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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.
Leases
The Company accounts for lease agreements in accordance with SFAS No. 13, “Accounting for Leases,” which requires categorization of
leases at their inception as either operating or capital leases depending on certain criteria. The Company recognizes rent expense for operating
leases on a straight-line basis without regard to deferred payment terms, such as rent holidays or fixed escalations. Incentives are treated as a
reduction of the Company’s rent costs over the term of the lease agreement. The Company records leasehold improvements funded by
landlords under operating leases as leasehold improvements and deferred rent.
Facility Exit and Restructuring Costs
The Company accounts for facility exit and restructuring costs in accordance with SFAS No. 144 and SFAS No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities,” which requires that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Facility exit and restructuring liabilities 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 operating expenses due under lease arrangements, the timing and amounts of sublease rental payments, tenant improvement costs and
brokerage and other related costs. The Company periodically evaluates and, if necessary, adjusts its estimates based on currently-available
information. Such adjustments are classified as facility exit and restructuring costs in the Consolidated Statements of Operations.
Segments
The Company operates in one principal business segment, Internet access. Substantially all of the Company’s operating results and
identifiable assets are in the U.S.
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. 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. EarthLink adopted SFAS No. 123 (R) on January 1, 2006 based on the new effective
date announced by the SEC and applied the modified prospective method upon adoption. The modified prospective method requires companies
to record compensation cost beginning with the effective date (a) based on the requirements of SFAS No. 123 (R) for all share-based payments
granted after the effective date and (b) based on the
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