Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2012

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

2.     Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are either directly or indirectly wholly owned.  These include: Otelco Telecommunications LLC (“OTC”); Otelco Telephone LLC (“OTP”); Hopper Telecommunications LLC (“HTC”); Brindlee Mountain Telephone LLC (“BMTC”); Blountsville Telephone LLC (“BTC”); Otelco Mid-Missouri LLC (“MMT”) and its wholly owned subsidiary I-Land Internet Services LLC; Mid-Maine Telecom LLC (“MMTI”); Mid-Maine Telplus LLC (“MMTP”); Granby Telephone LLC (“GTT”); War Telephone LLC (“WT”); Pine Tree Telephone LLC (“PTT”); Saco River Telephone LLC (“SRT”); Shoreham Telephone LLC (“ST”); CRC Communications LLC (“PTN”); and Communications Design Acquisition LLC (“CDAC”).

The accompanying consolidated financial statements include the accounts of the Company and all of the aforesaid subsidiaries after elimination of all material intercompany balances and transactions.

Use of Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities.  The estimates and assumptions used in the accompanying consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements.  Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements.

     Significant accounting estimates include the recoverability of goodwill, identified intangibles, long-term assets, deferred tax valuation allowances and allowance for doubtful accounts.

Regulatory Accounting

The Company follows the accounting for regulated enterprises, Accounting Standards Codification 980,  Regulated Operations  (“ASC 980”), as issued by the Financial Accounting Standards Board (the “FASB”).  This accounting practice recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities.  Accordingly, ASC 980 requires the Company to depreciate telecommunications property and equipment over the estimated useful lives approved by regulators, which could be different than the estimated useful lives that would otherwise be determined by management.  ASC 980 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years.  Criteria that would give rise to the discontinuance of accounting in accordance with ASC 980 include (1) increasing competition restricting the ability of the Company to establish prices that allow it to recover specific costs and (2) significant changes in the manner in which rates are set by regulators from cost-based regulation to another form of regulation.  The Company periodically reviews the criteria to determine whether the continuing application of ASC 980 is appropriate for its rural local exchange carriers.

The Company is subject to reviews and audits by regulatory agencies.  The effect of these reviews and audits, if any, will be recorded in the period in which they first become known and determinable.

Intangible Assets and Goodwill

Intangible assets consist  of customer related intangibles, non-compete agreements and long-term customer contracts.  Goodwill represents the excess of total acquisition cost over the assigned value of net identifiable tangible and intangible assets acquired through various business combinations, less any impairment.   Due to the regulatory accounting required by ASC 980, the Company did not record acquired regulated telecommunications property and equipment at fair value as required by ASC 805,  Business Combinations  (“ASC 805”), through 2004.  In accordance with 47 CFR 32.2000, the federal regulation governing acquired telecommunications property and equipment, such property and equipment is accounted for at original cost, and depreciation and amortization of property and equipment acquired is credited to accumulated depreciation.

To allow the audit committee of the Company’s board of directors sufficient time to review the assessment of goodwill for impairment, management performs the annual goodwill impairment testing with an effective date of October 1.  The Company believes this testing date closely aligns the analysis with the Company’s budgeting and forecasting process.  In September 2011, the Company adopted  Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”).  ASU 2011-08 allows an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  As discussed in note 3, Impairments, below, the Company had indicators of impairment in the second quarter of 2012 and management performed steps 1 and 2, recording an impairment charge.  As a result of this action, the annual goodwill impairment testing performed as of October 1, 2012 utilized the qualitative assessment.

The Company performs a quarterly review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances do exist, the Company assesses the recoverability of identified intangible assets by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts.  Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets.

For the acquisition of ST, property has been recorded at fair value in accordance with ASC 805, resulting in a plant acquisition adjustment in 2011.  The Company has acquired identifiable intangible assets associated with the territories it serves, including a non-compete agreement with one of the former owners of ST, and the customer lists of ST.  The total purchase price over the amounts assigned to tangible and identifiable assets was recorded as goodwill.

Revenue Recognition

Local service revenue.  Local service revenue for monthly recurring local services is billed in advance to a portion of the Company’s customers and in arrears to the balance of the customers.  The Company records revenue for charges that have not yet been invoiced to its customers as unbilled revenue when services are rendered.  The Company records revenue billed in advance as advance billings and defers recognition until such revenue is earned.  Long distance service is billed to customers in arrears based on actual usage except when it is included in service bundles.  The Company records unbilled long distance revenue as unbilled revenue when services are rendered.  In bundles, unlimited usage is billed in arrears at a flat rate.

    Network access.  Network access revenue is derived from several sources.  Revenue for interstate access services is received through tariffed access charges filed by the National Exchange Carrier Association (“NECA”) with the FCC on behalf of the NECA member companies for our regulated subsidiaries.  These access charges are billed by the Company to interstate interexchange carriers and pooled with like-revenues from all NECA member companies.   A portion of the pooled access charge revenue received by the Company is based upon its actual cost of providing interstate access service, plus a return on the investment dedicated to providing that service.  The balance of the pooled access charge revenue received by the Company is based upon the nationwide average schedule costs of providing interstate access services.   Rates for our competitive subsidiaries are set by FCC rule to be no more than the interconnecting interstate rate of the predominant local carrier.

   Revenue for intrastate access service is received through tariffed access charges billed by the Company to the originating intrastate carrier using access rates filed with the Alabama Public Service Commission (the “APSC”), the Maine Public Utilities Commission (the “MPUC”), the Massachusetts Department of Telecommunications and Cable (the “MDTC”), the Missouri Public Service Commission (the “MPSC”), the New Hampshire Public Utilities Commission (the “NHPUC”), the Vermont Public Service Board (the “VPSB”) and the West Virginia Public Service Commission (the “WVPSC”) and are retained by the Company.

    Revenue for the intrastate/interLATA access service is received through tariffed access charges as filed with the APSC, MDTC, MPSC, MPUC, NHPUC, VPSB and WVPSC.  These access charges are billed to the intrastate carriers and are retained by the Company.  Revenue for terminating and originating long distance service is received through charges for providing usage of the local exchange network.  Toll revenues are recognized when services are rendered.

The FCC’s Intercarrier Compensation order, released in November 2011, has and will significantly change the way telecommunication carriers receive compensation for exchanging traffic.   Over the next three years, all intrastate rates that exceed the interstate rate will be reduced to the interstate rate.   Beginning in 2014, the interstate rate will be reduced over six years to “bill and keep” in which carriers bill their customers for services and keep those charges but neither pay for or receive compensation from traffic sent to or received from other carriers.  In addition, subsidies to carriers serving high cost areas will be phased out over an extended period.

     Cable television, internet and transport services.  Cable television, internet and transport service revenues are recognized when services are rendered.  Operating revenues from the lease of dark fiber covered by indefeasible rights-of-use agreements are recorded as earned.  In some cases, the entire lease payment is received at inception of the lease and recognized ratably over the lease term after recognition of expenses associated with lease inception.  The Company has deferred revenue reflected in advance billings and paymnets in the accompanying consolidated balance sheet as of December 31, 2011 and 2012 of $656,968 and $840,303, respectively, related to transport services.

Cash and Cash Equivalents

Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high-quality, short-term money market instruments and highly liquid debt instruments with an original maturity of three months or less when purchased. The cash equivalents are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Accounts Receivable

The Company extends credit to its commercial and residential customers based upon a written credit policy.  Service interruption is the primary vehicle for controlling losses. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.  Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Materials and Supplies

Materials and supplies are stated at the lower of cost or market value.  Cost is determined using an average cost basis.

Property and Equipment

Regulated property and equipment is stated at original cost less any impairment.   Unregulated property and equipment purchased through acquisitions is stated at its fair value at the date of acquisition less any impairment.  Expenditures for improvements that significantly add to productive capacity or extend the useful life of an asset are capitalized.  Expenditures for maintenance and repairs are expensed when incurred.   Depreciation of regulated property and equipment is computed principally using the straight-line method over useful lives determined by the APSC, MDTC, MPSC, MPUC, NHPUC, VPSB and WVPSC as discussed above.  Depreciation of unregulated property and equipment primarily employs the straight-line method over industry standard estimated useful lives.

Long-Lived Assets

The Company reviews its long-lived assets for impairment at each balance sheet date and whenever events or changes in circumstances indicate that the carrying amount of an asset should be assessed.  To determine if an impairment exists, the Company estimates the future undiscounted cash flows expected to result from the use of the asset being reviewed for impairment.  If the sum of these expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss in accordance with guidance included in ASC 360,  Property, Plant, and Equipment (“ASC 360”).  The amount of the impairment recognized is determined by estimating the fair value of the assets and recording a loss for the excess of the carrying value over the fair value (see note 3, Impairments, below).

Deferred Financing Costs

    Deferred financing and loan costs consist of debt issuance costs incurred in obtaining long-term financing, which are amortized over the life of the related debt using the effective yield method.   Amortization of deferred financing and loan costs is classified as “Interest expense”.   When amendments to debt agreements are considered to extinguish existing debt per guidance included in ASC 470,  Debt, the remaining deferred financing costs are written off at the time of amendment.

Derivative Financial Instruments

    Derivative financial instruments are accounted for under guidance included in ASC 815, Derivatives and Hedging (“ASC 815”).   Under ASC 815, all derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value.    

    The Company was exposed to the market risk of adverse changes in interest rates.   The Company utilized two interest rate swaps which matured on February 8, 2012.   The first swap had a notional amount of $90 million with the Company paying a fixed rate of 1.85% and the counterparty paying a variable rate based upon the three month LIBOR interest rate.   It was effective from February 9, 2009 through February 8, 2012.   The second swap had a notional amount of $60 million with the Company paying a fixed rate of 2.0475% and the counterparty paying a variable rate based upon the three month LIBOR interest rate.   It was effective from February 9, 2010 through February 8, 2012.   From an accounting perspective, the documentation for both swaps did not meet the technical requirements of ASC 815 to allow the swaps to be considered highly effective hedging instruments, and therefore, the swaps did not qualify for hedge accounting.   The change in fair value of the swaps was charged or credited to income as a change in fair value of derivatives.   Over the life of the swaps, the cumulative change in fair value was zero.

Income Taxes

The Company accounts for income taxes using the asset and liability approach in accordance with guidance included in ASC 740,  Income Taxes  (“ASC 740”).   The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities.  A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The provision for income taxes consists of an amount for the taxes currently payable and a provision for the tax consequences deferred to future periods.

Interest and penalties related to income tax matters would be recognized in income tax expense.  As of December 31, 2012, we did not have an amount recorded for interest and penalties.

The Company conducts business in multiple jurisdictions and, as a result, one or more subsidiaries file income tax returns in the U.S.  federal, various state and local jurisdictions.   All tax years since 2006 are open for examination by various tax authorities.

Fair Value of Financial Instruments

The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and derivative liabilities approximate their fair value as of December 31, 2011 and 2012.  The fair value of debt instruments at December 31, 2011 and 2012 is disclosed in the footnotes to the financial statements.

 Comprehensive Income (Loss)

Comprehensive income (loss) equals net income (loss) plus other comprehensive income.   Other comprehensive income refers to revenue, expenses, gains and losses, which are reflected in retained earnings but excluded from net income.

Income (Loss) per Common Share

The Company computes net income (loss) per common share in accordance with the provision included in ASC 260, Earnings per Share (“ASC 260”).   Under ASC 260, basic and diluted income per share is computed by dividing net income (loss) available to stockholders by the weighted average number of common shares and common share equivalents outstanding during the period.   Basic income (loss) per common share excludes the effect of potentially dilutive securities, while diluted income (loss) per common share reflects the potential dilution that would occur if securities or other contracts to issue common shares were exercised for, converted into or otherwise resulted in the issuance of common shares.   Net income (loss) is adjusted for the Class B derivative liability in calculating diluted earnings.   On June 8, 2010, all of the Company’s Class B shares were exchanged for IDSs, which include a common share, on a one-for-one basis.

Recently Adopted Accounting Pronouncements

    In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”) an update to ASC 220,  Comprehensive Income .   This ASU requires the components of net income and the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but continuous statements.   ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.   This guidance does not change the items that must be reported in other comprehensive income, when an item of other comprehensive income must be reclassified to net income or how earnings per share is calculated or presented.   ASU 2011-05 is effective for public entities for interim and annual periods beginning after December 15, 2011.   As ASU 2011-05 impacts presentation only, the adoption of this update did not have a material impact on our consolidated financial statements.

    In September 2011, the FASB issued ASU 2011-08,an update to ASC 350.   This ASU provides an entity with the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.   If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.   However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test in accordance with ASC 350.   ASU 2011-08 is effective for annual and interim goodwill impairment tests for fiscal years beginning after December 15, 2011.    The Company performed its 2012 annual goodwill impairment testing using the qualitative assessment provided in ASU 2011-08. The implementation of this update did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements

During 2012, the FASB issued ASUs 2012-01 through 2012-07.  Except for ASU 2012-02, which is discussed below, these ASUs provide technical corrections to existing guidance and to specialized industries or entities and therefore, have minimal, if any, impact on the Company.

     In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, an amendment to ASC 350.  This ASU provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met.  The amendments are effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012.  The implementation of this ASU is not expected to have a material impact on the Company’s consolidated financial position or results of operations.