Windstream 2007 Annual Report Download - page 127

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies and Changes, Continued:
likelihood of default by the interest rate swap counterparties must be assessed as being unlikely in order to
conclude that there is no ineffectiveness in the hedging relationship. The Company performs and documents this
assessment under Method 1 each quarter, and it concluded at December 31, 2007 that there was no ineffectiveness
to be recognized in earnings in any of its four interest rate swap agreements that are designated as hedges.
After the completion of a refinancing transaction in February 2007, a portion of one of the four interest rate swap
agreements with a notional value of $125.0 million ($115.8 million as of December 31, 2007) was de-designated
as the corresponding hedged item was repaid. Therefore, the undesignated portion of the swap agreement was no
longer an effective hedge of the variable interest rate paid on Tranche B.
In accordance with SFAS No. 133, the Company recognizes all derivative instruments at fair value in the
accompanying consolidated balance sheets as either assets or liabilities depending on the rights or obligations
under the related contracts. The fair value of the unrealized holding loss on the Company’s interest rate swaps of
$83.2 million and $39.0 million is included in other liabilities in the accompanying consolidated balance sheets at
December 31, 2007 and 2006, respectively. Changes in the fair value of the effective portion of these derivative
instruments, which totaled $25.6 million and $23.6 million net of tax at December 31, 2007 and 2006,
respectively, were reported as a component of other comprehensive income (loss) in the current period and will be
reclassified into earnings as the hedged transaction affects earnings. Changes in the fair value of the ineffective
portion of the swaps are recognized in net income, including a $3.1 million loss in 2007. These changes were
recorded as other income, net in the accompanying consolidated statement of income for the year ended
December 31, 2007. Net amounts due related to interest rate swap agreements are recorded as adjustments to
interest expense in the consolidated statements of income when earned or payable.
Revenue Recognition – Service revenues are primarily derived from providing access to or usage of the
Company’s networks and facilities. Wireline local access revenues are recognized over the period that the
corresponding services are rendered to customers. Revenues derived from other telecommunications services,
including interconnection, long distance and custom calling feature revenues are recognized monthly as services
are provided. Sales of communications products including customer premise equipment and modems are
recognized when products are delivered to and accepted by customers. The Company accounts for transactions
involving the activation of service in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
Recognition”. Fees assessed to communications customers to activate service are not a separate unit of
accounting, and are deferred upon activation and recognized as service revenue on a straight-line basis over the
expected life of the customer relationship. The costs associated with activating such services, up to the related
amount of deferred revenue, are deferred and recognized as an operating expense over the same period.
Prior to the sale of Windstream Yellow Pages, advertising revenues associated with directory publishing and the
related directory costs were recognized when the directories were published and delivered. For directory contracts
with a secondary delivery obligation, Windstream Yellow Pages deferred a portion of its revenues and related
directory costs until secondary delivery occurred. Included in assets held for sale were unbilled receivables related
to directory advertising revenues earned but not yet billed of $58.8 million at December 31, 2006.
Prior to the merger with Valor, the telecommunications information services business earned revenues from data
processing services performed for Valor. These revenues were recognized as services were performed in
accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 97-2
“Software Revenue Recognition” and SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions”. When the arrangement with the customer included significant production,
modification or customization of the software, the Company used contract accounting, specifically the
percentage-of-completion method under SOP 81-1 “Accounting for Performance of Construction-Type and
Certain Production-Type Contracts”. After the merger, these services were no longer offered as Valor was the sole
remaining external customer.
Advertising – Advertising costs are expensed as incurred. Advertising expense totaled $51.7 million in 2007,
$33.6 million in 2006 and $25.1 million in 2005.
Stock-Based Compensation – In accordance with SFAS 123(R), “Share-Based Payment”, the Company values all
share-based awards to employees at fair value on the date of the grant, and recognizes that value as compensation
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