Earthlink 2006 Annual Report Download - page 75

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
As of December 31, 2006, EarthLink had various stock-based compensation plans, which are more fully described in Note 11, “Stock-
Based Compensation.” Prior to January 1, 2006, the Company accounted for stock-
based compensation using the intrinsic value method, which
follows the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, “Accounting for Certain Transactions
Involving Stock Compensation.” Generally, no stock-based employee compensation cost related to stock options was reflected in net income
(loss) prior to January 1, 2006, as all options granted under stock-based compensation plans had an exercise price equal to the market value of
the underlying common stock on the grant date. However, to the extent that the Company modified stock options subsequent to the grant date,
the Company recorded compensation expense based on the modification, as required by SFAS No. 123, “Accounting for Stock-Based
Compensation,” and APB Opinion No. 25. Compensation cost related to restricted stock units granted to non-employee directors and certain
key employees was reflected in net income as services were rendered.
On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment,” using the modified prospective method, which
requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation over the
requisite service period for awards expected to vest. In accordance with the modified prospective method, the Company’s financial statements
for periods prior to implementation have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). The Company
estimates the fair value of stock options using the Black-Scholes valuation model, and determines the fair value of restricted stock units based
on the number of shares granted and the quoted price of EarthLink’s common stock on the date of grant . Such value is recognized as expense
over the requisite service period, net of estimated forfeitures, using the straight-line attribution method. The estimate of awards that will
ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates,
such amounts will be recorded as a cumulative adjustment in the period estimates are revised. The Company considers many factors when
estimating expected forfeitures, including types of awards, employee class and historical employee attrition rates. Actual results, and future
changes in estimates, may differ substantially from the Company’s current estimates.
In March 2005, the SEC published SAB No. 107, which provides the Staff’s views on a variety of matters relating to stock-based
payments. SAB No. 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. The
Company has classified stock-based compensation expense during the year ended December 31, 2006 within the same operating expense line
items as cash compensation paid to employees.
In November 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “
Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards,” which provides an elective transition method for calculating the initial pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R). Companies were permitted to take up to one
year from the effective date of this FASB Staff Position to evaluate the available transition alternatives and make a one
-time election as to
which method to adopt. The Company elected to use the alternative method provided in FSP No. FAS 123(R)-3.
The cumulative effect of adoption of SFAS No. 123(R) using the modified prospective transition method, which resulted from estimating
forfeitures on nonvested shares of restricted stock rather than
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