Windstream 2009 Annual Report Download - page 155

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 each quarter, and has concluded at December 31, 2009 that there was no ineffectiveness to be
recognized in earnings in any of its four interest rate swap agreements that are designated as hedges.
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. Changes in fair
value of these derivative instruments were as follows for the years ended December 31:
(Millions) 2009 2008 2007
Changes in fair value of effective portion, net of tax (a) $20.4 $(39.1) $(25.6)
Changes in fair value of undesignated portion (b) $ 3.0 $ (5.8) $ (3.1)
(a) Included as a component of other comprehensive income (loss) and will be reclassified into earnings as the
hedged transaction affects earnings.
(b) Represents non-cash income recorded in other income, net in the accompanying consolidated statements of
income.
Net amounts due related to designated interest rate swap agreements are recorded as adjustments to interest
expense in the accompanying 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. Fees assessed to customers for service
activation are deferred upon service activation and recognized as service revenue on a straight-line basis over the
expected life of the customer relationship in accordance with authoritative guidance on multiple element
arrangements. 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 second delivery
occurred.
Advertising – Advertising costs are expensed as incurred. Advertising expense totaled $46.6 million in 2009,
$50.0 million in 2008 and $51.7 million in 2007.
Share-Based Compensation – In accordance with authoritative guidance on share-based compensation, 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 authoritative guidance for operating leases with nonlevel rents. 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 guidance on accounting for income
taxes, under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated
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