Windstream 2008 Annual Report Download - page 134

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies and Changes, Continued:
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 undesignated portion of the
swaps were recognized in other income, net in the accompanying consolidated statement of income. 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.
Changes in fair value of these derivative instruments were as follows for the years ended December 31:
(Millions) 2008 2007 2006
Decrease in fair value of effective portion, net of tax $ (39.1) $ (25.6) $ (23.6)
Changes in fair value of undesignated portion $ (5.8) $ (3.1) $ -
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.
Advertising – Advertising costs are expensed as incurred. Advertising expense totaled $50.0 million in 2008,
$51.7 million in 2007 and $33.6 million in 2006.
Stock-Based Compensation – In accordance with SFAS No. 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 expense over the period that each award vests. This expense is included in cost of services and
selling, general, administrative and other expenses in the accompanying consolidated statements of income.
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 is 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.
Income Taxes – The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for
Income Taxes”, under the asset and liability method. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax balances are adjusted to reflect tax rates
based on currently enacted tax laws, which will be in effect in the years in which the temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the
results of operations in the period of the enactment date. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
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