Earthlink 2014 Annual Report Download - page 70

Table of Contents EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Recognition
General.
The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been provided or products have
been delivered, the sales price is fixed or determinable and collectibility is reasonably assured. The Company's customers generally pay in
advance for their services, and revenue is recognized ratably over the service period. Advance payments from customers for invoiced services
that have not yet been performed are recorded as deferred revenue in the Consolidated Balance Sheets.
The Company's Business Services segment earns revenue by providing a broad range of data, voice and managed services to retail and wholesale
business customers. The Company's Business Services revenue includes the following categories: (1) retail services, which includes data, voice
and managed services provided to businesses and enterprise organizations; (2) wholesale services, which includes the sale of transmission
capacity and other services to other telecommunications carriers; and (3) other services, which includes web hosting. Revenues generally consist
of recurring monthly charges for such services; usage fees; installation fees; equipment fees; termination fees; and administrative fees.
The Company's Consumer Services segment earns revenue by providing nationwide Internet access and related value-
added services. The
Company's Consumer Services revenue includes the following categories: (1) access services, which includes dial-up and high-
speed Internet
access services and (2) value-added services, which includes revenues from ancillary services sold as add-
on features to the Company's Internet
access services, such as security products, premium email only, home networking and email storage; search revenues; and advertising revenues.
Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees; and fees for
equipment.
Multiple element arrangements.
Revenues may be part of multiple element arrangements, such as equipment sold with data and voices services.
For multiple element arrangements, the Company separates deliverables into units of accounting and recognizes revenue for each unit of
accounting based on evidence of each unit's relative selling price to the total arrangement consideration, assuming all other revenue recognition
criteria have been met, limited to amounts currently billable under the terms of the Company's contracts. Each deliverable is considered a
separate unit of accounting if the delivered item has stand-
alone value to the customer. The Company uses a hierarchy to determine the selling
price to be used for allocating revenue to deliverables: 1) the price the Company sells the same unit for when the Company sells it separately;
2) the price another vendor would sell a generally interchangeable item; or 3) the Company's best estimate of the stand-alone price.
Gross versus net revenue recognition. The Company offers certain services that are provided by third-
party vendors. When the Company is the
primary obligor in a transaction, has latitude in establishing prices, is the party determining the service specifications or has several but not all of
these indicators, the Company records the revenue on a gross basis. If the Company is not the primary obligor and/or a third-
party vendor has
latitude in establishing prices, the Company records 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.
Activation and installation.
When the Company receives service activation and installation fee revenues in advance of the provision of services,
the Company defers the service activation and installation fee revenues and amortizes them over the weighted average initial contract terms of
contracts initiated each month, assuming a customer churn factor. The costs associated with such activation and installation activities are
deferred and recognized as operating expense over the same period to the extent they are recoverable based on future revenues.
Sales credit reserves.
The Company makes estimates for potential future sales credits to be issued in respect of earned revenues, related to
billing errors, service interruptions and customer disputes which are recorded as a reduction in revenue. The Company analyzes historical credit
activity and changes in customer demands related to current billing and service interruptions when evaluating its credit reserve requirements.
The Company reserves known billing errors and service interruptions as incurred. The Company reviews customer disputes and reserves against
those the Company believes to be valid claims. The Company also estimates a sales credit reserve related to unknown billing errors and disputes
based on historical credit activity. Experience indicates that the invoices that are provided to other telecommunications providers are often
subject to significant billing disputes. Experience also has shown that these disputes can require a significant amount of time to resolve given the
complexities and regulatory issues surrounding the customer relationships.
Taxes Collected from Customers and Remitted to Governmental Authorities
The Company records all taxes billed to its customers and remitted to governmental authorities, including Universal Service Fund contributions
and sales, use and excise taxes, on a net basis in the Consolidated Statements of Comprehensive Income (Loss).
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