Sprint - Nextel 2007 Annual Report Download - page 94

SPRINT NEXTEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
intercompany transactions and balances have been eliminated in consolidation. We use the equity method to
account for equity investments in unconsolidated entities in which we have the ability to exercise significant
influence over operating and financial policies. We recognize all changes in our proportionate share of the equity
of these entities resulting from their equity transactions as adjustments to our investment and shareholders’
equity balances.
Estimates, Adoption of SAB No. 108 and Reclassifications
We prepare our consolidated financial statements in conformity with accounting principles generally
accepted in the United States, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
balance sheet as well as the reported amounts of revenues and expenses during the reporting periods. Due to the
inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in
which significant estimates have been made include, but are not limited to, revenue recognition, the allowance
for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property,
plant and equipment and definite lived intangible assets, goodwill and indefinite lived intangible asset
impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities
assumed in business combinations.
Effective January 1, 2006, we adopted Staff Accounting Bulletin, or SAB, No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
SAB No. 108 requires a dual approach for quantifying misstatements using both a method that quantifies a
misstatement based on the amount of misstatement originating in the current year statement of operations, as well
as a method that quantifies a misstatement based on the effects of correcting the misstatement existing in the
balance sheet. Prior to the adoption of SAB No. 108, we quantified any misstatements in our consolidated
financial statements using the statement of operations method in addition to evaluating qualitative characteristics.
In fourth quarter 2006, we discovered lease accounting misstatements during the process of migrating more
than 30,000 leases into a single lease accounting system. During this process, we identified that we previously
were not accurately calculating the straight-line impact of operating lease expense nor were we accurately
following the definition of a lease term for a number of leases.These misstatements accumulated over several
years and were immaterial when quantifying the misstatements using the statement of operations method. Upon
adoption of SAB No. 108 on January 1, 2006, we recorded an $81 million increase to the deferred rent liability
for the cumulative misstatements as of December 31, 2005. In addition, we reduced retained earnings by
$50 million and recorded $31 million as a deferred tax asset. The related 2006 misstatement of $17 million, or
$10 million net of tax, was recorded in the fourth quarter 2006.
Certain prior period amounts have been reclassified to conform to the current period presentation.
Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents generally include highly liquid investments with original maturities at purchase of three
months or less. These investments include money market funds, U.S. government and government-sponsored
debt securities, corporate debt securities, municipal securities, bank-related securities, and credit and debit card
transactions in process.
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