Earthlink 2003 Annual Report Download - page 34

other indefinite life intangible assets was $118.2 million. EarthLink accounts for intangible assets in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets," which requires that goodwill and certain intangible assets deemed to have indefinite lives, including
those recorded in past business combinations, no longer be amortized through the statement of operations, but instead be tested for impairment
at least annually. We perform an impairment test of our goodwill and other indefinite life intangible assets annually during the fourth quarter of
our fiscal year or when events and circumstances indicate the indefinite life intangible assets might be permanently impaired. EarthLink is one
reporting unit and, consequently, we test our indefinite life intangible assets in the aggregate. Our impairment test entails comparing the
aggregate market value of our outstanding securities plus our liabilities to the aggregate carrying value of our assets, including goodwill and
other indefinite life intangible assets. Based on our testing during the fourth quarter of 2003, we concluded that there was no impairment of our
goodwill and other indefinite life intangible assets.
EarthLink's business is subject to competitive pressures. Therefore, it is possible that the values assigned to goodwill and other indefinite
life intangible assets could be adversely impacted in the future by competition or other factors outside of our control. If management
determines that events or circumstances have occurred which resulted in an other than temporary impairment of indefinite life intangible assets,
we may be required to record a significant impairment adjustment, which would reduce earnings.
Recently Issued Accounting Pronouncements
In November 2002, the EITF reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF
Issue No. 00-21 addresses certain aspects of the accounting for arrangements under which a vendor will perform multiple revenue-generating
activities. EITF Issue No. 00-21 addresses when a revenue arrangement with multiple deliverables should be divided into separate units of
accounting and, if separation is appropriate, how the arrangement consideration should be allocated to the identified accounting units. EITF
Issue No. 00-21 is applicable to transactions entered into in fiscal periods beginning after June 15, 2003. EarthLink's adoption of EITF Issue
No. 00
-21 on July 1, 2003 did not have a material impact on its results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity," which establishes standards for classifying and measuring as liabilities certain financial instruments that include obligations of the
issuer and have characteristics of both liabilities and equity. SFAS No. 150 requires mandatorily redeemable instruments be classified as
liabilities. SFAS No. 150 is effective at the beginning of the first interim period beginning after June 15, 2003, including all financial
instruments created or modified after May 31, 2003. EarthLink's adoption of SFAS No. 150 on July 1, 2003 did not have a material effect on
EarthLink's results of operations or financial position.
In January 2003, the Financial Accounting Standards Board ("FASB") issued Financial Interpretation No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities." In December 2003, the FASB published revised guidance on FIN 46. FIN 46 addresses the consolidation of
certain variable interest entities ("VIEs"). As modified, FIN 46 is effective immediately for financial interests in special purpose entities and is
effective for all other types of VIEs for periods ending after March 15, 2004. EarthLink does not expect the adoption of FIN 46 will have a
material effect on its results of operations or financial position.
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In December 2003, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." SAB No. 104 revises or rescinds the guidance included in Topic B of the Codification of Staff Accounting Bulletins in order to
make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The
adoption of SAB No. 104 did not have a material effect on EarthLink's results of operations or financial position.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Sensitivity
The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from
our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means
that a change in prevailing interest rates may cause the fair value of the investments to fluctuate. For example, if we hold a security that was
issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of our investment may
decline. To minimize this risk, we have historically held many investments until maturity, and as a result, we receive interest and principal
amounts pursuant to the underlying agreements. To further mitigate risk, we maintain our portfolio of cash equivalents in a variety of
securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing
interest rate. In addition, we invest in relatively short-term securities and, therefore, changes in short-term interest rates impact the amount of
interest income included in the statements of operations. The effect of a hypothetical one percentage point increase in interest rates would have
a nominal effect on the fair value of our investments because of the relatively short maturities of our investments. The following table
summarizes the amortized costs and fair value of our investments by security type as of December 31, 2002 and 2003.
As of December 31, 2002 As of December 31, 2003