Windstream 2007 Annual Report Download - page 126

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies and Changes, Continued:
SFAS No. 142 also requires intangible assets with indefinite lives to be tested for impairment on at least an annual
basis, or more frequently if events or changes in circumstances indicate that the asset may be impaired, by
comparing the fair value of the assets to their carrying amounts. For purposes of completing the annual
impairment reviews, the fair value of the wireline franchise rights and wireless licenses is determined based on the
discounted cash flows of the acquired operations.
Net Property, Plant and Equipment – Property, plant and equipment are stated at original cost. Wireline plant
consists of central office equipment, outside communications plant and furniture, fixtures, vehicles and machinery
and equipment. Other plant consists of central office equipment, office and warehouse facilities and software to
support the business units in the distribution of telecommunications products and wireless services. The costs of
additions, replacements and substantial improvements, including related labor costs, are capitalized, while the
costs of maintenance and repairs are expensed as incurred. Depreciation expense amounted to $488.1 million in
2007, $422.3 million in 2006 and $466.0 million in 2005.
Net property, plant and equipment consists of the following at December 31:
(Millions) Depreciable Lives 2007 2006
Land $ 24.7 $ 24.2
Buildings and improvements 5-40 years 435.6 426.8
Central office equipment 4-25 years 3,680.1 3,415.9
Outside communications plant 7-40 years 4,445.9 4,202.8
Furniture, vehicles and other equipment 3-23 years 459.1 440.3
Construction in progress 175.3 214.3
9,220.7 8,724.3
Less accumulated depreciation (5,178.4) (4,784.5)
Net property, plant and equipment $ 4,042.3 $ 3,939.8
The Company’s regulated operations use a group composite depreciation method. Under this method, when plant
is retired, the original cost, net of salvage value, is charged against accumulated depreciation and no gain or loss is
recognized on the disposition of the plant. For the Company’s non-regulated operations, when depreciable plant is
retired or otherwise disposed of, the related cost and accumulated depreciation are deducted from the plant
accounts, with the corresponding gain or loss reflected in operating results.
The Company capitalizes interest in connection with the acquisition or construction of plant assets. Capitalized
interest is included in the cost of the asset with a corresponding reduction in interest expense. Capitalized interest
amounted to $3.7 million in 2007, $2.7 million in 2006 and $2.6 million in 2005.
Derivative Instruments – SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as
amended, provides guidance on accounting for derivatives, including interest rate swaps. In addition, SFAS
No. 133 governs when a derivative or other financial instrument can be designated as a hedge, and requires
recognition of all derivative instruments at fair value. Accounting for the changes in fair value depends on
whether the derivative has been designated as, qualifies as and is effective as a hedge. Changes in fair value of the
effective portions of hedges should be recorded as a component of other comprehensive income in the current
period. Changes in fair values of the derivative instruments not qualifying as hedges, or of any ineffective portion
of hedges, should be recognized in earnings in the current period.
The effectiveness of the Company’s cash flow hedges is assessed each quarter using the “Change in Variable Cash
Flow Method”, or Method 1, described in Derivatives Implementation Group (“DIG”) Issue No. G7, “Cash Flow
Hedges: Measuring the Ineffectiveness of a Cash Flow Hedge under Paragraph 30(b) When the Shortcut Method
Is Not Applied”. Method 1 utilizes the matched terms principle of measuring effectiveness, and requires the
floating-rate leg of the swap and the hedged variable cash flows of the asset or liability to be based on the same
interest rate index. It also requires the variable interest rates of both instruments to reset on the same dates.
Furthermore, there should be no other differences in the terms of the hedge and the hedged item, and the
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