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Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
customers acquired by the Company. Customer acquisition costs include internal personnel costs directly associated with the provisioning of
new customer orders. Such customer acquisition costs represent incremental direct costs incurred by the Company that would not have been
incurred absent a new customer contract. Customer installation and acquisition costs are amortized over the actual weighted average initial
contract terms of contracts initiated each month, assuming a customer churn factor.
Investments
Equity investments in other companies.
Investments in other companies are accounted for under the cost method of accounting because
the Company does not have the ability to exercise significant influence over the companies' operations. Under the cost method of accounting,
investments in private companies are carried at cost and are only adjusted for other-than-
temporary declines in fair value and distributions of
earnings. For cost method investments in public companies that have readily determinable fair values, the Company classifies its investments as
available for sale and, accordingly, records these investments at their fair values with unrealized gains and losses included as a separate
component of stockholders' equity and in total comprehensive income. Upon sale or liquidation, realized gains and losses are included in the
Consolidated Statement of Operations. Amounts reclassified out of accumulated other comprehensive income into earnings are determined on a
specific identification basis.
Management regularly evaluates the recoverability of its investments based on the performance and the financial position of those
companies as well as other evidence of market value. Such evaluation includes, but is not limited to, reviewing the investee's cash position,
recent financings, projected and historical financial performance, cash flow forecasts and financing needs. Management also regularly evaluates
whether declines in fair values of its investments below their cost are potentially other than temporary. This evaluation consists of several
qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company's ability and intent to hold
the investment for a period of time to recover the cost basis of the investment.
Put right.
The Company had a put right to sell its auction rate securities back to the broker. The put right was classified as other current
assets in the Consolidated Balance Sheet as of December 31, 2009. The Company elected the fair value option for the put right and recorded the
put right at fair value, with changes in fair value recognized as gain (loss) on investments, net, in the Consolidated Statement of Operations. The
fair value of the put right was estimated using a discounted cash flow analysis. During the year ended December 31, 2010, the Company sold its
auction rate securities to the selling broker at par, plus accrued interest. As a result, the Company no longer had a put right as of December 31,
2010. See Note 6, "Investments," for more information.
Variable Interest Entities
Variable interest entities ("VIEs") are entities that either do not have equity investors with proportionate economic and voting rights or have
equity investors that do not provide sufficient financial resources for the entity to support its activities. Consolidation is required if it is
determined that the Company absorbs a majority of the expected losses and/or receives a majority of the expected returns. In determining if an
investee is a VIE and whether EarthLink must consolidate its results, management evaluates whether the equity of the entity is sufficient to
absorb its expected losses and whether EarthLink is the primary beneficiary. Management generally performs this assessment at the date
EarthLink becomes involved with the entity and upon changes in the capital structure or related governing documents of the entity. Management
has concluded that the Company does not have any arrangements with entities that would require consolidation.
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