Earthlink 2004 Annual Report Download - page 75

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reclassifications
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. EarthLink
reclassified prior period financial statements to reflect investments in asset-backed, auction rate securities as short-term investments rather than
as cash and cash equivalents. EarthLink invests in auction rate securities with reauction periods of 90 days or less, and the maturities of the
instruments underlying the auction rate securities are generally more than 90 days from the balance sheet date (“Securities”). EarthLink
previously considered investments in Securities as cash equivalents based on the reauction period; however, EarthLink has reclassified the
investments in the Securities because the maturities of the underlying instruments are greater than 90 days from the balance sheet dates. For
the Consolidated Balance Sheets as of December 31, 2001, 2002 and 2003, EarthLink has reclassified Securities of $250.7 million, $211.2
million and $141.0 million, respectively, from cash equivalents to short-term investments.
In addition, EarthLink previously excluded purchases and sales of Securities from the Consolidated Statements of Cash Flows because the
Securities were classified as cash equivalents. Purchases of investments in the Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2003 have been adjusted to include $286.2 million and $318.1 million of purchases of Securities, and sales and
maturities of investments for the years ended December 31, 2002 and 2003 have been adjusted to include $325.8 million and $388.3 million of
sales and maturities of Securities.
Recently Issued Accounting Pronouncements
In March 2004, the FASB approved the consensus reached on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments.” The objective of EITF Issue No. 03-1 is to provide guidance for identifying other-than-
temporarily
impaired investments. EITF Issue No. 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily
impaired. In September 2004, the FASB issued a FASB Staff Position (FSP) EITF 03-1-
1 that delays the effective date of the measurement and
recognition guidance in EITF Issue No. 03-1 until further notice. The disclosure requirements of EITF Issue No. 03-1 are effective for the year
ended December 31, 2004. Once the FASB reaches a final decision on the measurement and recognition provisions, the Company will evaluate
the impact of the adoption of the accounting provisions of EITF Issue No. 03-1.
In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment,” which replaces SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123 (R) requires that compensation cost relating to all share-based payment transactions, including grants of
employee stock options, be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an
alternative. SFAS No. 123 (R) is effective the first interim or annual reporting period that begins after June 15, 2005. EarthLink expects to
adopt SFAS No. 123 (R) on July 1, 2005 and expects to apply the modified prospective method upon adoption. The modified prospective
method requires companies to record compensation cost beginning with the effective date (a) based on the requirements of SFAS No. 123 (R)
for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB Opinion No. 25’s
intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS
No. 123 (R)
’s fair value
72