Earthlink 2005 Annual Report Download - page 76

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
doubtful accounts, management considers multiple factors including the aging of its receivables, historical write-offs and the general economic
environment. If the financial condition of EarthLink’s customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required. With respect to receivables due from consumers, the Company’s policy is to specifically
reserve for all receivables 60 days or more past due and provide additional reserves for receivables less than 60 days past due based on
expected write-offs. EarthLink provides reserves for commercial accounts receivable and periodically evaluates commercial accounts
receivable and provides specific reserves when accounts are deemed uncollectible. The Company’s allowance for doubtful accounts was $7.9
million and $8.1 million as of December 31, 2004 and 2005, respectively. The Company recorded bad debt expense of $33.4 million, $26.3
million and $22.6 million during the years ended December 31, 2003, 2004 and 2005, respectively. The Company’s write-offs of uncollectible
accounts were $32.5 million, $24.3 million and $22.4 million during the years ended December 31, 2003, 2004 and 2005, respectively.
Investments in Other Companies
Minority investments in other companies are included in other long-
term assets and are accounted for under the cost method of accounting
because the Company does not have the ability to exercise significant influence over the companies’ operations. Under the cost method of
accounting, investments in private companies are carried at cost and are only adjusted for other-than-temporary declines in fair value and
distributions of earnings. For cost method investments in public companies that have readily determinable fair values, the Company classifies
its investments as available-for-sale in accordance with SFAS No. 115 and, accordingly, records these investments at their fair values with
unrealized gains and losses included as a separate component of stockholders’ equity and in total comprehensive income (loss). Upon sale or
liquidation, realized gains and losses are included in the consolidated statement of operations.
Management regularly evaluates the recoverability of its investments in other companies based on the performance and the financial
position of those companies as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee’s
cash position, recent financings, projected and historical financial performance, cash flow forecasts and financing needs. During the years
ended December 31, 2003, 2004 and 2005, the Company recognized losses due to other-than-temporary declines of the value of investments of
$0.2 million, $1.4 million and $0.9 million, respectively. These losses are included in gain (loss) on investments in other companies, net, in the
Consolidated Statements of Operations.
Variable Interest Entities
The Company applies the guidance prescribed in FIN No. 46, “Consolidation of Variable Interest Entities,” to determine if the Company
must consolidate the results of companies in which the Company has invested. Variable interest entities (“VIEs”) are entities that either do not
have equity investors with proportionate economic and voting rights or have equity investors that do not provide sufficient financial resources
for the entity to support its activities. Consolidation is required if it is determined that the Company absorbs a majority of the expected losses
and/or receives a majority of the expected returns. In determining if an investee is a VIE and whether EarthLink must consolidate its results,
management evaluates whether the equity of the entity is sufficient to absorb its expected losses and whether EarthLink is the primary
beneficiary. Management generally performs this assessment at the date EarthLink becomes involved with the entity and upon changes in the
capital structure or related governing documents of the entity.
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