Earthlink 2012 Annual Report Download - page 76

Table of Contents EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
measures the impairment loss, if any, based on the difference between the carrying amount and fair value. Long-
lived assets held for sale are
reported at the lower of cost or fair value less costs to sell.
Leases
The Company categorizes leases at their inception as either operating or capital leases depending on certain criteria. Certain of the
Company's operating lease agreements include scheduled rent escalations or rent holiday over the term of the lease. The Company recognizes
rent expense on a straight-
line basis over the term of the lease. The difference between rent expense and rent paid is recorded as deferred rent
and included in other liabilities in the Consolidated Balance Sheets. Incentives granted under certain leases are treated as a reduction of the
Company's rent expense on a straight-
line basis over the term of the related lease agreement. Leasehold improvements funded by the lessor
under operating leases are recorded as leasehold improvements and deferred rent.
Asset Retirement Obligations
The Company has asset retirement obligations associated with certain assets within leased facilities that the Company is contractually
obligated to retire upon termination of the associated lease agreement and the return of facilities to pre-
lease condition. The fair value of the
obligation is also capitalized as property and equipment and amortized over the estimated useful life of the associated asset. The Company's asset
retirement obligations were $4.3 million and $4.3 million as of December 31, 2011 and 2012 , respectively, and are included in other long-
term
liabilities in the Consolidated Balance Sheets.
Revenue Recognition
General.
EarthLink recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is
fixed or determinable and collectibility is reasonably assured. EarthLink's customers generally pay in advance for their services, and revenue is
recognized ratably over the service period. Advance payments from customers for invoiced services that have not yet been performed are
recorded as deferred revenue in the Consolidated Balance Sheets.
The Company's Business Services segment earns revenue by providing a broad range of data, voice, equipment and IT services to retail
and wholesale business customers. The Company presents its Business Services revenue into the following categories: (1) retail services, which
includes data, voice and IT services provided to businesses and enterprise organizations; (2) wholesale services, which includes the sale of
transmission capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment and
web hosting. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; equipment fees; and
termination fees.
The Company's Consumer Services segment earns revenue by providing nationwide Internet access and related value-
added services.
The Company presents its Consumer Services revenue into the following categories: (1) access services, which includes narrowband and
broadband Internet access services and (2) value-added services, which includes revenues from ancillary services sold as add-
on features to
EarthLink's Internet access services, such as security products, premium email only, home networking and email storage; search revenues; and
advertising revenues. Revenues generally consist of recurring monthly charges for such services; usage fees; installation fees; termination fees;
and fees for equipment.
Multiple element arrangements.
Revenues may be part of multiple element arrangements, such as equipment sold with data and
voices services. For multiple element arrangements, the Company separates deliverables into units of accounting and recognizes revenue for
each unit of accounting based on evidence of each unit's relative selling price to the total arrangement consideration, assuming all other revenue
recognition criteria have been met. Each deliverable is considered a separate unit of accounting if the delivered item has stand-
alone value to the
customer. The Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: 1) the price the
Company sells the same unit for when the Company sells it separately; 2) the price another vendor would sell a generally interchangeable item;
or 3) the Company's best estimate of the stand-alone price.
Gross versus net revenue recognition. The Company offers certain services that are provided by third-
party vendors. When the
Company is the primary obligor in a transaction, has latitude in establishing prices, is the party determining the service specifications or has
several but not all of these indicators, the Company records the revenue on a gross basis. If the Company is not the primary obligor and/or a
third-
party vendor has latitude in establishing prices, the Company records 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.
Activation and installation.
When the Company receives service activation and installation fee revenues in advance of the provision