Earthlink 2005 Annual Report Download - page 58

under the lease, including estimated operating expenses, estimated tenant improvement costs and brokerage and other related costs net of
expected sublease recovery, is recognized as a liability at the date of acquisition, and the liability is included in the fair values of identifiable
assets acquired and liabilities assumed. If the facility to be closed is not associated with an acquisition, we accrue the estimated future costs of
the lease obligation, net of estimated sublease income, and record facility exit costs in the statements of operations. Our current facility exit
cost liabilities include $15.3 million of lease commitments and $9.7 million of sublease income.
If the real estate and leasing markets change or if existing subtenants experience financial difficulty, sublease amounts could vary
significantly from the amounts estimated, resulting in a material change to our recorded liability. We record any changes to the liability for
facilities associated with an acquisition in the statements of operations if such change is more than one year from the date of acquisition, and
we record any adjustments to liabilities associated with facility exit costs as facility exit costs. We periodically evaluate and, if necessary,
adjust our estimates based on currently-available information and such adjustments have periodically resulted in additional expense.
Adjustments to our recorded liabilities for future lease obligations associated with vacated facilities could adversely or favorably affect future
operating results.
Recoverability of noncurrent assets
Our indefinite life intangible assets consist primarily of goodwill. As of December 31, 2005, the carrying value of goodwill and other
indefinite life intangible assets was $104.1 million. We account for intangible assets in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and certain intangible assets deemed to
have indefinite lives be tested for impairment at least annually. We perform an impairment test of our goodwill and other indefinite life
intangible assets annually during the fourth quarter of our fiscal year or when events and circumstances indicate the indefinite life intangible
assets might be permanently impaired. We are one reporting unit and, consequently, we test our indefinite life intangible assets in the
aggregate. Our impairment test entails comparing the aggregate market value of our outstanding securities plus our liabilities to the aggregate
carrying value of our assets, including goodwill and other indefinite life intangible assets. Based on our test during the fourth quarter of 2005,
we concluded that there was no impairment of our goodwill and other indefinite life intangible assets. Our business is subject to competitive
pressures and our stock price is volatile. Therefore, it is possible that the values assigned to goodwill and other indefinite life intangible assets
could be adversely impacted in the future by competition, changes in our stock price or other factors outside of our control. If management
determines that events or circumstances have occurred which could result in an other than temporary impairment of indefinite life intangible
assets, we may be required to record a significant impairment adjustment, which would reduce earnings.
For noncurrent assets such as property and equipment, subscriber bases and investments in other companies, we perform tests of
impairment when certain events or changes in circumstances indicate that the carrying amount may not be recoverable. Our tests involve
critical estimates reflecting management’s best assumptions and estimates related to, among other factors, subscriber additions, churn, prices,
marketing spending, operating costs and capital spending. Significant judgment is involved in estimating these factors, and they include
inherent uncertainties. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The
variability of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates
may change from period to period. If other assumptions and estimates had been used in the current period, the balances for noncurrent assets of
$91.9 million could have been materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in
future periods, future operating results could be materially impacted.
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