FairPoint Communications 2004 Annual Report Download - page 88

FairPoint files a consolidated income tax return with its subsidiaries. FairPoint has a tax-sharing agreement in which all
subsidiaries are participants. All intercompany tax transactions and accounts have been eliminated in consolidation.
As part of the income tax provision process of preparing the Company's consolidated financial statements, the Company
is required to estimate its income taxes. This process involves estimating current tax expenses together with assessing
temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities. The Company then assesses the likelihood that deferred tax assets will be recovered from
future taxable income and to the extent management believes the recovery is not likely, management will establish a valuation
allowance. Management uses judgment to determine the provision or benefit for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against net deferred tax assets.
(m) Interest Rate Swap Agreements
The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company
maintains risk management control systems to monitor interest rate cash flow risk attributable to both the Company's
outstanding and forecasted debt obligations. The risk management control systems involve the use of analytical techniques,
including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company's future
cash flows.
The Company uses variable and fixed-rate debt to finance its operations, capital expenditures, and acquisitions. The
variable-rate debt obligations expose the Company to variability in interest payments due to changes in interest rates. The
Company believes it is prudent to limit the variability of a portion of its interest payments. To meet this objective, the Company
enters into interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps
change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate
swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the
equivalent of fixed-rate debt. As of December 31, 2003, the Company had two interest rate swap agreements with a combined
notional amount of $50.0 million that expired in May 2004. These interest rate swap agreements did not qualify as accounting
hedges under SFAS No. 133.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, 
. In June 2000, the FASB issued SFAS No. 138, 
 . SFAS No. 133 and SFAS
No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. The Company
adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. In accordance with the transition provisions of SFAS No. 133,
the Company recorded a cumulative-effect-type loss adjustment (the transition adjustment) of $(4.7) million in other
comprehensive income (loss) to recognize at fair value all interest rate swap agreements. As of December 31, 2004, the
Company has reclassified to nonoperating income (expense) the entire transition adjustment
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