Earthlink 2015 Annual Report Download - page 70

Table of Contents
EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue Recognition
General. The Company recognizes revenue when persuasive evidence of an arrangement exists, services have been provided or products have been delivered, the
sales price is fixed or determinable and collectibility is reasonably assured. The Company's customers generally are billed in advance for their services, and
revenue is recognized ratably over the service period. Advance billings from customers for invoiced services that have not yet been performed are recorded as
deferred revenue in the Consolidated Balance Sheets.
The Company generates business services revenue by providing a broad range of data, voice and managed network services to retail and wholesale business
customers. The Company's business services revenue includes revenues from its Enterprise/Mid-Market, Small Business and Carrier/Transport segments. The
Company classifies its business services revenue in the following three categories: (1) retail services, which includes data, voice and managed network services
provided to business customers; (2) wholesale services, which includes the sale of transmission capacity and other services to telecommunications carriers and
large enterprises; and (3) other services, which primarily consists of web hosting. Revenues generally consist of recurring monthly charges for such services; usage
fees; installation fees; termination fees; and administrative fees.
The Company’s generates consumer services revenue by providing nationwide Internet access and related value-added services to residential customers. The
Company classifies its consumer services revenue in the following two categories: (1) access services, which includes dial-up and high-speed Internet access
services; and (2) value-added services, which includes revenues from ancillary services sold as add-on features to the Company'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.
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, limited to amounts currently
billable under the terms of the Company's contracts. 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 to the
customer.
Activation and installation. When the Company receives service activation and installation fee revenues in advance of the provision of services, the Company
defers the service activation and installation fee revenues and amortizes them over the weighted average initial contract terms of contracts initiated each month,
assuming a customer churn factor. The costs associated with such activation and installation activities are deferred and recognized as operating expense over the
same period to the extent they are recoverable based on future revenues.
Sales credit reserves. The Company makes estimates for potential future sales credits to be issued in respect of earned revenues, related to billing errors, service
interruptions and customer disputes which are recorded as a reduction in revenue. The Company analyzes historical credit activity and changes in customer
demands related to current billing and service interruptions when evaluating its credit reserve requirements. The Company reserves known billing errors and
service interruptions as incurred. The Company reviews customer disputes and reserves against those the Company believes to be valid claims. The Company also
estimates a sales credit reserve related to unknown billing errors and disputes based on historical credit activity. Experience indicates that the invoices that are
provided to 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 customer relationships.
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