Earthlink 2004 Annual Report Download - page 52

with the related subscribers on a net basis, netting the cost of revenue associated with the service against the gross amount billed the customer
and recording the net amount as revenue. The determination of whether we meet many of the attributes specified in EITF Issue No. 99-19 for
gross and net revenue recognition is judgmental in nature and is based on an evaluation of the terms of each arrangement. A change in the
determination of gross versus net revenue recognition could have an impact on the gross amounts of revenues and cost of revenues we
recognize and the gross profit margin percentages in the period in which such determination is made and in subsequent periods; however, such
a change in determination of revenue recognition would not affect net income (loss).
Multiple element arrangements. Certain customer arrangements encompass multiple deliverables, such as Internet access services,
hardware and installation. We account for these arrangements in accordance with EITF Issue No. 00-21, “
Revenue Arrangements with Multiple
Deliverables.” If the deliverables meet the criteria in EITF Issue No. 00-21, the deliverables are divided into separate units of accounting and
revenue is allocated to the deliverables based on their relative fair values. The criteria specified in EITF Issue No. 00-21 are that the delivered
item has value to the customer on a stand-alone basis, there is objective and reliable evidence of the fair value of the undelivered item, and if
the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered
probable and substantially in the control of the vendor. For our purpose, fair value is generally defined as the price at which a customer could
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 Issue 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.
Sales incentives. We have marketing arrangements with a number of leading hardware and software manufacturers to include our
Internet access software pre-installed on or included with their products. We also market our products and services through retailers. We pay
fees to retailers, manufacturers or other marketing partners for marketing our products and services. Depending on the nature of the
arrangement, the marketing partners may purchase our products and services in addition to providing marketing services. For these types of
arrangements, management uses the guidance provided in EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products),”
which states that cash consideration given by a vendor to a customer is presumed to
be a reduction of the selling price of the vendor’s products or services and should be classified as a reduction of revenue. If the retailer or
manufacturer does not purchase our products or services, we classify the fees as a sales and marketing expense when incurred because the
retailer or manufacturer is not a reseller and the accounting in EITF Issue No. 01-
9 does not apply. If the retailer or manufacturer purchases and
then resells our products or services, we account for the fees as a reduction in revenue because the consideration is presumed to be a reduction
of the selling price of our products or services; however, if we receive an identifiable benefit whose fair value can be reasonably estimated in
exchange for the fees, we classify the fees as operating expenses. Management applies judgment in determining whether a retailer or
manufacturer is reselling our products and services or solely providing marketing services. Any change in this determination could have an
impact on the gross amounts of revenues and cost of revenues we recognize and the gross profit margin percentages in the period in which such
determination is made and in subsequent periods; however, such a change in determination of revenue recognition would not generally affect
net income (loss).
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. With
respect to receivables due from consumers, our policy is to specifically
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