Earthlink 2011 Annual Report Download - page 73

Table of Contents
evaluating our credit reserve requirements. We reserve known billing errors and service interruptions as incurred. We review customer disputes
and reserve against those we believe to be valid claims. We also estimate a sales credit reserve related to unknown billing errors and disputes
based on historical credit activity. The determination of the general sales credit and customer dispute credit reserve requirements involves
significant estimation and judgment.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for accounts receivable amounts that may not be collectible. In assessing the adequacy of
the allowance for doubtful accounts, management considers a number of factors, including the aging of the accounts receivable balances,
historical collection experience, a specific customer's ability to meet its financial obligations to us and the general economic environment. If the
financial condition of EarthLink's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required. Due to the current economic climate, the competitive environment in the telecommunications sector and the
volatility of the financial strength of particular customer segments including our wholesale customers, the collectability of receivables and
creditworthiness of customers may become more difficult and unpredictable. Changes in the financial viability of significant customers and a
worsening of economic conditions may require changes to our estimate of the recoverability of the receivables. The determination of our
allowance for doubtful accounts reserve requirements involves significant estimation and judgment.
Cost of Revenues
Cost of revenues includes direct expenses associated with providing services to our customers and the cost of equipment sold. These costs
include the cost of leasing facilities from incumbent local exchange carriers and other telecommunications providers that provide us with access
connections to our customers, to some components of our network facilities, and between our various facilities. In addition, we use other carriers
to provide services where we do not have facilities. We use a number of different carriers to terminate our long distance calls. These costs are
expensed as incurred. Some of these expenses are billed in advance and some expenses are billed in arrears. Accordingly, we are required to
accrue for expected expenses irrespective of whether these expenses have been billed. We use internal management information to support these
required accruals.
Experience indicates that the invoices that are received from other telecommunications providers are often subject to significant billing
disputes. We typically accrue for all invoiced amounts unless there are contractual, tariff or operational data that clearly indicate support for the
billing dispute. Experience also has shown that these disputes can require a significant amount of time to resolve given the complexities and
regulatory issues surrounding the vendor relationships. We maintain reserves for any anticipated exposure associated with these billing disputes.
We believe our reserves are adequate. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management
judgment as new information becomes available. In view of the length of time it historically has required to resolve these disputes, disputes may
be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods.
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 if it is more-likely-than-
not that additional taxes will be due. 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
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