FairPoint Communications 2006 Annual Report Download - page 53

· Allowance for doubtful accounts;
· Accounting for income taxes; and
· Valuation of long-lived assets, including goodwill.
Revenue recognition. Certain of our interstate network access and data revenues are based on tariffed access charges filed directly with the Federal
Communications Commission; the remainder of such revenues are derived from revenue sharing arrangements with other local exchange carriers administered
by the National Exchange Carrier Association.
The Telecommunications Act allows local exchange carriers to file access tariffs on a streamlined basis and, if certain criteria are met, deems those tariffs
lawful. Tariffs that have been “deemed lawful” in effect nullify an interexchange carrier’s ability to seek refunds should the earnings from the tariffs ultimately
result in earnings above the authorized rate of return prescribed by the Federal Communications Commission. Certain of the Company’s telephone subsidiaries
file interstate tariffs directly with the Federal Communication Commission using this streamlined filing approach. As of December 31, 2006, the amount of
our earnings in excess of the authorized rate of return reflected as a liability on the balance sheet for the 2005 to 2006 monitoring periods was approximately
$0.4 million. The settlement period related to (i) the 2003 to 2004 monitoring period lapses on September 30, 2007 and (ii) the 2005 to 2006 monitoring period
lapses on September 30, 2009. We will continue to monitor the legal status of any pending or future proceedings that could impact its entitlement to these
funds, and may recognize as revenue some or all of the over-earnings at the end of the settlement period or as the legal status becomes more certain.
Allowance for doubtful accounts. In evaluating the collectibility of our accounts receivable, we assess a number of factors, including a specific
customer’s or carrier’s ability to meet its financial obligations to us, the length of time the receivable has been past due and historical collection experience.
Based on these assessments, we record both specific and general reserves for uncollectible accounts receivable to reduce the related accounts receivable to the
amount we ultimately expect to collect from customers and carriers. If circumstances change or economic conditions worsen such that our past collection
experience is no longer relevant, our estimate of the recoverability of our accounts receivable could be further reduced from the levels reflected in our
accompanying consolidated balance sheet.
Accounting for income taxes.As part of the process of preparing our consolidated financial statements we were required to estimate our income taxes.
This process involves estimating our actual current tax exposure and assessing temporary differences resulting from different treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then
assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe the recovery is not likely, we must
establish a valuation allowance. Further, to the extent that we establish a valuation allowance or increase this allowance in a financial accounting period, we
must include a tax provision, or reduce our tax benefit in our consolidated statement of operations. In performing the assessment, management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. We use our judgment to determine our provision or
benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
There are various factors that may cause those tax assumptions to change in the near term. We cannot predict whether future U.S. federal income tax laws
and regulations might be passed that could have a 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.
51