FairPoint Communications 2011 Annual Report Download - page 60

Table of Contents
Fresh Start Accounting. Upon the Effective Date, we applied fresh start accounting principles in accordance with guidance under the applicable
reorganization accounting rules. With the exception of deferred taxes and assets and liabilities associated with pension and post-retirement health plans, all
Successor Company assets and non-interest bearing liabilities are recorded at their estimated fair values upon the Effective Date. The fair value estimates for
property, plant and equipment were based on various valuation methods, including but not limited to, the market approach, the indirect cost approach, the
direct replacement cost approach and the “percent of cost” market approach. The fair value estimates of identifiable assets were based on the cost method for
our customer lists and the relief from royalty for our trade name.
We also recorded the Successor Company debt and equity at fair value utilizing the total enterprise value of approximately $1.5 billion, which was
determined in conjunction with the confirmation of the Plan in part based on a set of financial projections for the Successor Company. The calculation of the
enterprise value was dependent upon achieving the estimated future financial results set forth in our projections, as well as the realization of certain other
assumptions.
Our actual performance against these projections and assumptions made in applying fresh start accounting could result in an impairment of the value
attributed to our long-lived assets, including goodwill and the trade name, on the Effective Date. In fact, as further discussed in our accounting policy of the
valuation for long-lived assets, including goodwill below, an impairment to goodwill and our trade name was recorded at September 30, 2011. Although an
impairment charge could have a material effect on our results of operations, this non-cash expense would have no impact on our compliance with the covenants
contained in the Credit Agreement.
Revenue Recognition. We recognize service revenues based upon usage of our local exchange network and facilities and contract fees. Fixed fees for
voice services, Internet services and certain other services are recognized in the month the service is provided. Revenue from other services that are not fixed fee
or that exceed contracted amounts is recognized when those services are 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 recorded as
a reduction to revenue. SQI penalties for Maine, New Hampshire and Vermont are recorded to other accrued liabilities on the consolidated balance sheets. PAP
penalties for Maine and New Hampshire are recorded as a reduction to accounts receivable since these penalties are paid by the Company in the form of credits
applied to the CLEC bills. PAP penalties in Vermont are recorded to other accrued liabilities as a majority of these penalties are paid to the Vermont Universal
Service Fund, while the remaining credits assessed in Vermont are paid by the Company in the form of credits applied to CLEC bills. All SQI and Vermont
PAP penalties related to the Predecessor Company are recorded to the Claims Reserve at December 31, 2011 and to liabilities subject to compromise at
December 31, 2010.
We make estimated adjustments, as necessary, to revenue or accounts receivable for billing errors, including certain disputed amounts.
Allowance for Doubtful Accounts. In evaluating the collectability 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.
On the Effective Date, the accounts receivable balances were valued at fair value using the net realizable value approach. The net realizable value
approach was determined by reducing the gross receivable balance by our allowance for doubtful accounts. Due to the relatively short collection period, the net
realizable value approach was determined to result in a reasonable indication of fair value of the assets.
Accounting for Pension and Other Post-retirement Benefits. Some of our employees participate in our pension plans and other post-retirement
healthcare plans. In the aggregate, the benefit obligations of the pension plans and the benefit obligations of the post-retirement healthcare plans each exceed the
fair value of their respective assets, resulting in expense. Significant pension and other post-retirement healthcare plan assumptions, including the discount rate
used, the long-term rate-of-return on plan assets, and medical cost trend rates are periodically updated and impact the amount of benefit plan income, expense,
assets and obligations reflected in our consolidated financial statements. The actuarial assumptions we used in determining our pension and post-retirement
healthcare plans obligations may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or
longer or shorter life spans of participants. While we believe that the assumptions used are appropriate, differences in actual experience or changes in
assumptions might materially affect our financial position or results of operations.
Our pension and post-retirement liabilities are highly sensitive to changes in the discount rate. We currently estimate that a movement of 1% in the
discount rate would change our pension plan benefit obligations by approximately 19%. We currently estimate that a 1% fluctuation in the discount rate would
change our post-retirement healthcare benefit obligations by approximately 23%.
The post-retirement healthcare benefit obligations are also highly sensitive to the medical trend rate assumption. A 1% increase in the medical trend rate
assumed for post-retirement healthcare benefits at December 31, 2011 would result in an increase in the post-retirement healthcare benefit obligations of
approximately $134.1 million and a 1% decrease in the medical trend rate assumed at December 31, 2011 would result in a decrease in the post-retirement
healthcare benefit obligations of approximately $101.1 million.