Earthlink 2005 Annual Report Download - page 57

consideration is presumed to be a reduction of the selling price of our products or services; however, if we receive an identifiable benefit whose
fair value can be reasonably estimated in exchange for the fees, we classify the fees as operating expenses. Management applies judgment in
determining whether a retailer or manufacturer is reselling our products and services or solely providing marketing services. Any change in this
determination 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 generally affect net income (loss).
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. With
respect to receivables due from consumers, our policy is to specifically reserve for all consumer receivables 60 days or more past due and
provide additional reserves for receivables less than 60 days past due based on expected write-offs. We provide reserves for commercial
accounts receivable and periodically evaluate commercial accounts receivable and provide specific reserves when accounts are deemed
uncollectible. Commercial accounts receivable are written off when management determines there is no possibility of collection.
In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables,
historical write-off experience and the general economic environment. Management applies considerable judgment in assessing the realization
of receivables, including assessing the probability of collection and the current creditworthiness of classes of customers. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be
required.
Deferred tax asset valuation allowance
We recognize deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities, including net operating loss carryforwards. Management assesses the realizability of deferred
tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. Based
on management’s assessment, a valuation allowance has been established for all of our deferred tax assets as of December 31, 2005, primarily
net operating loss carryforwards, due to uncertainty regarding their realization. We consider the probability of future taxable income and our
historical profitability, among other factors, in assessing the amount of the valuation allowance. However, adjustments could be required in the
future if we estimate that the amount of deferred tax assets to be realized is more than the net amount we have recorded. Any decrease in the
valuation allowance could have the effect of increasing stockholders’ equity, reducing goodwill and/or increasing or decreasing the income tax
provision in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such
determination is made.
Restructuring and facility exit costs
From time to time, we acquire businesses and identify personnel of the acquired business that will be terminated and facilities used by the
acquired business that we will close and exit. We have also closed facilities to streamline our business. Restructuring-related liabilities,
including reserves for facility exit costs, include estimates for, among other things, severance payments and amounts due under lease
obligations, net of estimated sublease income, if any. Key variables in determining such estimates include estimating the future operating
expenses to be incurred for the facilities, anticipating the timing and amounts of sublease rental payments, tenant improvement costs and
brokerage and other related costs. For acquired facilities to be closed that are subject to long-term lease agreements, the remaining liability
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