Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Property, Plant and Equipment U.S. Cellular TDS Telecom Depreciation Revenue Recognition Advertising Costs Income Taxes Recent Accounting Pronouncements Asset Impairment Stock-Based Compensation Computation of Earnings Per Share 45 Telephone and Data Systems, Inc. Annual Report 2001 Telephone and Data Systems, Inc. Annual Report 2001 44 The Company’s incumbent local telephone operations follow accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation.” Management periodically reviews the criteria for applying these provisions to determine whether continuing application of SFAS No. 71 is appropriate. Management believes that such criteria are still being met and therefore has no current plans to change its method of accounting.  In analyzing the effects of discontinuing the application  of SFAS No. 71, management has determined that the  useful lives of plant assets used for regulatory and financial reporting purposes are consistent with generally accepted accounting principles and, therefore, any adjustments to telecommunications plant would be immaterial, as would be any write-off of regulatory assets and liabilities. Depreciation is provided using the straight-line method over the estimated useful lives of the assets.  Revenues from cellular operations primarily consist of charges for access, airtime, roaming and value added services provided for U.S. Cellular’s retail customers; charges to customers of other systems who use U.S. Cellular’s cellular systems when roaming; charges for long-distance calls made on U.S. Cellular’s systems; end user equipment sales; and sales of accessories. Revenues are recognized as services are rendered. Certain activation and reconnection fees are recognized over average customer service periods. U.S. Cellular does not defer any of the related direct incremental customer acquisition costs; these costs are charged to expense as incurred. Unbilled revenues, resulting from cellular service provided from the billing cycle date to the end of each month and from other cellular carriers’ customers using U.S. Cellular’s cellular systems for the last half of each month, are estimated and recorded. Equipment sales represent a separate earnings process. Equipment and accessory sales are recognized upon delivery to the customer and reflect charges to customers for equipment purchased. TDS’s telephone subsidiaries participate in revenue pools with other telephone companies for interstate revenue and for certain intrastate revenue. Such pools are funded by toll revenue and/or access charges within state jurisdiction and by Renewals and betterments of units of property are recorded as additions to telephone plant in service. The original cost of depreciable property retired is removed from plant in service and, together with removal cost less any salvage realized, is charged to accumulated depreciation. No gain or loss is recognized on ordinary retirements of depreciable telephone property. Repairs and renewals of minor units of property are charged to plant operations expense.  TDS Telecom’s property, plant and equipment is stated at the  original cost of construction including the capitalized costs of certain taxes, payroll-related expenses, and an allowance for funds used during construction. Renewals and betterments of units of property are recorded as additions to cellular plant in service. The original cost of depreciable property retired (along with the related accumulated depreciation) is removed from plant in service and, together with removal cost less any salvage realized, is charged to depreciation expense. Repairs and renewals of minor units of property are charged to system operations expense. U.S. Cellular’s property, plant and equipment is stated at the original cost of construction including capitalized costs of certain taxes and payroll-related expenses. follows the equity method of accounting, which recognizes TDS’s proportionate share of the income and losses accruing to it under the terms of its partnership or shareholder agreements, where the Company’s ownership interest equals or exceeds 20% for corporations and 3% for partnerships. Equity method investments aggregated $179.9 million and $149.0 million at December 31, 2001 and 2000, respectively. Income and losses from these entities are reflected in the Consolidated Statements of Operations on a pretax basis as Investment income. At December 31, 2001, the cumulative share of income from minority investments accounted for under the equity method was $310.2 million, of which $119.4 million was undistributed. The cost method of accounting is followed for certain minority interests where the Company’s ownership interest is less than 20% for corporations and 3% for partnerships. Cost method investments aggregated $53.8 million and $33.3 million at December 31, 2001 and 2000, respectively. TDS files a consolidated federal income tax return. 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 recognized for taxable temporary differences. Both deferred tax assets and liabilities are measured using the current enacted tax rates. Temporary differences are the differences 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. SFAS No. 142 defines the accounting for intangible assets. The accounting for a recognized intangible asset is based on the useful life to the entity. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. The useful life of the intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the entity.  The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 141 “Business Combinations” and No. 142 “Goodwill and Other Intangible Assets” in July 2001. These statements require, among other things, that all future business combinations be accounted for using the purchase method of accounting and prohibit the use of the pooling-of-interest method. For acquisitions completed after July 1, 2001, goodwill will not be amortized. In addition, effective January 1, 2002, previously recorded goodwill and other intangible assets with indefinite lives will no longer be amortized but will be subject to impairment tests. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company evaluates the asset for possible impairment based on an estimate of related undiscounted cash flows over the remaining asset life. If an impairment is identified, a loss is recognized for the difference between the fair value of the asset (less cost to sell) and the carrying value of the asset. The Company accounts for stock options, stock appreciation rights (“SARs”) and employee stock purchase plans under Accounting Principles Board (“APB”) Opinion No. 25 as allowed by SFAS No. 123 “Accounting for Stock-Based Compensation.” Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Potentially dilutive securities included in diluted earnings per share represent incremental shares issuable upon exercise of outstanding stock options or the potential conversion of preferred stock to common shares. For the year ended December 31, 2001, the diluted loss per share calculation excludes the effect of the potentially dilutive securities because their inclusion would be anti-dilutive. The Company expenses advertising costs as incurred.  Advertising expense totaled $77.2 million, $77.0 million and $69.0 million in 2001, 2000, and 1999, respectively. The cumulative effect of the accounting change on periods prior to 2000 was recorded in 2000 reducing net income by $3.8 million, net of taxes of $3.7 million and minority interest of $820,000, or $.06 per basic and diluted share. Had results for the year ended December 31, 1999, been restated, the effect of this change would have been to decrease operating revenues by $4.5 million, net income from continuing operations by $1.5 million and basic and diluted earnings per share by $.03 and $.04, respectively. Effective January 1, 2000, U.S. Cellular changed its method of accounting for certain activation and reconnect fees charged to its customers when initiating service through its retail and direct channels or when resuming service after suspension. This accounting change is in compliance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” Based upon this guidance, U.S. Cellular recognizes these fees as revenue ratably over the average customer service periods (ranging from six to 48 months). Prior to implementing SAB No. 101, U.S. Cellular recorded these fees as operating revenues in the period they were charged to the customer. SAB No. 101 had no effect on the operating results of TDS Telecom.  access charges in the interstate market. Revenues earned through the various pooling processes are initially recorded based on TDS Telecom’s estimates. Telephone and Data Systems, Inc.