Earthlink 2011 Annual Report Download - page 72

Table of Contents
The following table presents a reconciliation of Operating Cash Flow to the most closely related financial measure reported under GAAP
for the years ended December 31, 2009, 2010 and 2011:
Critical Accounting Policies and Estimates
Set forth below is a discussion of the accounting policies and related estimates that we believe are the most critical to understanding our
consolidated financial statements, financial condition and results of operations and which require complex management judgments, uncertainties
and/or estimates. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses during a reporting period; however, actual results could differ from those estimates. Management has discussed the
development, selection and disclosure of the critical accounting policies and estimates with the Audit Committee of the Board of Directors.
Information regarding our other accounting policies is included in the Notes to our Consolidated Financial Statements.
Revenue recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable
and collectibility is reasonably assured. We offer certain services that are provided by third-
party vendors. When we are the primary obligor in a
transaction, 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 and cost of revenue on a gross basis. If we are not the primary obligor and/or a third-
party vendor 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.
Receivable reserves
Sales credit reserves
We make estimates for potential future sales credits to be issued related to billing errors, service interruptions and customer disputes, which
are recorded as a reduction in revenue. We analyze historical credit activity and changes in customer demands related to current billing and
service interruptions when
66
Year Ended December 31,
2009
2010
2011
(in thousands)
Net income
$
287,118
$
81,480
$
34,567
Interest expense and other, net
21,125
23,409
70,640
Income tax benefit (provision)
(126,085
)
56,804
19,902
Depreciation and amortization
23,962
23,390
160,083
Stock
-
based compensation expense
13,231
9,959
13,466
Impairment of goodwill and intangible assets
24,145
1,711
—
Restructuring and acquisition
-
related costs
5,615
22,368
32,068
Purchases of property and equipment
(13,119
)
(24,025
)
(101,967
)
Operating Cash Flow
$
235,992
$
195,096
$
228,759