Earthlink 2012 Annual Report Download - page 61

Table of Contents
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Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions
Cost of Revenues
We rely on other carriers to provide services where we do not have facilities, and we
use a number of different carriers to terminate our long distance calls. These costs are
expensed as incurred. Experience indicates that the invoices that are received from
other telecommunications providers are often subject to significant billing disputes.
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. The reserves are reviewed on a monthly basis, but are subject to changes in
estimates and management judgment as new information becomes available.
Our cost of revenues methodology
contains uncertainties because it
requires management to make
assumptions and apply judgment
regarding the amount of future billing
dispute resolutions.
We have not made any material
changes in the accounting
methodology we use to
estimate reserves for billing
disputes during the past three
years.
We do not believe there is a
reasonable likelihood that there
will be a material change in the
future estimates or assumptions
we use for these reserves.
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 includes the effect
of reserve provisions and changes to reserves that are
considered appropriate, as well as the related net interest and
penalties.
We recognize deferred tax assets and liabilities using tax
rates in effect for the years in which temporary differences
are expected to reverse, including net 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.
Our liability for unrecognized tax benefits contains
uncertainties because management is required to make
assumptions and to apply judgment to estimate the
exposures associated with our various filing positions.
Our effective income tax rate is also affected by changes
in tax law, our level of earnings and the results of tax
audits.
We consider the probability of future taxable income and
our historical profitability, among other factors, in
assessing the amount of the valuation allowance.
Significant judgment is involved in this determination,
including projections of future taxable income.
As of December 31, 2012 we had unrecognized tax
benefits of $23.4 million. Within the next twelve months,
it is reasonably possible that approximately $1.0 million of
the total uncertain tax positions recorded will reverse,
primarily due to the expiration of statutes of limitation in
various jurisdictions. Approximately $7.5 million would
impact the effective rate once settled.
Changes in these estimates and assumptions could
materially affect the amount or timing of valuation
allowance releases.
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 change in the valuation
allowance could have the effect of increasing stockholders'
equity and/or decreasing the income tax provision in the
statement of comprehensive income.