XO Communications 2010 Annual Report Download - page 40

Receivable 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.
It is common for invoices received from the third-party telecommunications providers to include items
which result in disputes due to billing discrepancies. We perform monthly bill verification procedures to
identify errors in vendors’ billing processes. The bill verification procedures include the examination of the
bills, comparing billing rates used with contractual billing rates, evaluating the trends of invoiced amounts by
vendors and reviewing the types of charges being processed. If we believe we have been billed inaccurately,
we accrue costs for disputed invoices based on the last 24 months of historical trends for resolutions of
similarly disputed items. If we ultimately settle a disputed amount for an amount which is different than the
accrual, we recognize the difference in the period in which the settlement is finalized as an adjustment to cost
of service. We believe that our accounting policy is designed to properly assess dispute accruals for third-party
telecommunications costs, however, changes to the estimates used in our calculation could result in a material
impact on our Consolidated Statement of Operations.
Assessment of Loss Contingencies
We have legal and other contingencies that could result in significant losses upon the ultimate resolution
of such contingencies. We have provided for losses in situations where we have concluded that it is probable
that a loss has been or will be incurred and the amount of the loss can be reasonably estimated. A significant
amount of judgment is involved in determining whether a loss is probable and reasonably estimatable due to
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