XO Communications 2009 Annual Report Download - page 59

sales credit reserves are assessed on a monthly basis using several factors, including the likelihood of billing
being disputed by customers and historical sales credit trends.
Reciprocal Compensation
Reciprocal compensation represents compensation from local exchange carriers (“LECs”) for local exchange
traffic originated on another LEC’s facilities and terminated on the Company’s facilities. Reciprocal compen-
sation rates are established by interconnection agreements between the parties based on federal and state
regulatory rulings. The Company recognizes reciprocal compensation revenue based on usage. If reciprocal
compensation revenue is under dispute or otherwise at risk, the Company creates a sales credit allowance
which is maintained until the disputed amount is settled.
m. Cost of Service
Cost of service includes expenses directly associated with providing telecommunications services to customers,
including, among other items, the cost of connecting customers to the Company’s networks via leased
facilities, the costs of leasing components of its network facilities and costs paid to third-party providers for
interconnect access and transport services. The Company accrues for the expected costs of services received
from third-party telecommunications providers during the period the services are rendered. Cost of service also
includes network operations, repairs and maintenance, costs necessary to maintain rights-of-way and building
access as well as certain other operational department costs. All such costs are expensed as incurred. The
Company accrues costs for disputed invoices based on its historical trend of resolutions for similarly disputed
items. If the Company ultimately settles a disputed amount which is different than the accrual, it recognizes
the difference in the period in which the settlement is finalized as an adjustment to cost of service.
n. Concentrations
The Company’s principal concentration of credit risk is accounts receivable. Accounts receivable are
geographically dispersed and include numerous customers in many different industries. As of December 31,
2009, there was one customer with which we entered into a circuit agreement, which accounted for more than
ten percent of the Company’s total trade receivables. As of December 31 2008, there were no individual
customers who accounted for more than ten percent of the Company’s total trade receivables. Although the
Company’s accounts receivable are geographically dispersed and include numerous customers in many
different industries, the receivables from other telecommunications service providers represented 39.5% of the
Company’s consolidated receivables as of December 31, 2009. The Company generally does not require
collateral to secure its receivable balances.
o. Allowances for Doubtful Accounts
The Company determines its allowances for doubtful accounts using both specific and general allowance
methods. A specific reserve requirement review is performed on customer accounts with larger balances. An
additional reserve requirement review is performed on accounts not subject to specific review using several
factors, including the length of time individual receivables are past due, historical collection experience, the
economic and competitive environment, and changes in the creditworthiness of our customers. Company is not
able to predict with certainty the changes in the financial stability of its customers. Allowances for doubtful
accounts are recorded as a selling, general and administrative expense.
p. Stock-Based Compensation
The Company recognizes stock-based compensation cost associated with share-based payments as expense on
a straight-line basis over the requisite service period of a stock option grant. The Company measures
compensation expense related to employee stock options based on the fair value of those awards at the grant
date using the Black-Scholes-Merton option pricing model. Additionally, the Company estimates forfeitures
over the requisite service period. When recognizing compensation expense, these estimates are adjusted to the
extent to which actual forfeitures differ, or are expected to materially differ, from such estimates.
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