Earthlink 2010 Annual Report Download - page 80

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Table of Contents
periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability of these factors depends on a
number of conditions, including uncertainty about future events, and thus our accounting estimates may change from period to period. If other
assumptions and estimates had been used in the current period, the balances for noncurrent assets could have been materially impacted.
Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating results could be
materially impacted.
Fair value measurements
We utilized unobservable (Level 3) inputs in determining the fair value of certain assets, which included auction rate securities with a
carrying value and fair value of $42.9 million as of December 31, 2009 and our put right with a carrying value and fair value of $5.2 million as
of December 31, 2009.
Our auction rate securities were variable-
rate debt instruments whose underlying agreements had contractual maturities of up to 40 years,
but had interest rate reset periods at pre-
determined intervals, usually every 28 days. These securities were predominantly secured by student
loans guaranteed by state related higher education agencies and reinsured by the U.S. Department of Education. Beginning in February 2008,
auctions for these securities failed to attract sufficient buyers, resulting in us continuing to hold such securities. Prior to February 2008, due to
the auction process, quoted market prices were readily available, which would have qualified as Level 1. However, due to events in credit
markets beginning in February 2008, these securities did not have readily determinable market values and were not liquid. The fair values of our
auction rate securities as of December 31, 2009 were estimated utilizing a discounted cash flow analysis. This analysis considered, among other
items, the collateralization underlying the security investments, the creditworthiness of the counterparty, and the timing and value of expected
future cash flows. These securities were also compared, when possible, to other observable market data with similar characteristics to the
securities held by us. Due to the failed auctions, we classified these instruments within Level 3. We elected the fair value option for the put right
to offset the fair value changes of the auction rate securities. The fair value of the put right was estimated using a discounted cash flow analysis
and was classified within Level 3.
Determining the fair values of our auction rate securities and put right required judgment. If other assumptions and estimates had been used
in the current period, the fair value of our auction rate securities and put right could have been materially impacted.
Business Combinations
We recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of
the acquisition date is measured as the excess of consideration transferred and the net of the acquisition date fair values of the assets acquired
and the liabilities assumed. While we use our best estimates and assumptions as a part of the purchase price allocation process to accurately
value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result,
during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and
liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are
recorded to our consolidated statements of operations.
Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition
date with respect to intangible assets, obligations assumed and pre-
acquisition contingencies. Although we believe the assumptions and estimates
we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from
the management of the acquired companies and are inherently uncertain.
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