Earthlink 2014 Annual Report Download - page 53

Table of Contents
Recently Issued Accounting Pronouncements
For information about recently issued accounting pronouncements, refer to Note 2 to our Consolidated Financial Statements.
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. GAAP 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 our Consolidated Financial Statements.
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Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions
Revenue Recognition
We offer certain services that are provided by third-party
vendors. When we are the primary obligor in a transaction,
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 and cost of
revenue on a gross basis. If we are not the primary obligor
and/or a third-party vendor 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 for gross and net revenue recognition is
judgmental in nature and is based on an evaluation of the
terms of each arrangement.
We have not made any material changes in the accounting
methodology we use to recognize revenue during the past
three years.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions used to recognize revenue.
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 Credit Reserves
We make estimates for potential future sales credits to be
issued related to billing errors, service interruptions and
customer disputes, which are recorded as a reduction in
revenue. We analyze historical credit activity and changes in
customer demands related to current billing and service
interruptions when evaluating our credit reserve
requirements. Invoices provided to other
telecommunications providers are often subject to
significant billing disputes, and these disputes may require a
significant amount of time to resolve given the complexities
and regulatory issues surrounding the customer
relationships.
The determination of our general sales credit and customer
dispute credit reserves contain uncertainties because they
require management to make assumptions and apply
judgment about the amount and timing of unknown billing
errors and disputes.
We have not made any material changes in the accounting
methodology we use to record sales credit reserves during
the past three years.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions used to record sales credit reserves.
A 10% difference in our sales credit reserves as of
December 31, 2014 would have affected net loss by
approximately $4.7 million during the year ended
December 31, 2014.
Allowance for Doubtful Accounts
We maintain an allowance for accounts receivable that may
not be collectible. In assessing the adequacy of the
allowance for doubtful accounts, management considers a
number of factors, including the aging of the accounts
receivable balances, historical collection experience and a
specific customer's ability to meet its financial obligations to
us.
The determination of our allowance for doubtful accounts
contains uncertainties because it requires management to
make assumptions and apply judgment about future
uncollectible accounts.
We have not made any material changes in the accounting
methodology we use to record our allowance for doubtful
accounts during the past three years.
We do not believe there is a reasonable likelihood that
there will be a material change in the future estimates or
assumptions used to record our allowance for doubtful
accounts.
A 10% difference in our allowance for doubtful accounts
as of December 31, 2014 would have affected net loss by
approximately $0.6 million as of December 31, 2014.