FairPoint Communications 2010 Annual Report Download - page 83

Table of Contents
Actual results could differ from those estimates. The consolidated financial statements reflect all adjustments that are necessary for a fair presentation of
results of operations and financial condition for the periods shown, including normal recurring accruals and other items. The Company has reclassified
certain prior period amounts in the consolidated financial statements to be consistent with current period presentation. These reclassifications were made to
correct the classification of performance assurance plans (“PAP”) penalties from selling, general and administrative expenses to contra-revenue and to correct
the allocation of certain employee and general computer expenses between cost of services and selling, general and administrative expenses. Correction of these
classification errors resulted in a decrease of $7.7 million to revenue, an increase of $0.5 million to cost of services, and a decrease of $8.1 million to selling,
general and administrative expenses for the year ended December 31, 2009. Correction of these classification errors had no impact on loss from operations or
net loss.
Examples of significant estimates include the allowance for doubtful accounts, revenue reserves, the recoverability of plant, property and equipment,
valuation of intangible assets, pension and post-retirement benefit assumptions and income taxes. In addition, estimates have been made in determining the
amounts and classification of certain liabilities subject to compromise.
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Revenues are recognized as services are rendered and are primarily derived from the usage of the Company’s networks and facilities or under revenue-
sharing arrangements with other communications carriers. Revenues are primarily derived from: access, pooling, voice services, Universal Service Fund
receipts, Internet and broadband services, and other miscellaneous services. Local access charges are billed to local end users under tariffs approved by each
state’s Public Utilities Commission (“PUC”). Access revenues are derived for the intrastate jurisdiction by billing access charges to interexchange carriers and
to other local exchange carriers (“LECs”). These charges are billed based on toll or access tariffs approved by the local state’s PUC. Access charges for the
interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association or by the individual company and approved by
the Federal Communications Commission (the “FCC”).
Revenues are determined on a bill-and-keep basis or a pooling basis. If on a bill-and-keep basis, the Company bills the charges to either the access provider
or the end user and keeps the revenue. If the Company participates in a pooling environment (interstate or intrastate), the toll or access billed is contributed to a
revenue pool. The revenue is then distributed to individual companies based on their company-specific revenue requirement. This distribution is based on
individual state PUCs’ (intrastate) or the FCC’s (interstate) approved separation rules and rates of return. Distribution from these pools can change relative to
changes made to expenses, plant investment, or rate-of-return. Some companies participate in federal and certain state universal service programs that are
pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Revenues earned through the various pooling
arrangements are initially recorded based on the Company’s estimates.
Long-distance retail and wholesale services are usage sensitive and are billed in arrears and recognized when earned. Internet and data services revenues are
substantially all recurring revenues and are billed one month in advance and deferred until earned. As of December 31, 2010 and 2009, unearned revenue of
$15.3 million and $13.2 million, respectively, was included in other accrued liabilities on the consolidated balance sheet. The majority of the Company’s
miscellaneous revenue is provided from billing and collection and directory services. The Company earns revenue from billing and collecting charges for toll
calls on behalf of interexchange carriers. The interexchange carrier pays a certain rate per each minute billed by the Company. The Company recognizes
revenue from billing and collection services when the services are provided.
Internet and broadband services and certain other services are recognized in the month the service is provided.
Non-recurring customer activation fees, along with the related costs up to, but not exceeding the activation fees, are deferred and amortized over the
customer relationship period.
SQI penalties and certain PAP penalties are settled by crediting customer accounts and recorded as a reduction to revenue.
Revenue is recognized net of tax collected from customers and remitted to governmental authorities.
Management makes estimated adjustments, as necessary, to revenue or accounts receivable for billing errors, including certain disputed amounts. At
December 31, 2010 and 2009, the Company recorded revenue reserves of $19.6 million and $22.6 million, respectively.
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