Update. January 13, AT&T Intellectual Property. All rights reserved. AT&T and the AT&T logo are trademarks of AT&T Intellectual Property.

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1 AT&T Accounting Update January 13, 2011

2 Agenda Introduction Brooks McCorcle Senior Vice President-Investor Relations Opening Comments Rick Lindner Senior Executive Vice President and Chief Financial Officer Accounting Update John Stephens Senior Vice President and Controller Q and A

3 Cautionary Language Concerning Forward-Looking Statements Information set forth in this presentation contains financial estimates t and other forward-looking statements t t that t are subject to risks and uncertainties, and actual results might differ materially. A discussion of factors that may affect future results is contained in AT&T s filings with the Securities and Exchange Commission. AT&T disclaims any obligation to update and revise statements contained in this presentation based on new information or otherwise. This presentation may contain certain non-gaap financial measures. Reconciliations between the non-gaap financial measures and the GAAP financial measures are available on the company s Web site at

4 Benefit Plan Accounting Changes Implementing new benefit accounting policy that recognizes market-based gains and losses in the year incurred, instead of amortizing them over time Service costs, interest costs and expected return on assets to be booked quarterly Annual adjustment booked to reflect actual return on assets, changes in discount rates and other actuarial assumptions Discontinuing i use of a smoothing corridor Adjusting prior years financials to be consistent with new policy Changing where some benefit costs book (operating segments vs. other segment/consolidation) Updating benefit accounting assumptions 4

5 Advantages Aligns with fair value accounting concepts Reflects a preferable accounting method Gains and losses recognized in the year they are incurred Market based: tied to current market returns, interest rates and health care cost experience Simpler, more transparent Aligns cost and accountability Does not impact cash flow or funding requirements 5

6 4Q10 Annual Adjustment to Benefit Costs Estimated Q Impacts Lower discount rate ($6.8B) Higher return on assets $2.9B Lower health care cost $1.2B Recognized Actuarial Gain/(Loss) ($2.7B) EPS Impact (at 38% tax rate) ($0.28) Previous accounting method would have amortized over future years Policy change does not impact benefit plan funding status or cash flow Discount Rate 6.5% 5.8% 2010 Return on Assets 8.5% ~13.0% 2010 Health Care Cost Growth 5.0% 1.7% Assumed Actual Assumed Actual 6

7 Impact to Detailed Benefit Costs 2010 Annual Benefit Costs Methods: (Expense)/Benefit ($B) Previous New Change Service Costs ($0.8) ($0.8) $0.0 0 Interest Costs ($5.6) ($5.6) $0.0 Expected return on assets (Fair Value) $5.8 $4.8 ($1.0) Recognized actuarial Gain/(Loss) ($0.7) ($2.7) ($2.0) TOTAL with adjustments ($1.3) ($4.3) ($3.0) Total ongoing costs ($1.3) ($1.6) ($0.3) * 2010 impacts are estimated. Booked quarterly to operating segment Booked quarterly to other segment Booked annually at consolidated level Only Expected return on assets and Recognized actuarial gain/loss change Expected return on assets will be based on actual fair market value rather than a smoothed value methodology Recognized actuarial gain/(loss) now only includes end-of-year adjustment with no amortization of prior gains and losses The components of benefit costs will be booked to better align with business unit accountability; margins change slightly 7

8 Benefit Cost Impact Impacts of new methodology ($B) * Benefit costs as reported (previous methodology) ($0.5) ($2.0) ($1.3) Change in service costs $0 $0 $0 Change in interest costs $0 $0 $0 Change in assets due to fair value accounting $0.2 ($1.0) ($1.0) Removal of amortization $0 $0.6 $0.7 Change in discount rate $4.0 ($4.0) ($6.8) Change in actual return on assets ($30.0) $3.8 $2.9 Health care costs experience/other $0.9 $0.0 $1.2 Included in end-of-year adjustments Benefit costs (new methodology) ($25.4) ($2.6) ($4.3) Difference ($24.9) ($0.6) ($3.0) EPS impact Gain/(Loss) ($2.60) ($0.07) ($0.29) * 2010 impacts are estimates at this time. Reported EPS will change Adjustment will be primarily reflected in Consolidation and Other Segment 2008 impact caused by large loss in asset value 8

9 2011 Guidance for Ongoing Benefit Costs Benefit Costs excluding EOY Adjustments ($B) 2010* 2011 Expectations Service costs ($0.8) Stable service costs (booked at segment level) Interest costs ($5.6) Lower discount rate (booked in Other segment) Expected return on assets $4.8 Stable expected return (booked in Other segment) TOTAL ($1.6) In-line with benefit plan costs expected to be in line with 2010 costs (excluding market year-end adjustment) 2011 assumptions: Discount rate 5.8% (from 6.5%) Expected ROA 8.25% (from 8.5%) Medical trends 5.0% (no change) * 2010 impacts are estimates at this time and are before capitalization of expense. 9

10 Summary Simplifies benefit plan accounting and adds transparency Aligns with fair value accounting concepts Recognizes plan gains or losses in year they occur; eliminates amortization of gains/losses Non-cash event. No changes in: Funding status of benefit plans Cash flow Dividend policy Guidance excludes annual gain or loss adjustment 2011 benefit plan costs expected to be in line with