Earthlink 2006 Annual Report Download - page 79

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EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. Management has concluded that the Company does not have any
arrangements with entities that would require consolidation pursuant to FIN No. 46.
Investment in Equity Affiliate
The Company has a joint venture with SK Telecom Co., Ltd. (“SK Telecom”), HELIO. HELIO is a non-facilities-based mobile virtual
network operator (“MVNO”) offering mobile communications services and handsets to U.S. consumers. EarthLink and SK Telecom each have
an equal voting and economic ownership interest in HELIO. EarthLink and SK Telecom, as partners, invested an aggregate of $166.0 million
of cash and non-cash assets upon completing the formation of HELIO in March 2005, invested an aggregate of $78.0 million of cash in
August 2005, invested an aggregate $157.0 million in 2006 and have committed to invest additional cash of $39.0 million in 2007, including
$27.0 million that was invested in February 2007.
The Company accounts for its investment in HELIO under the equity method of accounting because the Company can exert significant
influence over HELIO’s operating and financial policies. The Company determined that HELIO does not qualify as a VIE under FIN No. 46,
so consolidation pursuant to FIN No. 46 is not required. In accordance with the equity method of accounting, EarthLink’s investment in
HELIO was recorded at original cost and is adjusted to recognize EarthLink’s proportionate share of HELIO’s net income (loss), amortization
of basis differences and additional contributions made.
Goodwill and Purchased Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for
under the purchase method of accounting pursuant to SFAS No. 141, “Business Combinations.” Purchased intangible assets consist primarily
of subscriber bases and customer relationships, acquired software and technology and other assets acquired in conjunction with the purchases
of businesses and subscriber bases from other companies. Subscriber bases acquired directly are valued at cost plus assumed service liabilities,
which approximates fair value at the time of purchase. When management determines material intangible assets are acquired in conjunction
with the purchase of a company, EarthLink engages an independent third party to determine the allocation of the purchase price to the
intangible assets acquired. Intangible assets determined to have definite lives are amortized on a straight-line basis over their estimated useful
lives.
The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”
which prohibits the amortization of goodwill and certain intangible assets deemed to have indefinite lives. SFAS No. 142 requires the
Company to test its goodwill for impairment at least annually. The Company performs an impairment test of its goodwill annually during the
fourth quarter of its fiscal year or when events and circumstances indicate that goodwill might be permanently impaired. Impairment testing of
goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the estimated fair value
of the reporting unit. The fair values of the reporting unit are estimated using discounted expected future cash flows. If the
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