Cincinnati Bell 2012 Annual Report Download - page 157

Form 10-K Part II Cincinnati Bell Inc.
Certain customer contracts require specified levels of service or performance. If we fail to meet these
service levels, our customers may be eligible to receive credits on their contractual billings. These credits are
recognized against revenue when an event occurs that gives rise to such credits.
Advertising Expenses — Costs related to advertising are expensed as incurred. Advertising costs were
$16.6 million, $18.4 million, and $22.0 million in 2012, 2011, and 2010, respectively.
Legal Expenses — In the normal course of business, the Company is involved in various claims and legal
proceedings. Legal costs incurred in connection with loss contingencies are expensed as incurred. Legal claim
accruals are recorded once determined to be both probable and estimable.
Income, Operating, and Regulatory Taxes
Income taxes — The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction as
well as various foreign, state and local jurisdictions. The provision for income taxes is based upon income in the
consolidated financial statements, rather than amounts reported on the income tax return. The income tax
provision consists of an amount for taxes currently payable and an amount for tax consequences deferred to
future periods. Deferred investment tax credits are amortized as a reduction of the provision for income taxes
over the estimated useful lives of the related property, plant and equipment.
Deferred income taxes are provided for temporary differences between financial statement and income tax
assets and liabilities. Deferred income taxes are recalculated annually at rates then in effect. Valuation
allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized. The
ultimate realization of the deferred income tax assets depends upon the ability to generate future taxable income
during the periods in which basis differences and other deductions become deductible and prior to the expiration
of the net operating loss carryforwards.
Previous tax filings are subject to normal reviews by regulatory agencies until the related statute of
limitations expires.
Operating taxes — Certain operating taxes such as property, sales, use, and gross receipts taxes are reported
as expenses in operating income primarily within cost of services. These taxes are not included in income tax
expense because the amounts to be paid are not dependent on our level of income. Liabilities for audit exposures
are established based on management’s assessment of the probability of payment. The provision for such
liabilities is recognized as an operating expense. Upon resolution of an audit, any remaining liability not paid is
released and increases operating income.
Regulatory taxes — The Company incurs federal regulatory taxes on certain revenue producing transactions.
We are permitted to recover certain of these taxes by billing the customer; however, collections cannot exceed
the amount due to the federal regulatory agency. These federal regulatory taxes are presented in sales and cost of
services on a gross basis because, while the Company is required to pay the tax, it is not required to collect the
tax from customers and, in fact, does not collect the tax from customers in certain instances. The amounts
recorded as revenue for 2012, 2011, and 2010 were $22.2 million, $20.6 million, and $19.9 million, respectively.
The amounts expensed for 2012, 2011, and 2010 were $24.4 million, $22.7 million, and $22.0 million,
respectively. We record all other federal taxes collected from customers on a net basis.
Stock-Based Compensation — Compensation cost is recognized for all share-based awards to employees.
We value all share-based awards to employees at fair value on the date of grant and expense this amount over the
required service period, generally defined as the applicable vesting period. For awards which contain a
performance condition, compensation expense is recognized over the service period, when achievement of the
performance condition is deemed probable. The fair value of stock options and stock appreciation rights is
determined using the Black-Scholes option-pricing model using assumptions such as volatility, risk-free interest
rate, holding period and dividends. The fair value of stock awards is based on the Company’s closing share price
on the date of grant. For all share-based payments, an assumption is also made for the estimated forfeiture rate
based on the historical behavior of employees. The forfeiture rate reduces the total fair value of the awards to be
recognized as compensation expense. Our accounting policy for graded vesting awards is to recognize
compensation expense on a straight-line basis over the vesting period. We have also granted employee awards to
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Form 10-K