Earthlink 2015 Annual Report Download - page 55

Table of Contents
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.
While we believe our reserves for billing disputes are
adequate, it is reasonably possible that we could record
additional expense of up to $14.7 million for unrecorded
disputed amounts.
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 loss.
As of December 31, 2015, we had unrecognized tax positions
of $18.4 million. Within the next twelve months, it is
reasonably possible that approximately $2.2 million of the
total uncertain tax positions recorded will reverse, primarily
due to the expiration of statutes of limitation in various
jurisdictions. Approximately $1.6 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.
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