Earthlink 2006 Annual Report Download - page 62

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exercised and cancelled. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the current period.
Recently Issued Accounting Pronouncements
In June 2006, the FASB ratified the consensus reached in EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06-2 provides recognition guidance on the accrual of employees’ rights to
compensated absences under a sabbatical or other similar benefit arrangement. EITF Issue No. 06-2 is effective for the Company for all
financial statements after December 31, 2006. We are currently assessing the impact of the adoption of EITF Issue No. 06-2 on our financial
statements.
In July 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes,” which prescribes a comprehensive model for
how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken
or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). The accounting
provisions of FIN No. 48 are effective for fiscal years beginning after December 15, 2006. We will adopt FIN No. 48 on January 1, 2007 and
we do not believe its adoption will result in a material cumulative-effect adjustment.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value
and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We are currently assessing the impact of the adoption of this standard
on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Interest Rate Risk
We are exposed to interest rate risk with respect to our investments in marketable securities. A change in prevailing interest rates may
cause the fair value of our 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 its 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 a portfolio of investments in a variety of securities, including government agency notes,
asset-backed debt securities (including auction rate debt securities), corporate notes and commercial paper, all of which bear a minimum short-
term rating of A1/P1 or a minimum long-term rating of A/A2. As of December 31, 2005 and 2006, net unrealized losses in these investments
were not material. 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.
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