Windstream 2010 Annual Report Download - page 126

through the review of recent market observable transactions involving wireline telecommunication companies. If the
fair value is less than its carrying value, a second calculation is required in which the implied fair value of goodwill is
compared to its carrying value. If the implied fair value of goodwill is less than its carrying value, goodwill must be
written down to its implied fair value.
We evaluate the remaining useful lives of our other indefinite-lived intangible assets and test them for impairment at
least annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. If the
carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an
amount equal to the excess. Windstream determines the fair value of its indefinite-lived intangible assets using a
combination of cost-based and income-based approaches.
The Company performs its impairment analysis on January 1st of each year. During 2010, 2009 and 2008, no write-
downs in the carrying values of either goodwill or indefinite-lived intangible assets were required based on their
calculated fair values. Reducing our January 1, 2010 market capitalization by 90 percent would not have resulted in an
impairment of the carrying value of goodwill. Changes in the key assumptions used in the impairment analysis due to
changes in market conditions could adversely affect the calculated fair values of goodwill and other indefinite-lived
intangible assets, materially affecting the carrying value of these assets and our future consolidated operating results.
See Notes 2 and 4 for additional information on Windstream’s goodwill and other indefinite-lived intangibles.
Derivative Instruments – Windstream accounts for its derivative instruments using authoritative guidance for
disclosures about derivative instruments and hedging activities, including 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.
While authoritative guidance permits designating existing derivatives with non-zero fair values in a new cash flow
hedge, Windstream will be unable to assume perfect effectiveness and will need to establish that the new hedge
relationship is expected to be “highly effective” as the non-zero fair value element to the new hedge relationship
introduces a source of ineffectiveness that the companies must assess and measure. Due to the presence of the
off-market, or financing element in the newly designated hedge, it is not appropriate to apply the short-cut method or
the critical-terms-match method (qualitative assessment techniques), but instead the long-haul method must be used.
The effectiveness of the Company’s cash flow hedges is assessed each quarter using the “Perfect Hypothetical Interest
Rate Swap Method”. This method measures hedge ineffectiveness based on a comparison of the fair value of the actual
interest rate swap and the fair value of a hypothetical interest rate swap with terms that identically match the critical
terms of the debt being hedged.
Changes in the fair value of the designated portion of the Company’s derivative instruments are 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 portions are recognized in other
income (expense), net. The Company settles interest payments on its swaps based on the LIBOR rate. The Company
does not expect any changes in the effectiveness of its swaps due to counterparty risk or further prepayment of hedged
items, but any such changes could increase the ineffective portion of the swaps. An increase in the value of the
ineffective portion of its swaps either through further de-designation of existing swaps or through further decreases in
the LIBOR rate could have an adverse impact on the Company’s future earnings.
See Notes 2, 5 and 6 for additional information on Windstream’s derivative instruments.
Income Taxes – Our estimates of income taxes and the significant items resulting in the recognition of deferred tax
assets and liabilities are disclosed in Note 12 and reflect our assessment of future tax consequences of transactions that
have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. Actual
income taxes to be paid could vary from these estimates due to future changes in income tax law or the outcome of
audits completed by federal and state taxing authorities. Included in the calculation of our annual income tax expense
are the effects of changes, if any, to our income tax reserves for uncertain tax positions. We maintain income tax
reserves for potential assessments from the IRS or other taxing authorities. The reserves are determined in accordance
with authoritative guidance and are adjusted, from time to time, based upon changing facts and circumstances. Changes
to the income tax reserves could materially affect our future consolidated operating results in the period of change. In
addition, a valuation allowance is recorded to reduce the carrying amount of deferred tax assets unless it is more likely
than not that such assets will be realized.
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