FairPoint Communications 2005 Annual Report Download - page 55

material effect on our results of operations. We assess the impact of significant changes to the U.S. federal and state income tax laws and regulations on a
regular basis and update the assumptions and estimates used to prepare our financial statements when new regulation and legislation is enacted.
Based on certain assumptions, we had $291.9 million in federal and state net operating loss carry forwards as of December 31, 2005. In
February 2005, we completed the offering which resulted in an “ownership change” within the meaning of the U.S. federal income tax laws addressing net
operating loss carry forwards, alternative minimum tax credits and other similar tax attributes. As a result of such ownership change, there will be specific
limitations on our ability to use our net operating loss carry forwards and other tax attributes. In order to fully utilize the deferred tax assets, mainly generated
by the net operating losses, we will need to generate future taxable income of approximately $219 million prior to the expiration of the net operating loss carry
forwards beginning in 2019 through 2025.
The valuation allowance for deferred tax assets as of December 31, 2004 was $66.0 million. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment,
as well as all positive and negative evidence that would affect the recoverability of deferred tax assets. As a result of the offering, we have reduced our aggregate
long term debt and expect a significant reduction in its annual interest expense. When considered together with our history of producing positive operating
results and other evidence affecting the recoverability of deferred tax assets, we expect that future taxable income will more likely than not be sufficient to
recover net deferred tax assets. Therefore, the valuation allowance was reversed in the first quarter of 2005, subsequent to the offering.
Valuation of long-lived assets, including goodwill.We review our long-lived assets, including goodwill for impairment whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. Several factors could trigger an impairment review such as:
· significant underperformance relative to expected historical or projected future operating results;
· significant regulatory changes that would impact future operating revenues;
· significant negative industry or economic trends; and
· significant changes in the overall strategy in which we operate our overall business.
Goodwill was $481.3 million at December 31, 2005. As part of the Berkshire and Bentleyville acquisitions, the Company has recorded intangible assets
related to the acquired companies’ customer relationships of $2.4 million and $1.4 million, respectively. These intangible assets will be amortized over 15
years. The intangible assets are included in Intangible Assets on the Consolidated Balance Sheet.
We are required to perform an annual impairment review of goodwill as required by Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. No impairment of goodwill resulted from the annual valuation of goodwill.
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In December 2004, the FASB issued SFAS No. 123(R). This new standard requires companies to adopt the fair value methodology of valuing stock-
based compensation and recognizing that valuation in the financial statements from the date of grant. Accordingly, the adoption of SFAS No. 123(R)’s fair
value method is not expected to have a significant impact on our results of operations. However, had we adopted SFAS No. 123(R) in prior periods, the impact
of that standard would have approximated the impact of SFAS No. 123 as disclosed in Note 1(n). SFAS No. 123(R) also requires the benefits of tax
deductions in
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