Earthlink 2010 Annual Report Download - page 78

Table of Contents
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 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. During the year ended December 31, 2010, we released $0.5 million of our valuation allowance related to our deferred tax
assets. This valuation allowance release was a combination of an increase in valuation allowance of $0.4 million relating to stock compensation
deferred tax assets, and a decrease in valuation allowance of $0.9 million relating to net operating loss carry forwards, which we determined we
will "more likely than not" be able to utilize due to the generation of sufficient taxable income in the future in certain jurisdictions. Of this
amount, $0.2 million is related to the use of certain tax benefits of stock compensation which are an adjustment to additional paid-
in capital. 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 valuation allowance of $39.2 million against certain deferred tax assets. Of this amount, $31.6 million relates to
net operating losses generated by the tax benefits of stock-
based compensation. The valuation allowance will be removed upon utilization of
these net operating losses by us as an adjustment to additional paid-in-
capital. A valuation allowance of $7.2 million relates to net operating
losses in certain jurisdictions where we believe it is not more likely than not to be realized in future periods. In addition, a valuation allowance of
$0.4 million was established in 2010 relating to stock compensation deferred tax assets. Adjustments could be required in the future if we
estimate that the amount of deferred tax assets that we are more likely than not able to realize is more or less than the net amount we have
recorded. Any decrease in the valuation allowance could have the effect of increasing stockholders' equity and/or decreasing the income tax
provision in the statement of operations.
Recoverability of noncurrent assets
Goodwill and indefinite-lived intangible assets
We test goodwill and indefinite-
lived intangible assets for impairment at least annually. We perform an impairment test of our goodwill and
indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events and circumstances indicate the indefinite-
lived intangible assets might be impaired. During the fourth quarter of 2008, our annual impairment test concluded that goodwill and certain
intangible assets recorded as a result of our April 2006 acquisition of New Edge were impaired and we recorded non-
cash impairment charges
related to the New Edge reporting unit of $64.0 million for goodwill and $3.1 million for the indefinite-
lived trade name. During the fourth
quarter of 2009, our annual impairment test concluded that goodwill and certain intangible assets recorded as a result of the New Edge
acquisition were further impaired and we recorded non-
cash impairment charges related to the New Edge reporting unit of $23.9 million for
goodwill and $0.2 million for the indefinite-lived trade name. As a result, there is no remaining carrying value related to New Edge goodwill.
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