FairPoint Communications 2011 Annual Report Download - page 61

Table of Contents
Accounting for Income Taxes. Our current and deferred income taxes are affected by events and transactions arising in the normal course of
business, as well as in connection with the adoption of new accounting standards and non-recurring items. Assessment of the appropriate amount and
classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of
income tax payments. Actual payments may differ from these estimates as a result of changes in tax laws, as well as unanticipated future transactions
affecting related income tax balances. We account for tax benefits taken or expected to be taken in our tax returns utilizing a two step approach for recognizing
and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions.
Depreciation of Property, Plant and Equipment. We recognize depreciation on property, plant and equipment principally on the composite group
remaining life method and straight-line composite rates over estimated useful lives ranging from three to 50 years. This method provides for the recognition of
the cost of the remaining net investment in telephone plant, less anticipated net salvage value (if any), over the remaining asset lives. This method requires the
periodic revision of depreciation rates. We review the depreciable lives annually. Changes in the estimated useful lives of property, plant and equipment or
depreciation methods could have a material effect on our results of operations. However, a change in this non-cash expense would have no impact on our
compliance with the covenants contained in the Credit Agreement.
Stock-based Compensation. Compensation expense for share-based awards made to employees and directors are recognized based on the estimated fair
value of each award over the award’s vesting period. We estimate the fair value of share-based payment awards on the date of grant using either an option-
pricing model for stock options or the closing market value of our stock for restricted stock, and expense the value of the portion of the award that is
ultimately expected to vest over the requisite service period in the statement of operations.
We utilize the Black-Scholes option pricing model to calculate the fair value of our stock option grants. The key assumptions used in the Black-Scholes
option pricing model are the expected life of the stock option, the expected dividend rate, the risk-free interest rate and expected volatility. The expected life of the
stock options granted represents the period of time that the options are expected to be outstanding. The risk-free interest rates are based on United States
Treasury yields in effect at the date of grant consistent with the expected exercise timeframes. The expected volatility reflects the historical volatility for a
duration consistent with the contractual life of the options. Given the lack of historical data of employee behavior and our company, our assumptions of these
key inputs in addition to our assumption made about the portion of the awards that will ultimately vest requires subjective judgment.
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. In addition, we review goodwill and non-amortizable intangible assets for
impairment on an annual basis as of the first day of the fourth quarter of each year. 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.
At December 31, 2011, we have no goodwill and $138.6 million of gross intangible assets related to customer relationships, the FairPoint trade name
and favorable leasehold agreements as of December 31, 2011. The customer relationships and favorable leasehold agreements are being amortized over a
weighted average life of approximately 9.0 years and 2.7 years, respectively. As of December 31, 2011, there is $10.4 million of accumulated amortization
recorded. The trade name has an indefinite life and is, therefore, not amortized. The intangible assets are included in intangible assets on our consolidated
balance sheet. In addition, we have recorded $1.9 billion of gross property, plant and equipment as of December 31, 2011, net of $280.5 million accumulated
depreciation. These assets are depreciated over lives ranging from three to 50 years.
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