Earthlink 2007 Annual Report Download - page 54

December 31, 2005, 2006 and 2007, we received $4.4 million, $0.4 million and $1.6 million, respectively, in cash distributions from EVG.
Critical Accounting Policies and Estimates
Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition, and results of operations and which require complex management judgments, uncertainties
and/or estimates. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported amounts of revenues and expenses during a reporting period; however, actual results could differ from those estimates. Management
has discussed the development, selection and disclosure of the critical accounting policies and estimates with the Audit Committee of the Board
of Directors. Information regarding our other accounting policies is included in the Notes to our Consolidated Financial Statements.
Revenue recognition
We maintain relationships with certain telecommunications partners in which we provide services to customers using the "last mile"
element of the telecommunications providers' networks. The term "last mile" generally refers to the element of telecommunications networks
that is directly connected to homes and businesses. In these instances, management evaluates the criteria outlined in Emerging Issues Task Force
("EITF") Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," in determining whether it is appropriate to record
the gross amount of revenue and related costs or the net amount due from the telecommunications partner as revenue. Generally, when we are
the primary obligor in the transaction with the subscriber, have latitude in establishing prices, are the party determining the service specifications
or have several but not all of these indicators, we record the revenue at the amount billed the subscriber. If we are not the primary obligor and/or
the telecommunications partner has latitude in establishing prices, we record revenue associated with the related subscribers on a net basis,
netting the cost of revenue associated with the service against the gross amount billed the customer and recording the net amount as revenue. The
determination of whether we meet many of the attributes specified in EITF Issue No. 99-19 for gross and net revenue recognition is judgmental
in nature and is based on an evaluation of the terms of each arrangement. A change in the determination of gross versus net revenue recognition
would have an impact on the gross amounts of revenues and cost of revenues we recognize and the gross profit margin percentages in the period
in which such determination is made and in subsequent periods; however, such a change in determination of revenue recognition would not
affect net income.
Allowance for doubtful accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. With
respect to receivables due from consumers, our policy is to specifically reserve for all consumer receivables 60 days or more past due and
provide additional reserves for receivables less than 60 days past due based on expected write-offs. We provide reserves for commercial
accounts receivable and periodically evaluate commercial accounts receivable and provide specific reserves when accounts are deemed
uncollectible. Commercial accounts receivable are written off when management determines there is no possibility of collection.
In judging the adequacy of the allowance for doubtful accounts, we consider multiple factors including the aging of our receivables,
historical write-
off experience and the general economic environment. Management applies considerable judgment in assessing the realization of
receivables, including assessing the probability of collection and the current creditworthiness of classes of customers. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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