Earthlink 2005 Annual Report Download - page 56

sharing arrangement. The amounts paid to and received from Boingo during the years ended December 31, 2003 and 2005 were less than $0.1
million.
Critical Accounting Policies and Estimates
Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition, and results of operations and which require complex management judgments,
uncertainties and/or estimates. The preparation of financial statements in accordance with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported amounts of revenues and expenses during a reporting period; however, actual results could differ from
those estimates. Management has discussed the development, selection and disclosure of the critical accounting policies and estimates with the
Audit Committee of the Board of Directors. Information regarding our other accounting policies is included in the Notes to Consolidated
Financial Statements.
Revenue recognition
Gross versus net revenue recognition.
We maintain relationships with certain telecommunications partners in which we provide services
to customers using the “last mile” element of the telecommunications providers’ networks. The term “last mile” generally refers to the element
of telecommunications networks that is directly connected to homes and businesses. In these instances, management evaluates the criteria
outlined in Emerging Issues Task Force (“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” in
determining whether it is appropriate to record the gross amount of revenue and related costs or the net amount due from the
telecommunications partner as revenue. Generally, when we are the primary obligor in the transaction with the subscriber, have latitude in
establishing prices, are the party determining the service specifications or have several but not all of these indicators, we record the revenue at
the amount billed the subscriber. If we are not the primary obligor and/or the telecommunications partner has latitude in establishing prices, we
record revenue associated with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross
amount billed the customer and recording the net amount as revenue. The determination of whether we meet many of the attributes specified in
EITF Issue No. 99-19 for gross and net revenue recognition is judgmental in nature and is based on an evaluation of the terms of each
arrangement. A change in the determination of gross versus net revenue recognition would have an impact on the gross amounts of revenues
and cost of revenues we recognize and the gross profit margin percentages in the period in which such determination is made and in subsequent
periods; however, such a change in determination of revenue recognition would not affect net income (loss).
Sales incentives. We have marketing arrangements with a number of leading hardware and software manufacturers to include our
Internet access software pre-installed on or included with their products. We also market our products and services through retailers. We pay
fees to retailers, manufacturers or other marketing partners for marketing our products and services. Depending on the nature of the
arrangement, the marketing partners may purchase our products and services in addition to providing marketing services. For these types of
arrangements, management uses the guidance provided in EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products),”
which states that cash consideration given by a vendor to a customer is presumed to
be a reduction of the selling price of the vendor’s products or services and should be classified as a reduction of revenue. If the retailer or
manufacturer does not purchase our products or services, we classify the fees as a sales and marketing expense when incurred because the
retailer or manufacturer is not a reseller and the accounting in EITF Issue No. 01-
9 does not apply. If the retailer or manufacturer purchases and
then resells our products or services, we account for the fees as a reduction in revenue because the
55