Notes to Consolidated Financial Statements period. The cumulative effect of this accounting change on periods prior to 2002 was recorded in 2002 increasing net income by $4.1 million, net of taxes of $3.0 million and minority interest of $0.4 million, or $0.05 per diluted share. Upon the initial adoption of SAB 101, had  U.S. Cellular deferred expense recognition for a portion of commission expenses in the amount of deferred activation fees revenue, Net Income and Basic and Diluted Earning per Share would have been $174.4 million, $2.02 and $2.00, respectively, for the year ended December 31, 2001. U.S. Cellular expenses advertising costs as incurred. Advertising costs totaled $130.0 million, $91.6 million and $66.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. Bad debt expense totaled $61.1 million, $63.7 million and $28.7 million in 2003, 2002 and 2001, respectively. U.S. Cellular is included in a consolidated federal income tax return with other members of the TDS consolidated group. TDS and U.S. Cellular are parties to a Tax Allocation Agreement. The Tax Allocation Agreement provides that U.S. Cellular and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. U.S. Cellular and its subsidiaries calculate their income and credits as if they comprised  a separate affiliated group. Under the Tax Allocation Agreement, U.S. Cellular remits its applicable income tax payments to TDS. U.S. Cellular had a tax receivable balance with TDS of $5.4 million and $28.0 million as of December 31, 2003 and 2002. Deferred taxes are computed using the liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards, and deferred tax liabilities are recog- nized for taxable temporary differences. Both deferred tax assets and liabilities are measured using tax rates expected to be in effect when the temporary differences reverse. Temporary differences are the differ- ences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. U.S. Cellular accounts for stock options and employee stock purchase plans under Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees,” as allowed by SFAS  No. 123 “Accounting for Stock-Based Compensation.” No compensation costs have been recognized for the stock option and employee stock purchase plans. Had compensation cost for all plans been determined consistent with SFAS No. 123, U.S. Cellular’s net income (loss) and earnings per share would have been reduced to the following pro forma amounts: Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,” was issued in January 2003. It is effective for all variable interests in variable interest entities created after January 31, 2003 and is effective October 1, 2003 for variable interests in variable interest entities created before February 1, 2003. This Interpretation modifies the requirements for consolidation of investments previously contained in Accounting Research Bulletin  No. 51, “Consolidated Financial Statements.” Under FIN 46 certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties are considered variable interest entities and are potentially subject to consolidation by an investor other than the investor with the majority equity interest. In December 2003, the FASB issued FIN 46R, “Consolidation of Variable Interest Entities,” which among other things, deferred the application of FIN 46 by public entities with interest in variable interest entities referred to as special purpose entities until periods ending after December 15, 2003 and by public entities for all other types of variable interest entities until periods ending after March 15, 2004. U.S. Cellular has reviewed the provisions of FIN 46R and does not anticipate that the adoption of  FIN 46R will have a material impact on U.S. Cellular’s future financial position or results of operations. U.S. Cellular reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may  not be recoverable. U.S. Cellular evaluates the asset for possible impair- ment based on an estimate of related undiscounted cash flows over  the remaining asset life. If an impairment is identified, a loss is recog- nized for the difference between the fair value of the asset (less cost  to sell) and the carrying value of the asset. U.S. Cellular participates in a qualified noncontributory defined contribu- tion pension plan sponsored by TDS. It provides pension benefits for  the employees of U.S. Cellular and its subsidiaries. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $7.0 million, $5.0 million and $3.4 million in 2003, 2002 and 2001, respectively. Y ear Ended December 31, 2003 2002 2001 (as restated) (as restated) (Dollars in thousands, except per share amounts) Net Income (Loss): As Reported $42,660 $(26,945) $173,876 Pro Forma Expense (8,391) (5,324) (1,746) Pro Forma 34,269 (32,269) 172,130 Basic Earnings Per Share: As Reported 0.50 (0.31) 2.02 Pro Forma Expense (0.10) (0.06) (0.02) Pro Forma 0.40 (0.37) 2.00 Diluted Earnings Per Share: As Reported 0.49 (0.31) 1.99 Pro Forma Expense (0.10) (0.06) (0.02) Pro Forma $ 0.39 $( 0.37) $ 1.97 Advertising Costs Bad Debt Expense Income Taxes P ension Plan Asset Impairment Recent Accounting Pronouncements Stock-Based Compensation 50