Windstream 2006 Annual Report Download - page 143

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Continued:
Changes in estimates for revenues, costs and profits are recognized in the period in which they are determinable.
When such estimates indicate that costs will exceed future revenues and a loss on the contract exists, a provision
for the entire loss is then recognized. For all other operations, revenue is recognized when products are delivered to
and accepted by customers or when services are rendered to customers in accordance with contractual terms.
Advertising – Advertising costs are expensed as incurred. Advertising expense totaled $33.6 million in 2006, $25.1
million in 2005 and $23.8 million in 2004.
Stock-Based Compensation – On January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment”, which is a revision of SFAS No. 123 and supercedes Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be
expensed over the applicable vesting period. In addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested
awards is measured based on the fair value of the awards previously calculated in developing the pro forma
disclosures in accordance with the provisions of SFAS No. 123. Upon adoption of the standard, the Company
followed the modified prospective transition method and valued its share-based payment transactions using a
Black-Scholes valuation model. Under the modified prospective transition method, the Company recognizes
compensation cost in its consolidated financial statements for all awards granted after January 1, 2006 and for all
existing awards for which the requisite service has not been rendered as of the date of adoption. The adoption of
SFAS No. 123(R) did not have a material impact on net income in 2006.
Prior to the adoption of SFAS 123(R), the Company accounted for stock-based employee compensation in
accordance with the recognition and measurement principles of APB Opinion No. 25 and related interpretations.
For fixed stock options granted under the Alltel’s stock-based compensation plans, the exercise price of the option
equaled the market value of Alltel’s common stock on the date of grant. Accordingly, no compensation expense
was recognized by the Company in the accompanying consolidated statements of income in periods prior to 2006
for any of the fixed options granted. Had compensation costs for the fixed options granted been determined based
on the basis of the fair value of the awards at the date of grant, consistent with the methodology prescribed by
SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income would have been
reduced to the following pro forma amounts for the years ended December 31:
(Millions) 2005 2004
Net income as reported $374.3 $386.3
Deduct stock-based employee compensation expense determined
under fair value method for all awards, net of related tax effects (4.1) (4.8)
Pro forma net income $370.2 $381.5
Basic earnings per share: As reported $.93 $.96
Pro forma $.92 $.95
Diluted earnings per share: As reported $.93 $.96
Pro forma $.92 $.95
The pro forma amounts presented above may not be representative of the future effects on reported net income that
could result from the future granting of stock-based compensation, since the pro forma compensation expense is
allocated over the periods in which the awards become exercisable, and new awards may be granted each year.
Operating Leases – Certain of the Company’s operating lease agreements include scheduled rent escalations during
the initial lease term and/or during succeeding optional renewal periods. Windstream accounts for these operating
leases in accordance with SFAS No. 13, “Accounting for Leases”, and FASB Technical Bulletin No. 85-3,
“Accounting for Operating Leases with Scheduled Rent Increases”. Accordingly, the scheduled increases in rent
expense are recognized on a straight-line basis over the initial lease term and those renewal periods that are
reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and included in
other liabilities in the accompanying consolidated balance sheets. Leasehold improvements are amortized over the
shorter of the estimated useful life of the asset or the lease term, including renewal option periods that are
reasonably assured.
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