Earthlink 2015 Annual Report Download - page 71

Table of Contents
EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 Loss.
Cost of Revenues
Cost of revenues includes costs directly associated with providing products and services to the Company's customers. Cost of revenues does not include
depreciation and amortization expense. Cost of revenues includes the cost of connecting customers to the Company's networks via leased facilities; the costs of
leasing components of its network facilities; costs paid to third-party providers for interconnect access and transport services; and other costs directly related to the
Company's network and services. The Company utilizes other carriers to provide services where the Company does not have facilities. The Company utilizes a
number of different carriers to terminate its long distance calls outside of its network.
These costs include an estimate of charges for which invoices have not yet been received, and are based upon the estimated number of transmission lines and
facilities in service, estimated minutes of use and estimated amounts accrued for pending disputes with other carriers, as well as upon the contractual rates charged
by the Company's service providers. Subsequent adjustments to these estimates may occur after the bills are received for the actual costs incurred, but these
adjustments generally are not expected to be material to operating results. Experience indicates that the invoices that are received from 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 affecting the vendor relationships. The Company maintains 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. Given the length of time the Company has historically required to resolve these disputes, disputes may be resolved or require adjustment in future
periods and relate to costs invoiced, accrued or paid in prior periods. The Company believes its reserves for billing disputes are adequate.
Selling, General and Administrative Expense
The Company's selling, general and administrative expenses consist of expenses related to sales and marketing, customer service, network operations, information
technology, regulatory, billing and collections, corporate administration, and legal and accounting. Such costs include salaries and related employee costs
(including stock-based compensation), outsourced labor, professional fees, property taxes, travel, insurance, rent, advertising and other administrative expenses.
Advertising Costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the Consolidated Statements of Comprehensive Loss.
Advertising expenses were $9.1 million , $7.8 million and $5.6 million during the years ended December 31, 2013, 2014 and 2015 , respectively.
Stock-Based Compensation
As of December 31, 2015 , the Company had various stock-based compensation plans, which are more fully described in Note 9, "Stock-Based Compensation."
The Company measures compensation cost for all stock awards at fair value on the date of grant and recognizes compensation expense over the requisite service
period for awards expected to vest. The Company estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value
of restricted stock units based on the quoted price of EarthLink’s common stock on the date of grant . Such value is recognized as expense over the requisite service
period, net of estimated forfeitures, using the straight-line attribution method. For performance-based awards, the Company recognizes expense over the requisite
service period, net of estimated forfeitures, using the accelerated attribution method when it is probable that the performance measure will be achieved. The
estimate of awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current
estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when estimating
expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future changes in estimates, may differ
substantially from the Company’s current estimates.
Contingencies
The Company is party to various legal proceedings and other disputes arising in the normal course of business, including, but not limited to, regulatory audits, E911
payments, trademark and patent infringement, billing disputes, rights of access, tax, consumer protection, employment and tort. The Company accrues for such
matters when it is both probable that a liability has been incurred
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