FairPoint Communications 2009 Annual Report Download - page 121

Table of Contents
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
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
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
FairPoint files a consolidated income tax return with its subsidiaries. FairPoint has a tax-sharing agreement in which all subsidiaries are
participants. All intercompany tax transactions and accounts have been eliminated in consolidation.
The Company adopted FASB Interpretation No. (FIN) 48, 
 on January 1, 2007. FIN 48 requires applying a "more likely than not" threshold to the recognition and de-recognition of tax positions. The
Company's unrecognized tax benefits totaled $8.8 million as of January 1, 2009 and $5.4 million as of December 31, 2009, of which $2.0 million
would impact its effective tax rate, if recognized.
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 determines its estimates of future taxable income based upon the
scheduled reversal of deferred tax liabilities, projected future taxable income exclusive of reversing temporary differences, and tax planning strategies.
The Company establishes valuation allowances for deferred tax assets when it is estimated to be more likely than not that the tax assets will not be
realized.
Based upon the level of projections for future taxable income at December 31, 2008, management believed it was more likely than not the
Company would realize the full benefits of these deductible differences. However, as a result of the change in facts and circumstances during 2009 in
which the Company filed for Chapter 11 reorganization, the Company reassessed the likelihood that its deferred tax assets will be realized as of
December 31, 2009. Based upon the change in circumstances, management believes it can support the realizability of its deferred tax asset only by the
scheduled reversal of its deferred tax liabilities and can no longer rely upon the projection of future taxable income. At December 31, 2009, the
Company established a valuation allowance of $27.2 million against its deferred tax assets which consists of a $21.7 million Federal allowance and a
$5.5 million state allowance.
(p) Stock-based Compensation Plans
The Company accounts for its stock-based compensation plans in accordance with the Compensation-Stock Compensation Topic of the ASC,
which establishes accounting for stock-based awards granted in exchange for employee services. Accordingly, for employee awards which are expected
to vest, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense on a straight-line
basis over the requisite service period, which generally begins on the date the award is granted through the date the award vests. The Company elected
to adopt the provisions of the Compensation-Stock Compensation Topic of the ASC using the prospective application method for awards granted prior
to becoming a public company and valued using the minimum value method, and using the modified prospective application method for awards granted
subsequent to becoming a public company.
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