Frontier Communications 2007 Annual Report Download - page 68

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SAB No. 108 allowed for a one-time transitional cumulative effect adjustment to retained earnings as of
January 1, 2006 for errors that were not previously deemed material as they were being evaluated under a single
method but were material when evaluated under the dual approach prescribed by SAB No. 108. The Company
adopted SAB No. 108 in connection with the preparation of its financial statements for the year ended
December 31, 2006. The adoption did not have any impact on the Company’s cash flow or prior year financial
statements. As a result of adopting SAB No. 108 in the fourth quarter of 2006 and electing to use the one-time
transitional cumulative effect adjustment, the Company made adjustments to the beginning balance of retained
earnings as of January 1, 2006 in the fourth quarter of 2006 for the following errors (all of which were
determined to be immaterial under the Company’s previous methodology):
Summary SAB No. 108 entry recorded January 1, 2006:
($ in thousands) Increase/(Decrease)
Property, Plant & Equipment ................................... $ 1,990
Goodwill ................................................... (3,716)
Other Assets ................................................ (20,081)
$(21,807)
Current Liabilities ............................................ $ (2,922)
Deferred Taxes .............................................. (17,339)
Other Long-Term Liabilities ................................... (13,037)
Long-Term Debt ............................................. (24,901)
Retained Earnings ............................................ 36,392
$(21,807)
Deferred Tax Accounting. As a result of adopting SAB No. 108 in the fourth quarter of 2006 we recorded
a decrease in deferred income tax liabilities in the amount of approximately $23.5 million and an increase in
retained earnings of approximately $23.5 million as of January 1, 2006. The change in deferred tax and retained
earnings is a result of excess deferred tax liabilities that built up in periods prior to 2004 (approximately $4
million in 2003, $5.4 million in 2002 and $14.1 million in 2001 and prior), resulting primarily from differences
between actual state income tax rates and the effective composite state rate utilized for estimating the Company’s
book state tax provisions.
Goodwill. During 2002, we estimated and booked impairment charges (pre-tax) of $1.07 billion. We
subsequently discovered that the impairment charge recorded was overstated as it exceeded the underlying book
value by approximately $8.1 million. The result was an understatement of goodwill. We corrected this error by
reversing the negative goodwill balance of $8.1 million with an offset to increase retained earnings.
Unrecorded Liabilities. The Company changed its accounting policies associated with the accrual of
utilities and vacation expense. Historically, the Company’s practice was to expense utility and vacation costs in
the period these items were paid, which generally resulted in a full year of utilities and vacation expense in the
consolidated statements of income. The utility costs are now accrued in the period used and vacation costs are
accrued in the period earned. The cumulative amount of these changes as of the beginning of fiscal 2006 was
approximately $3.0 million and, as provided in SAB No. 108, the impact was recorded as a reduction of retained
earnings as of the beginning of fiscal 2006.
We established an accrual of $4.5 million for advance billings associated with certain revenue at two
telephone properties that the Company operated since the 1930’s. For these two properties, the Company’s
records have not reflected the liability. This had no impact on the revenue reported for any of the five years
reported in this 10-K.
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