Earthlink 2014 Annual Report Download - page 54

Table of Contents
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Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions
Cost of Revenues
We rely on other carriers to provide services where we do
not have facilities, and we use a number of different carriers
to terminate our long distance calls. These costs are
expensed as incurred. The invoices received from other
telecommunications providers are often subject to
significant billing disputes. These disputes may require a
significant amount of time to resolve given the complexities
and regulatory issues surrounding the vendor relationships.
We maintain reserves for any anticipated exposure
associated with these billing disputes. The reserves are
reviewed on a monthly basis, but are subject to changes in
estimates and management judgment as new information
becomes available.
Our cost of revenues methodology contains uncertainties
because it requires management to make assumptions and
apply judgment regarding the amount of future billing
dispute resolutions.
We have not made any material changes in the accounting
methodology we use to estimate reserves for billing
disputes 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 we use for these reserves.
Income Taxes
We recognize deferred tax assets and liabilities using tax
rates in effect for the years in which temporary differences
are expected to reverse, 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.
We establish reserves for tax-related uncertainties if it is
more-likely-than-not that additional taxes will be due. We
adjust these reserves in light of changing facts and
circumstances, such as the closing of a tax audit, new tax
legislation or the change of an estimate. To the extent that
the final tax outcome of these matters is different than the
amounts recorded, such differences will affect the provision
for income taxes in the period in which such determination
is made. The provision for income taxes includes the effect
of reserve provisions and changes to reserves that are
considered appropriate, as well as the related net interest and
penalties.
We consider the probability of future taxable income and
our historical profitability, among other factors, in
assessing the amount of the valuation allowance.
Significant judgment is involved in this determination,
including projections of future taxable income.
Our liability for unrecognized tax benefits contains
uncertainties because management is required to make
assumptions and to apply judgment to estimate the
exposures associated with our various filing positions.
Our effective income tax rate is also affected by changes
in tax law, our level of earnings and the results of tax
audits.
During the year ended December 31, 2013, we recorded
income tax expense of $266.3 million to record a valuation
allowance for deferred tax assets that we determined are
not "more-likely-than-not" able to be realized. Any future
change in the valuation allowance could have an effect on
stockholders' equity and the income tax provision in the
statement of comprehensive income.
As of December 31, 2014, we had unrecognized tax
positions of $17.2 million. Within the next twelve months,
it is reasonably possible that approximately $0.2 million of
the total uncertain tax positions recorded will reverse,
primarily due to the expiration of statutes of limitation in
various jurisdictions. Approximately $0.4 million would
impact the effective rate once settled.
Changes in these estimates and assumptions could
materially affect the amount or timing of valuation
allowance releases.