Earthlink 2001 Annual Report Download - page 25

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than anticipated if capital requirements vary materially from those currently planned, if revenues do not grow as anticipated, or if the company
is not successful in reducing telecommunications and operating costs as planned. We have no commitments for any additional financing and
have no lines of credit or similar sources of financing, and we cannot be sure that we can obtain additional commitments on favorable terms, if
at all. Additional equity financing may dilute our stockholders, and debt financing, if available, may restrict our ability to declare and pay
dividends and raise
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future capital. If we are unable to obtain additional needed financing, we may be required to reduce the scope of operations or anticipated
expansion, which could materially and adversely affect us.
Critical Accounting Policies and Estimates
General
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including
those related to revenue recognition, intangible assets, network service costs, bad debts, sales and marketing costs, investments, intangible
assets, restructuring, and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions
or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
101"), as amended and other related guidance. SAB 101 requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and
(4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the nature of the
fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.
Cash and Cash Equivalents
All short-term, highly liquid investments with an original maturity of three months or less at the date of acquisition are classified as cash
equivalents.
Investments
Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date. These investments are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). The Company has classified all short and long-term
investments as available-for-sale. Available-for-sale securities are carried at fair value, with any unrealized gains and losses, net of tax,
reported in a separate component of stockholders' equity. Realized gains and losses are included in investment income and are determined on a
specific identification basis.
Bad Debt
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
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