Earthlink 2003 Annual Report Download - page 33

purchase each of the elements independently from other vendors. Applicable revenue recognition criteria is considered separately for each
separate unit of accounting. Management applies judgment to ensure appropriate application of EITF No. 00-21, including value allocation
among multiple deliverables, determination of whether undelivered elements are essential to the functionality of delivered elements and timing
of revenue recognition, among others.
38
Allowance for doubtful accounts
EarthLink maintains allowances for doubtful accounts for estimated losses resulting from the inability of EarthLink's customers to make
payments. With respect to receivables due from consumers, EarthLink's policy is to specifically reserve for all consumer receivables 60 days or
more past due and provide a general reserve for receivables less than 60 days past due. EarthLink provides a general reserve for commercial
accounts receivable and periodically evaluates commercial accounts receivable and provides specific reserves when accounts are deemed
uncollectible. Commercial accounts receivable are written off when management determines there is no possibility of collection.
In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables,
historical bad debt experience and the general economic environment. Management applies considerable judgment in assessing the realization
of receivables, including assessing the probability of collection and the current creditworthiness of each customer. If the financial condition of
EarthLink's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Deferred tax asset valuation allowance
EarthLink accounts for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes," which
requires that deferred tax assets and liabilities be recognized using future tax rates for the effect of temporary differences between the book and
tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that a portion of the deferred tax asset will not be realized.
Based on management's assessment, a valuation allowance has been established for all of EarthLink's deferred tax assets, primarily net
operating loss carryforwards, due to uncertainty regarding their realization. We consider future taxable income in assessing the amount of the
valuation allowance. However, adjustments could be required in the future if we estimate that the amount of deferred tax assets to be realized is
more than the net amount we have recorded. Any decrease in the valuation allowance could have an impact on our income tax provision
(benefit) and net income (loss) in the period in which such determination is made.
Restructuring and facility exit costs
From time to time, EarthLink acquires businesses and identifies personnel of the acquiree that will be terminated and facilities used by the
acquiree that it will close and exit. EarthLink also has closed its own facilities to streamline its business. Restructuring-related liabilities,
including reserves for facility exit costs, include estimates for, among other things, severance payments and amounts due under lease
obligations, net of estimated sublease income, if any. Key variables in determining such estimates include anticipating the commencement of
sublease agreements as well as estimates of sublease rental payment amounts, tenant improvement costs and brokerage and other related costs.
For acquired facilities to be closed that are subject to long-term lease agreements, the remaining liability under the lease, estimated tenant
improvement costs and brokerage and other related costs net of expected sublease recovery, is recognized as a liability at the date of
acquisition, and the liability is included in the fair values of identifiable assets acquired and liabilities assumed. If the facility to be closed is not
associated with an acquisition, we accrue the estimated future costs of the lease obligation, net of estimated sublease income, and record facility
exit costs in the statements of operations.
If the real estate and leasing markets change, sublease amounts could vary significantly from the amounts estimated, resulting in a material
change to EarthLink's recorded liability. We record any changes to the liability for facilities associated with an acquisition in the statements of
operations if such change is more than one year from the date of acquisition. We periodically evaluate and, if necessary, adjust our estimates
based on currently-available information and such adjustments have periodically resulted in
39
additional expense. Adjustments to EarthLink's recorded liabilities for future lease obligations associated with vacated facilities could adversely
or favorably affect future operating results.
Goodwill and other indefinite life intangible assets
EarthLink's indefinite life intangible assets consist primarily of goodwill. As of December 31, 2003, the carrying value of goodwill and