) which is regulated by the FCC. The intrastate portion of access revenues is billed based upon an individual company tariff access charge structure as approved by the state regulatory authority. The tariffs developed from this structure are used to charge the connecting carrier and recognize revenues in the period the traffic is transported based on the minutes of traffic carried. Long distance revenues are recognized at the time a call is placed based on the minutes of traffic processed at contracted rates.



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The Company provides billing services to other local exchange carriers. Revenues are recognized as customer billing is completed.

Rental income is recognized at the start of the rental period when the lessee is contractually obligated for payment.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities.

Taxes Collected from Customers and Remitted to Governmental Authorities

Taxes collected from customers and remitted to governmental authorities are presented in the accompanying consolidated statements of income on a net basis.

Reclassifications

Certain reclassifications have been made to the 2017 financial statements to conform to the 2018 financial statement presentation. These reclassifications had no effect on net earnings.

Note 2: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of available-for-sale securities are as follows:

Amortized Cost

Gross Unrealized

Gains

Gross Unrealized

Losses Fair Value

Available-for-SaleSecurities:December 31, 2018:

Mutual funds $ 2,243,100 $ 6,267 $ (155,038) $ 2,094,329

December 31, 2017:Mutual funds $ 2,157,831 $ 140,077 $ (21,530) $ 2,276,378



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The following table shows the Company’s available-for-sale investments’ gross unrealized losses, fair value and length of time that the individual securities have been in continuous unrealized loss position at December 31, 2018 and 2017:

Description Fair ValueUnrealized

Losses Fair ValueUnrealized


Losses

Mutual funds 955,227$ 117,522$ 865,559$ 37,516$ 1,820,786$ 155,038$

Description Fair ValueUnrealized



Losses

Mutual funds 943,972$ 21,530$ -$ -$ 943,972$ 21,530$

2018

Less than 12 Months 12 Months or More Total

Less than 12 Months 12 Months or More Total

2017

Management evaluates the need for recording an other than temporary impairment for these investments annually. Based on the nature and financial information available for each individual investment, the length of time and extent of its fair value being below cost (generally less than twelve months at December 31, 2018) and the Company’s ability and intent to hold the investments for a sufficient time to allow for the recovery of the cost of the investment, an other than temporary impairment has not been recognized as of December 31, 2018 and 2017.

Proceeds from sales of available-for-sale securities were $600,878 and $332,451 in 2018 and 2017, respectively. The gross realized gains on sales of available-for-sale securities totaled $48,135 and $21,944 in 2018 and 2017, respectively, and the gross realized losses totaled $9,776 and $800 in 2018 and 2017, respectively. The change in net unrealized holding gains (losses) on available-for-sale securities included as a separate component of comprehensive income before tax totaled ($267,318) and $153,435 in 2017 and 2016, respectively.

Note 3: Investments

Investments accounted for under the cost method consist of the following:

2018 2017

Optimal Software 5,000$ 5,000$ ANPI 54,375 81,563 RTFC - Patronage Capital 90,763 90,763

Long-term Investments $ 150,138 $ 177,326



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Because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs, management has determined it is not practical to estimate the fair value of these investments. However, management believes that the carrying amount of these investments at December 31, 2018, included in other investments is not impaired.

Note 4: Property, Plant and Equipment

Property, plant and equipment includes the following:

2018 2017

Telephone plant in service:Land 90,839$ 90,839$ Buildings 1,201,494 1,002,661 Furniture and office equipment 1,332,891 1,326,278 Vehicles and equipment 161,732 151,820 Switching equipment 6,839,203 6,511,918 Outside plant 15,235,856 14,872,874

Subtotal 24,862,015 23,956,390

Other plant in service:Land 809,312 809,312 Buildings 150,017 161,318 Other equipment 1,379,394 1,366,422 Towers 1,110,555 1,110,555

Subtotal 3,449,278 3,447,607

Total property, plant and equipment 28,311,293$ 27,403,997$

Depreciation on depreciable property resulted in composite rates of 3.60% and 3.54% for 2018 and 2017, respectively.



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Note 5: Income Taxes

Income taxes reflected in the Consolidated Statements of Income consist of the following:

2018 2017

Federal income taxes:Current tax expense 250,732$ 390,024$ Adjustment of deferred tax liability for enacted

changes in tax laws - (140,000) Deferred tax expense (13,585) 114,172

State income taxes:Current tax expense 107,420 111,011 Deferred tax expense (7,915) 23,858

Income tax expense $ 336,652 $ 499,065

Cash paid for income taxes and estimated income taxes for 2018 and 2017 totaled $143,000 and $400,000, respectively.

Deferred federal and state tax liabilities and assets reflected in the Consolidated Balance Sheets are summarized as follows:

2018 2017

Deferred tax liabilitiesFederal 417,300$ 428,910$ State 119,200 130,316

Total Deferred Tax Liabilities 536,500 559,226

Deferred tax assetsFederal 236,400 179,400 State 68,000 57,400

Total Deferred Tax Assets 304,400 236,800

Total Deferred Tax Liabilities $ 232,100 $ 322,426



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Prepaid income taxes of $82,809 and $297,942 appearing on the Consolidated Balance Sheets at December 31, 2018 and 2017, respectively, reflect overpayments of estimated taxes.

On December 22, 2017, the United States enacted tax reform legislation through the Tax Cuts and Jobs Act, which significantly changes the U.S. tax laws, including a reduction in the corporate tax rate from 35% to 21%, as well as other changes. As a result of enactment of the legislation, the company incurred a one-time income tax benefit of $140,000 during the fourth quarter of 2017, primarily related to the remeasurement of certain deferred tax assets and liabilities.

The Company has evaluated its income tax positions and has determined that there are no uncertain income tax positions that need to be recorded or reported in the financial statements at December 31, 2018.

The Company’s federal and state income tax returns for years 2015 to present remain subject to examination.

Note 6: Defined Contribution Pension Plan

The Company has a defined contribution retirement program in effect for employees who meet certain eligibility requirements. This program provides for contributions to each employee’s individual retirement account. The Company’s policy is to fund plan costs accrued. Costs, expensed and capitalized, for 2018 and 2017 were $444,426 and $486,488, respectively.

Note 7: Post-retirement Benefit Plan

The Company sponsors a defined benefit post-retirement plan for its employees. The plan provides medical benefits for retired employees and their families from the date of retirement to Medicare eligible age. Eligibility is based on a factor of age and years of service. Additionally, the Company provides free local telephone service for retired employees who reside in the Company’s service territory. The plan is noncontributory and is not funded. There were no employer or participant contributions in 2018 or 2017, nor does the plan possess any assets.

Information about the plan’s status follows:

2018 2017

Benefit obligation, end of year 398,303$ 363,503$

Liabilities recognized on the balance sheets:

2018 2017

Noncurrent liabilities 398,303$ 363,503$



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Other significant balances and costs are:

2018 2017Benefits paid 33,534$ 52,436$

Net post-retirement costs recognized 34,800$ 26,700$

The discount rate used in determining the accumulated post-retirement benefit obligation was 4.25% and 3.0% in 2018 and 2017, respectively.

Estimated Future Benefit Payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:

Other Benefits

2019 1,833$ 2020 1,945 2021 1,274 2022 1,274

2023-2028 7,644

Note 8: Concentration of Credit Risk

The Company grants credit to customers, all of whom are located in the franchised service area, and telecommunications intrastate and interstate long distance carriers.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents.

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Eleven employees located in Delton, Michigan and employed by the Barry County Telephone Company were represented by the International Brotherhood of Electrical Workers of America, AFL-CIO Local 1106 under a three-year collective bargaining agreement expiring in 2020. The agreement will remain in effect after the above mentioned date unless terminated by either party.



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Note 9: Disputed Access and Local Termination

The Company is billing access and local termination charges to Competitive Local Exchange Carriers (CLECs), wireless carriers and other telecommunications carriers who provide service using unbundled network elements (UNE). However, some of those carriers are not paying their billed amounts. Some carriers are disputing the Company’s bills and other carriers are simply refusing to pay the billed amounts. This is a problem that is present throughout the telecommunications industry. The Company is working with its legal counsel to try to resolve any issues relating to disputed charges. It is also trying to work to get carriers that are refusing to pay to make their accounts with the Company current.

Note 10: Regulatory Matters

The Company received 30% and 28% of its 2018 and 2017 revenues, respectively, from access revenues and assistance provided by the Federal Universal Service Fund. The manner in which access revenues and Universal Service funds are determined has been modified in several recent Federal Communications Commission proceedings. Changes include modifications to rate-of-return support including caps on the recovery of certain expenditures, and reductions in terminating access charges billed with eventual transition to a bill-and-keep framework for the exchange of traffic between carriers.

On March 23, 2018, the FCC released a Report and Order, Third Order on Reconsideration, and Further Notice of Proposed Rulemaking to further reform Universal Service Fund (USF). The order in this proceeding (1) clarifies which expenses are eligible for legacy USF recovery, (2) mitigates the effects of the budget control mechanism on rate-of-return carriers for fiscal year 2018 and (3) provides additional Alternative Connect America Model (A-CAM) support funding of $365 million for model eligible carriers to elect to receive in exchange for revised broadband deployment obligations. The additional support payments are retroactive to January 2017.

On December 13, 2018, the FCC released a Report and Order, Further Notice of Proposed Rulemaking and Order on Reconsideration, to further reform USF. The order in this proceeding (1) provides additional support for standalone broadband, (2) mitigates the effects of the budget control mechanism on rate-of-return carriers for fiscal year 2019 (July 2018 – June 2019) and (3) provides additional A-CAM support funding for eligible carriers to elect to receive in exchange for new deployment obligations. The Order allows eligible rate-of-return carriers to elect the new A-CAM option, continue with their existing A-CAM election or remain a legacy rate-of-return carrier.

As of the date of this report, the A-CAM II offers have not yet been made available. As a result, the Company is unable to determine what elections they will make.

The Company was eligible to elect A-CAM support but determined to remain a legacy rate-of-return carrier. The amount of support that will be received is not certain due to constraints on the FCC’s budget.



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Whether a rate-of-return carrier chooses model-based support or remains on legacy mechanisms, it will be required to meet service obligations, adhere to reporting obligations, and retain records.

Note 11: Disclosures About Fair Value of Assets and Liabilities

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

Recurring Measurements

Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended December 31, 2018.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The available-for-sale securities are measured at Level 1 in the fair value hierarchy.



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Future Changes in Accounting Principles

Revenue Recognition

The Financial Accounting Standards Board amended its standards related to revenue recognition. This amendment replaces all existing revenue recognition guidance and provides a single, comprehensive revenue recognition model for all contracts with customers. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of the time value of money in the transaction price and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments and assets recognized from costs incurred to fulfill a contract. The standard allows either full or modified retrospective adoption effective for nonpublic entities for annual periods beginning after December 15, 2018, and any interim periods within annual reporting periods that begin after December 15, 2019. The Company is in the process of evaluating the impact the amendment will have on the consolidated financial statements.

Accounting for Financial Instruments – Recognition and Measurement of Financial Assets and Liabilities

The Financial Accounting Standards Board amended its standard related to the recognition and measurement of financial assets and liabilities. The amendments in the update make targeted improvements to current guidance on financial instruments, including:

Most equity investments, not accounted for by the equity or consolidation methods, will be measured at fair value with increases or decreases in value recorded through net income. Notably, this includes equity investments previously accounted for under the cost method. For equity investments without a readily determinable fair value, a practical expedient may be elected to measure equity investments at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer.

Impairment testing for equity investments without readily determinable fair value will be simplified by requiring a qualitative assessment to identify impairment.

Eliminates the requirement to disclose fair value of financial instruments measured at amortized cost for nonpublic entities.

Separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, i.e., securities or loans and receivables, on the balance sheet or in financial statement notes will be required.



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The standard is effective for nonpublic entities for annual periods beginning after December 15, 2018, and any interim periods within annual reporting periods that begin after December 15, 2019. The Company is in the process of evaluating the impact the amendment will have on the consolidated financial statements.

Accounting for Leases

The Financial Accounting Standards Board amended its standard related to the accounting for leases. Under the new standard, lessees will now be required to recognize substantially all leases on the balance sheet as both a right-of-use asset and a liability. The standard has two types of leases for income statement recognition purposes: operating leases and finance leases. Operating leases will result in the recognition of a single lease expense on a straight-line basis over the lease term similar to the treatment for operating leases under existing standards. Finance leases will result in an accelerated expense similar to the accounting for capital leases under existing standards. The determination of lease classification as operating or finance will be done in a manner similar to existing standards. The new standard also contains amended guidance regarding the identification of embedded leases in service contracts and the identification of lease and nonlease components in an arrangement. The new standard is effective for annual periods beginning after December 15, 2019, and any interim periods within annual reporting periods that begin after December 15, 2020. The Company is in the process of evaluating the impact the amendment will have on the consolidated financial statements.

Note 12: Subsequent Events

Subsequent events have been evaluated through April 22, 2019, which is the date the financial statements were available to be issued.

Barry County Services Companybarrycountyservicescompany.com/BCSC_Annual_Report_2018.pdf · 2019. 4. 26. · first-out (FIFO) method. Securities Certain debt securities that management

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