XO Communications 2009 Annual Report Download - page 37

party professionals, and other various assumptions that are believed to be reasonable under the facts and
circumstances. Actual results could differ materially from those estimates made by management.
The following list is not intended to be a comprehensive list of all of our accounting policies. Our significant
accounting policies are described in Note 2 or our consolidated financial statements in Item 8 of this Annual
Report.
Revenue Recognition
Revenue from telecommunications services is recognized when the related services are provided. Fees billed
in connection with service installations and other non-recurring charges related to ongoing service are deferred
and recognized ratably over the average customer life. Up front cash collected from lease of unlit network
capacity under indefeasible rights of use is recognized ratably over the contract term.
Receivable Reserves
Sales Credit Reserves
During each reporting period we must make estimates for potential future sales credits to be issued related to
billing errors, service interruptions and customer disputes. We utilize both specific identification and general
reserve methods for determining the sales credit reserves. A specific reserve requirement review is performed
on customer accounts with larger balances. We also estimate a general sales credit reserve related to unknown
billing errors and disputes based on a rolling six months of historical sales credit activity. We assess the
adequacy of our sales credit reserve on a monthly basis using several factors, including the likelihood of
billing being disputed by customers and historical sales credit trends.
Historically management’s estimates used in the sales credit reserve calculation have not led to significant
write-offs in excess of reserves recorded. Although we believe that our accounting policy is designed to
properly assess our sales credit reserves, changes to the estimates in our reserve calculation could result in a
material impact on our Consolidated Statement of Operations.
Allowance for Doubtful Accounts
During each reporting period we must make estimates for potential losses resulting from uncollectible trade
accounts receivable. The determination of our allowance for doubtful accounts requires significant estimation
and assumptions. The corresponding provision for doubtful accounts is recorded as a Selling, General and
Administrative expense. We utilize both specific and general allowance methods for determining the allowance
for doubtful accounts.
A specific reserve requirement review is performed on customer accounts with larger balances. An additional
reserve requirement review is performed on accounts not subject to specific review using several factors,
including the length of time individual receivables are past due, historical collection experience, the economic
and competitive environment, and changes in the creditworthiness of our customers. We can and have
experienced significant month-to-month changes in reserve level requirements. If circumstances relating to
financial viability of significant customers change or economic conditions worsen such that our past collection
experience and assessment of the economic environment are no longer relevant, our estimate of the
recoverability of our trade receivables could be changed. If this occurs, we would adjust our valuation
allowance in the period the new information is known. Any material change in the financial status of any one
or group of customers could have a material adverse effect on our results of operations, financial position or
cash flows.
Cost of Service
Cost of Service — Telecommunications Services include expenses for customer loop, interconnect access and
transport services paid to third-party telecommunications providers. We accrue for the expected cost of
services obtained from third-party telecommunications providers during the period the services are rendered.
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