Earthlink 2005 Annual Report Download - page 59

Investments
From time to time, we make investments in other companies. At the date we become involved with an entity and upon changes in the
capital structure and corporate governance provisions of the entity, management evaluates investments in other companies to determine if we
must consolidate the results of the investee pursuant to Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation
of Variable Interest Entities”. Variable interest entities (“VIEs”) are entities that either do not have equity investors with proportionate
economic and voting rights or have equity investors that do not provide sufficient financial resources for the entity to support its activities.
Consolidation is required if we are the primary beneficiary of the VIE, meaning we absorb a majority of the expected losses and/or receive a
majority of the expected returns. In determining if an equity investee is a VIE and whether we must consolidate its results, management
evaluates whether the equity of the entity is sufficient to absorb its expected losses and whether we are the primary beneficiary. If management
determines the investee is not a VIE or if it is a VIE and we are not the primary beneficiary, management evaluates whether we should include
our proportionate share of the investee’s operating results in our results pursuant to Accounting Principles Board (“APB”) Opinion No. 18,
“The Equity Method of Accounting for Investments In Common Stock,” and related interpretations because we may be able to significantly
influence financial and operating policies of the investee or whether we should consolidate the results based on our ability to control the
operating and financial policies of the investee.
The assessment as to whether the investee is a VIE, whether we are the primary beneficiary, and whether we can exert significant
influence over or control the operating and financial policies of the investee requires estimates and judgments. We have an investment in one
VIE, EVG, but management has determined that we are not the primary beneficiary. Management determined that the other investees are not
VIEs and that we cannot significantly influence the operating and financial policies of any of the investees other than HELIO. Consequently,
investments in other companies, other than our investment in HELIO, are included in other long-term assets and are accounted for under the
cost method. Under the cost method of accounting, investments in private companies are carried at cost and are only adjusted for other-than-
temporary declines in fair value and distributions of earnings. We have one investment in a company accounted for under the cost method
whose stock has a readily determinable market value. When our investment has a readily determinable market value based on quoted prices on
a national exchange, we adjust the carrying value of the investment to market value through “unrealized gains (losses) on investments”
which is
included as a component of stockholders’ equity.
With respect to our investment in the HELIO joint venture, management determined HELIO did not qualify as a VIE, but we are able to
exert significant influence over HELIO’s operating and financial policies. As a result, we apply the equity method to our investment in HELIO
and record our proportionate share of HELIO’s net income (loss) in our statement of operations as “net earnings (losses) of equity affiliates,”
which is expected to adversely affect our net results in the near term. However, this accounting treatment is subject to change as HELIO enters
into financial and operating arrangements that impact the joint venture partners’ economic and voting interests.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-
Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123 (R) requires that
compensation cost relating to all share-based payment transactions, including grants of employee stock options, be recognized in the statement
of operations based on their fair values. Pro forma disclosure is no longer an alternative. In April 2005, the Securities and Exchange
Commission (“SEC”) amended the effective date of SFAS No. 123 (R) to be the first annual reporting period that begins after June 15, 2005.
We adopted SFAS No. 123 (R) on January 1, 2006 based on the new effective date announced by the SEC and applied the
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