Earthlink 2004 Annual Report Download - page 56

As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value
method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123 (R)’s
fair value method may have a significant impact on our results of operations, although it will have no impact on our overall financial position.
The impact of the adoption of SFAS No. 123 (R) cannot be predicted at this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted SFAS No. 123 (R) in prior periods, the impact of that standard would have approximated the
impact of SFAS No. 123 as described in the disclosure of pro forma net income (loss) and earnings (loss) per share in Note 2 to the
consolidated financial statements. We expect our earnings and earnings per share will be adversely affected upon adoption of SFAS No. 123
(R).
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29,”
which amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.
A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. We do not expect
the adoption of SFAS No. 153 to have a material impact on our results of operations or financial condition.
Item 7a .
Quantitative and Qualitative Disclosures about Market Risk.
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 investments 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 decrease the
value of our investments by less than 1% of their fair value as of December 31, 2004. The following table summarizes the amortized costs and
fair value of our investments by security type as of December 31, 2003 and 2004.
The following table presents the amounts of our cash equivalents and short- and long-term investments that are subject to market risk by
range of expected maturity and weighted-average interest
53
As of December 31, 2003
As of December 31, 2004
Estimated
Estimated
Amortized
Fair
Amortized
Fair
Cost
Value
Cost
Value
(in thousands)
Asset
-
backed (including auction rate) securities
$
165,237
$
165,147
$
117,449
$
117,406
U.S. corporate notes
92,656
92,623
45,057
44,964
Government agency notes
23,349
23,355
150,394
149,690
Commercial paper
15,787
15,787
—
—
$
297,029
$
296,912
$
312,900
$
312,060