Cincinnati Bell 2008 Annual Report Download - page 165

Stock-Based Compensation — In accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123(R), “Share-Based Payment,” the Company values all share-based payments to employees, including
grants of employee stock options, at fair value on the date of grant and expenses this amount over the applicable
vesting period. The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified prospective
application method.
The fair value of stock options is determined using the Black-Scholes option-pricing model using
assumptions such as volatility, risk-free interest rate, holding period and dividends. The fair value of stock
awards is based on the Company’s share price on the date of grant. For all share-based payments, an assumption
is also made for the estimated forfeiture rate based on the historical behavior of employees. The forfeiture rate
reduces the total fair value of the awards to be recognized as compensation expense. The Company’s policy for
graded vesting awards is to recognize compensation expense on a straight-line basis over the vesting period.
Refer to Note 13 of the Consolidated Financial Statements for further discussion related to stock-based
compensation.
Employee Benefit Plans — As more fully described in Note 9, the Company maintains qualified and
unqualified defined benefit pension plans, and also provides postretirement healthcare and life insurance benefits
for eligible employees. Effective December 31, 2006, the Company adopted SFAS No. 158 and recognizes the
overfunded or underfunded status of its defined benefit pension and other postretirement benefit plans as either
an asset or liability in its Consolidated Balance Sheets and recognizes changes in the funded status in the year in
which the changes occur as a component of comprehensive income. Pension and postretirement healthcare and
life insurance benefits earned during the year and interest on the projected benefit obligations are accrued and
recognized currently in net periodic benefit cost. Prior service costs and credits resulting from changes in plan
benefits are amortized over the average remaining service period of the employees expected to receive the
benefits. Net gains or losses resulting from differences between actuarial experience and assumptions or from
changes in actuarial assumptions are recognized as a component of annual net periodic benefit cost.
Unrecognized actuarial gains or losses that exceed 10% of the projected benefit obligation are amortized on a
straight-line basis over the average remaining service life of active employees (approximately 15 years on
average).
Termination Benefits — The Company has written severance plans covering both its management and
union employees and, as such, accrues probable and estimable employee separation liabilities in accordance with
SFAS No. 112, “Employers’ Accounting for Postemployment Benefits, an Amendment of FASB Statements
No. 5 and 43.” These liabilities are based on the Company’s historical experience of severance, historical costs
associated with severance, and management’s expectation of future severance.
The Company accrues for special termination benefits upon acceptance by an employee of any voluntary
termination offer in accordance with SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits.” Also, the Company considers whether employee
terminations give rise to a pension and postretirement curtailment charge under SFAS No. 88 and SFAS No. 106.
The Company’s policy is that terminations in a calendar year involving 10% or more of the plan’s expected
future service years will result in a curtailment of the pension or postretirement plan.
See Note 3 of the Consolidated Financial Statements for further discussion of the Company’s restructuring
plans.
Derivative Financial Instruments — The Company is exposed to the impact of interest rate fluctuations on
its indebtedness. The Company employs derivative financial instruments to manage its balance of fixed rate and
variable rate indebtedness. The Company does not hold or issue derivative financial instruments for trading or
speculative purposes. Interest rate swap agreements, a particular type of derivative financial instrument, involve
the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the notional
amounts between the parties. The Company has long-term interest rate swaps that qualify as fair value hedges
and are accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging
Activities.” Fair value hedges offset changes in the fair value of underlying assets and liabilities.
The Company also has short term interest rate swap contracts which are not designated as hedging
instruments under SFAS No. 133. As a result, the change in the fair value of these instruments is recognized in
earnings during each period in “Other expense (income), net” on the Consolidated Statement of Operations.
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Form 10-K