XO Communications 2009 Annual Report Download - page 38

It is common for invoices received from the third-party telecommunications providers to include items which
result in disputes due to billing discrepancies. We perform monthly bill verification procedures to identify
errors in vendors’ billing processes. The bill verification procedures include the examination of the bills,
comparing billing rates used with contractual billing rates, evaluating the trends of invoiced amounts by
vendors and reviewing the types of charges being processed. If we believe we have been billed inaccurately,
we accrue costs for disputed invoices based on the last 24 months of historical trends for resolutions of
similarly disputed items. If we ultimately settle a disputed amount which is different than the accrual, we
recognize the difference in the period in which the settlement is finalized as an adjustment to cost of service.
We believe that our accounting policy is designed to properly assess dispute accruals for third-party
telecommunications costs, however, changes to the estimates used in our calculation could result in a material
impact on our Consolidated Statement of Operations.
Assessment of Loss Contingencies
We have legal and other contingencies that could result in significant losses upon the ultimate resolution of
such contingencies. We have provided for losses in situations where we have concluded that it is probable that
a loss has been or will be incurred and the amount of the loss can be reasonably estimated. A significant
amount of judgment is involved in determining whether a loss is probable and reasonably estimatable due to
the uncertainty involved in predicting the likelihood of future events and estimating the financial impact of
such events. Accordingly, it is possible that upon the further development or resolution of a contingent matter,
a significant charge could be recorded in a future period related to an existing contingent matter. For additional
information regarding all of our legal proceedings and loss contingencies, see Note 19 of our consolidated
financial statements in Item 8 of this Annual Report.
Property and Equipment
We annually evaluate the estimated useful lives used to depreciate our assets. When performing this
assessment we consider (i) our historical usage and future planned use of the assets, (ii) the views of experts
within and outside of XOH, (iii) the impact of technological advances and (iv) trends in the industry on the
value and useful lives of our network assets. Such criteria includes the valuation of similar assets within the
industry and information gathered from manufacturers and other market participants. While we believe our
current estimates of useful lives are reasonable, significant differences in actual experience or significant
changes in assumptions may cause additional changes to future depreciation expense. As a result of an
evaluation, we changed the estimated useful life of certain network equipment which resulted in an increase of
$4.2 million and $13.3 million to depreciation expense during 2009 and 2007, respectively. No significant
revisions were made as a result of evaluations made in 2008.
Impairment of Long-lived Assets
We assess the possible impairment of equipment and other assets held for use whenever events or changes in
circumstances indicate that the carrying amount of the assets may be impaired. The assessment includes
comparing estimated future undiscounted cash flows with the carrying values of the assets. This analysis
requires management to make subjective assessments of factors including future cash flows, holding periods of
assets and capitalization rates. In the event that there are changes in the planned use of these assets or our
expected future undiscounted cash flows are reduced significantly, the assessment of our ability to recover the
carrying value of these assets in the future could change. There were no impairments of our long-lived assets
held for use recorded during 2009, 2008 or 2007.
Goodwill and Indefinite Lived-Intangible Assets
We assess the possible impairment of goodwill and indefinite-lived intangible assets on an annual basis or
when impairment indicators exist. Both goodwill and indefinite-lived intangible assets are tested using a
discounted cash flow model. Cash flow projections and assumptions are based on a combination of our
historical performance and trends, our business plans and management’s estimate of future performance, giving
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