Earthlink 2009 Annual Report Download - page 58

Table of Contents
businesses. 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 broadband 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 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.
Income taxes
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. We establish
reserves for tax-
related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are
established when we believe that certain positions might be challenged despite our belief that our tax return positions are in accordance with
applicable tax laws. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation,
or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences
will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect
of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest and penalties.
We recognize deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and
tax bases of recorded assets and liabilities, including net operating loss carryforwards. Management assesses the realizability of deferred tax
assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. We
consider the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation
allowance. During the year ended December 31, 2009, we released $199.0 million of our valuation allowance related to our deferred tax assets.
Of the valuation allowance release, $198.8 million was recorded as an income tax benefit in the Consolidated Statement of Operations and
$0.2 million related to temporary differences and was recorded to accumulated other comprehensive income (loss) on the Consolidated Balance
Sheet. These deferred tax assets relate primarily to net operating loss carryforwards which we determined we will more likely than not be able to
utilize due to the generation of sufficient taxable income in the future. Our determination was made based on our past performance and our belief
that we will generate sufficient taxable income in the future to utilize our tax assets. Significant judgment was involved in this determination,
including projections of future taxable income. Changes in these estimates and assumptions could materially affect the amount or timing of the
valuation allowance release.
We continue to maintain a partial valuation allowance of $34.1 million against our net deferred tax assets, consisting primarily of net
operating loss carryforwards. Of this amount, $31.7 million relates to net operating losses generated by the tax benefits of certain stock
compensation arrangements. The valuation allowance will be removed upon utilization of these net operating losses as an adjustment to
additional paid-in-
capital. The remaining $2.4 million valuation allowance is retained for net operating losses in certain jurisdictions where we
do not believe it is more likely than not that the net operating losses will be realized. Adjustments could be required in the future if we estimate
that the amount of deferred tax assets to be realized is more or less than the net amount we have recorded. Any decrease in the valuation
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