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Table of Contents EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contingencies
The Company is party to various legal proceedings and other disputes arising in the normal course of business, including, but not
limited to, regulatory audits, trademark and patent infringement, billing disputes, rights of access, tax, consumer protection, employment and
tort. The Company accrues for such matters when it is both probable that a liability has been incurred and the amount of the loss can be
reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the
range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals each reporting
period.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between
the financial reporting and tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using tax rates in effect for
the year in which the temporary differences are expected to reverse. A valuation allowance is recorded to reduce the carrying amounts of net
deferred tax assets if it is more-likely-than-
not that those assets will not be realized. EarthLink considers many factors when assessing the
likelihood of future realization, including the Company's recent cumulative earnings experience by taxing jurisdiction, expectations of future
taxable income, prudent and feasible tax planning strategies that are available, the carryforward periods available to the Company for tax
reporting purposes and other relevant factors.
The Company records a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a
tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax benefit (provision) in the
Consolidated Statements of Comprehensive Income.
Earnings per Share
The Company presents a dual presentation of basic and diluted earnings per share. Basic earnings per share represents net income
divided by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue common stock, including stock options, restricted stock units and
convertible debt (collectively "Common Stock Equivalents"), were exercised or converted into common stock. The dilutive effect of outstanding
stock options, restricted stock units and convertible debt is reflected in diluted earnings per share by application of the treasury stock method. In
applying the treasury stock method for stock-
based compensation arrangements, the assumed proceeds are computed as the sum of the amount
the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized and the amount of
excess tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the awards.
Comprehensive Income
Comprehensive income as presented in the Consolidated Statements of Comprehensive Income for the years ended
December 31, 2010,
2011 and 2012 includes unrealized gains and losses, net of tax, on certain investments classified as available-for-sale.
Certain Risks and Concentrations
Credit Risk.
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and
cash equivalents, marketable securities and trade receivables. In addition, credit risk for the Company's cash equivalents and marketable
securities may be exacerbated by unfavorable economic conditions. If financial markets experience prolonged periods of decline, the value or
liquidity of the Company's cash equivalents and marketable securities could decline and result in an other-than-
temporary decline in fair value,
which could adversely affect the Company's financial position, results of operations and cash flows. The Company's investment policy limits
investments to investment grade instruments.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the U.S. Credit
risk with respect to trade receivables is limited because a large number of geographically diverse customers make up the customer base.
Additionally, the Company maintains allowances for potential credit losses. As of December 31, 2011 and 2012
, no customer accounted for
more than 10% of gross accounts receivable.
Regulatory Risk.
The Company is subject to certain regulations and requirements of the Federal Communications Commission (the
"FCC") and various state public service commissions. Please refer to "Regulatory Environment" in the Business section of this Annual Report on
Form 10-K for a discussion of the regulatory risks to which the Company is subject.