Earthlink 2004 Annual Report Download - page 53

reserve for all consumer receivables 60 days or more past due and provide a general reserve for receivables less than 60 days past due. We
provide a general reserve for commercial accounts receivable and periodically evaluate commercial accounts receivable and provide 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 write-off 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
our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Deferred tax asset valuation allowance
We recognize deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities, including net operating loss carryforwards. Management assesses the realizability of deferred
tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. Based
on management’s assessment, a valuation allowance has been established for all of our deferred tax assets as of December 31, 2004, primarily
net operating loss carryforwards, due to uncertainty regarding their realization. We consider future taxable income and our historical
profitability, among other factors, 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 the effect of increasing stockholders’ equity, reducing goodwill and/or increasing or decreasing the income tax provision
in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such determination is
made.
Restructuring and facility exit costs
From time to time, we acquire businesses and identify personnel of the acquiree that will be terminated and facilities used by the acquiree
that we will close and exit. We have also closed facilities to streamline our 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 timing and amounts of sublease rental payments,
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. Our current facility exit cost
liabilities include $21.5 million of lease commitments and $13.1 million of sublease income.
If the real estate and leasing markets change, sublease amounts could vary significantly from the amounts estimated, resulting in a
material change to our 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, and we record any adjustments to liabilities associated with
facility exit costs as facility exit costs. We periodically evaluate and, if necessary, adjust our estimates based on currently-
available information
and such adjustments have periodically resulted in additional expense.
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