financials > notes to consolidated financial statements > note 2
note 2
ACCOUNTING CHANGE

Directory Accounting
As discussed in Note 1, effective January 1, 2003, we changed our method for recognizing revenues and expenses in our directory business from the publication-date method to the amortization method. The cumulative effect of this accounting change resulted in a charge of $2,697 million ($1,647 million after-tax), recorded as of January 1, 2003.

The following table presents our 2002 results of operations for comparison, assuming we had applied the amortization method in 2002:
(dollars in millions, except per share amounts )
Year Ended December 31, 2002  
  Before Directory   After Directory  
  Accounting Change   Accounting Change  
Operating revenues $ 67,056   $ 66,978  
Operating expenses   52,179     52,156  
Income before discontinued operations and cumulative effect of accounting change   4,591     4,554  
   Per common share – diluted   1.67     1.66  
Income before cumulative effect of accounting change   4,575     4,538  
   Per common share – diluted   1.66     1.65  
Net income   4,079     4,042  
   Per common share – diluted   1.49     1.47  
Stock – Based Compensation
As discussed in Note 1, we adopted the fair value recognition provisions of SFAS No. 123 using the prospective method as permitted under SFAS No. 148. The following table illustrates the effect on reported net income and earnings per share if the fair value method had been applied to all outstanding and unvested options in each period.
(dollars in millions, except per share amounts )
Years Ended December 31,   2004     2003     2002  
Net Income, As Reported $ 7,831   $ 3,077   $ 4,079  
Add: Stock option-related employee compensation expense
   included in reported net income, net of related tax effects		   53     44     –  
Deduct: Total stock option-related employee compensation
   expense determined under fair value based method for all
   awards, net of related tax effects		   (124 )   (215 )   (467 )
Pro Forma Net Income $ 7,760   $ 2,906   $ 3,612  
Earnings Per Share                  
Basic – as reported $ 2.83   $ 1.12   $ 1.49  
Basic – pro forma   2.80     1.05     1.32  
Diluted – as reported   2.79     1.12     1.49  
Diluted – pro forma   2.77     1.06     1.32  

After-tax compensation expense for other stock-based compensation included in net income as reported for the years ended December 31, 2004, 2003 and 2002 was $254 million, $80 million and $15 million, respectively.

For additional information on assumptions used to determine the pro forma amounts as well as other information related to our stock-based compensation plans, see Note 15.

Asset Retirement Obligations
We adopted the provisions of SFAS No. 143 on January 1, 2003. SFAS No. 143 requires that companies recognize the fair value of a liability for asset retirement obligations in the period in which the obligations are incurred and capitalize that amount as part of the book value of the long-lived asset. We determined that Verizon does not have a material legal obligation to remove long-lived assets as described by this statement. However, prior to the adoption of SFAS No. 143, we included estimated removal costs in our group depreciation models. Consequently, in connection with the initial adoption of SFAS No. 143 we reversed accrued costs of removal in excess of salvage from our accumulated depreciation accounts for these assets. The adjustment was recorded as a cumulative effect of an accounting change, resulting in the recognition of a gain of $3,499 million ($2,150 million after-tax).

Goodwill and Other Intangible Assets
The initial impact of adopting SFAS No. 142 on our consolidated financial statements was recorded as a cumulative effect of an accounting change as of January 1, 2002, resulting in a charge of $496 million, net of tax. This charge was comprised of $204 million ($203 million after-tax) for goodwill and $294 million ($293 million after-tax) for wireless licenses and goodwill of equity method investments and for other intangible assets.
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