Earthlink 2000 Annual Report Download - page 45

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the assets, which is
generally three to five years for computers and computer related equipment and five years for other non-computer furniture and equipment.
Leasehold improvements are amortized using the straight-line method over the shorter of their estimated lives or the term of the lease, ranging
from one to ten years.
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communications and other equipment under capital lease agreements. The assets and liabilities under
capital lease are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Assets under capital lease are amortized over the lesser of their estimated useful lives of
three to five years or the term of the lease.
INTANGIBLES
Intangible assets consist primarily of acquired customer bases, long-term marketing agreements, goodwill, and other items. Customer bases
acquired directly are valued at cost, which approximates fair value at the time of purchase. When intangible assets, such as customer bases and
goodwill are acquired in conjunction with the purchase of a company, EarthLink undertakes a study by an independent third party to determine
the allocation of the total purchase price to the various assets acquired and the liabilities assumed. The costs assigned to intangible assets are
being amortized on a straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Intangible assets
acquired in the acquisition of the Sprint Internet Passport business are being amortized on a straight-line basis over the estimated useful lives.
The Marketing and Distribution Agreement is being amortized over 5 and 10 years, which represents the life of the portion of the contract
related to Sprint's provision of additional customers and the overall contract life relative to the co-branding feature, respectively. (See note 16
for discussion of changes to the Sprint Agreements.) Substantially all acquired customer bases are being amortized over three years. If
indicators of impairment exist, the Company reviews the recoverability of intangible assets based on estimated undiscounted future cash flows
from operating activities compared with the carrying values of the intangibles.
ADVERTISING
Advertising costs are included in sales and marketing. Such costs are expensed as incurred. Advertising expenses were $18.9 million, $98.4
million and $182.0 million in 1998, 1999 and 2000, respectively.
INCOME TAXES
Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting basis and tax basis of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
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