XO Communications 2010 Annual Report Download - page 61

XO Holdings, Inc.
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (continued)
h. Fair Value
The carrying amounts for the Company’s financial instruments classified as current assets and liabilities,
including accounts receivable and accounts payable, approximate their fair value due to their short maturities.
As of December 31, 2010, the Company held a marketable security that is required to be measured at fair
value on a recurring basis. Fair value measurements are classified and disclosed in one of three categories:
Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other
than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own
assumptions.
i. Asset Retirement Obligations
The Company provides an accrual for estimated costs to remove telecommunications and data center
equipment from various leased technical facilities upon termination of the respective lease terms and the
return of facilities to pre-lease condition. These estimated obligations are calculated based on the expected
future cash outflows discounted at the Company’s credit-adjusted risk-free interest rate and adjusted for
inflation. Changes in expected future cash flows are discounted at the appropriate credit-adjusted risk-free rate
and adjusted for inflation.
j. Redeemable Preferred Stock
The Company accretes changes in the recorded value of each class of its preferred stock as they occur
and adjusts the carrying value of the security. The accretion is included in net loss allocable to common
shareholders in the Company’s Consolidated Statements of Operations and Stockholders’ Equity.
k. Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. A valuation allowance is established when it is more likely than not that the deferred tax
asset balance will not be realized.
The calculation of the Company’s tax liabilities involves significant judgment and evaluation of
uncertainties in the interpretation of complex tax laws. Despite management’s belief that the Company’s tax
return positions are fully supportable, the Company has established reserves for uncertainty in its tax
positions. The Company records and classifies income tax related interest and penalties as income tax expense.
l. Revenue Recognition
Services
The Company’s revenue is derived primarily from telecommunication services. Revenue from
telecommunications services is recognized when (i) the services are performed, (ii) evidence of an
arrangement exists, (iii) the fee is fixed and determinable and (iv) collectability is probable. In circumstances
when these criteria are not met, revenue recognition is deferred until all criteria are met. Revenue from
telecommunication services is recognized monthly as the services are provided. Communications services are
provided either on a usage basis, which can vary period to period, or at a contractually committed amount, net
of credits and adjustments for service discounts, billing disputes and unauthorized usage.
Installation Revenue
The Company defers revenue related to installation services and certain other non-recurring charges
related to the on-going service and amortizes the revenue on a straight-line basis over the average contracted
customer relationship (generally 36 months).
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