Earthlink 2007 Annual Report Download - page 71

EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED—(Continued)
2007, respectively, because the Company does not invoice the customer for the welcome kits or the associated shipping. All other shipping and
handling costs are included in cost of revenues.
Software Development Costs
EarthLink accounts for research and development costs in accordance with several accounting pronouncements, including SFAS No. 2,
"Accounting for Research and Development Costs," and SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed." SFAS No. 86 specifies that costs incurred internally in creating a computer software product should be charged to expense
when incurred as research and development until technological feasibility has been established for the product. Once technological feasibility is
established, all software costs should be capitalized until the product is available for general release to customers. Judgment is required in
determining when the technological feasibility of a product is established. The Company has determined that technological feasibility for its
products is reached very shortly before the products are released. Costs incurred after technological feasibility is established are not material,
and, accordingly, the Company expenses research and development costs when incurred.
EarthLink accounts for costs incurred to develop software for internal use in accordance with Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," which requires such costs be capitalized and amortized over the
estimated useful life of the software. Costs related to design or maintenance of internal-use software are expensed as incurred.
Income Taxes
The Company recognizes deferred tax assets and liabilities for operating loss carryforwards, tax credit carryforwards and the estimated
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary
differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of net deferred tax assets if
there is uncertainty regarding their realization. EarthLink considers many factors when assessing the likelihood of future realization including the
Company's recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods
available to the Company for tax reporting purposes and other relevant factors.
Earnings per Share
Net income (loss) per share has been computed according to SFAS No. 128, "Earnings per Share," which requires a dual presentation of
basic and diluted earnings per share ("EPS"). Basic EPS represents net income (loss) divided by the weighted average number of common shares
outstanding during a reported period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock, including stock options, warrants, restricted stock units, phantom share units, convertible debt and contingently issuable shares
(collectively "Common Stock Equivalents"), were exercised or converted into common stock. The dilutive effect of outstanding stock options,
warrants, restricted stock units and convertible debt is reflected in diluted earnings per share by application of the treasury stock method.
Phantom share units and contingently issuable shares are reflected on an if-converted basis. In applying the treasury stock method for stock-
based compensation arrangements during the years ended December 31, 2006 and 2007, the assumed proceeds were computed as the sum of
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