Earthlink 2015 Annual Report Download - page 54

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.
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 to 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 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, 2015 would have affected net loss by approximately $1.4
million during the year ended December 31, 2015.
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, 2015 would have affected net loss by
approximately $0.4 million as of December 31, 2015.
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