Organization and Basis of Financial Reporting

5 Months Ended

Jun. 30, 2011

Organization and Basis of Financial Reporting [Abstract]

Organization and Basis of Financial Reporting

(1) Organization and Basis of Financial Reporting

     FairPoint is a leading provider of communications services in rural and small urban communities, primarily in northern New England, offering an array of services, including high speed data (“HSD”), Internet access, voice, television and broadband product offerings, to residential, wholesale and business customers. FairPoint operates in 18 states with approximately 1.4 million access line equivalents (including voice access lines and HSD, which include digital subscriber lines (“DSL”), wireless broadband, cable modem and fiber-to-the-premises) as of June 30, 2011.

     Basis of Financial Reporting in Reorganization

     On October 26, 2009 (the “Petition Date”), the Company and substantially all of its direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code” or “Chapter 11”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The cases are being jointly administered under the caption In re FairPoint Communications, Inc., Case No. 09-16335 (the “Chapter 11 Cases”). On January 13, 2011, the bankruptcy judge confirmed the Company’s Third Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (as confirmed, the “Plan”) and on January 24, 2011 (the “Effective Date”) the Company emerged from Chapter 11 protection. On June 30, 2011, the Bankruptcy Court entered a final decree closing certain of the Company’s bankruptcy cases due to the closed cases being fully administered. See note 2 for details of the remaining open cases.

     The Company has applied the Reorganizations Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) effective as of the Petition Date. See note 2.

     Upon the Effective Date, the Company adopted fresh start accounting in accordance with guidance under the applicable reorganization accounting rules, pursuant to which the Company’s reorganization value, which represents the fair value of the entity before considering liabilities, and approximates the amount a willing buyer would pay for the assets of the entity immediately after the reorganization, has been allocated to the fair value of assets in conformity with guidance under the applicable accounting rules for business combinations, using the purchase method of accounting. The amount remaining after allocation of the reorganization value to the fair value of identified tangible and intangible assets has been reflected as goodwill, which is subject to periodic evaluation for impairment. In addition to fresh start accounting, the Company’s future consolidated financial statements will reflect all effects of the transactions contemplated by the Plan. Accordingly, the Company’s future condensed consolidated statements of financial position and condensed consolidated statements of operations will not be comparable in many respects to the Company’s condensed consolidated statements of financial position and condensed consolidated statements of operations for periods prior to the adoption of fresh start accounting and prior to accounting for the effects of the reorganization. See note 2 for a presentation of the impact of emergence from reorganization and fresh start accounting on the Company’s financial position.

Restatement

     In its Annual Report on Form 10-K for the fiscal year ended December 31, 2010 (the “2010 Annual Report”), the Company restated (the “Restatement”) its unaudited condensed consolidated financial statements for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010.

     The Company’s previously filed Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 (the “June 30, 2010 Quarterly Report”), which was impacted by the Restatement, was not amended. Accordingly, the Company cautions you that certain information contained in the June 30, 2010 Quarterly Report should no longer be relied upon, including the Company’s previously issued and filed June 30, 2010 interim consolidated financial statements and any financial information derived therefrom. In addition, the Company cautions you that other communications or filings related to the June 30, 2010 interim consolidated financial statements and which were filed or otherwise released prior to the filing of the 2010 Annual Report with the SEC, should no longer be relied upon. All financial information in this Quarterly Report for the three and six months ended June 30, 2010 affected by the Restatement adjustments reflect such financial information as restated.

The restated June 30, 2010 interim consolidated financial statements were corrected for the following errors:

     Project Abandonment Adjustment

     Certain capital projects, principally a wireless broadband fixed asset project, had been abandoned but the write-off of all of the related capitalized costs had not occurred in a timely manner.

     Costs Capitalized to Property, Plant and Equipment Adjustment

     Due to a backlog of capital projects not yet closed, certain costs (principally labor expenses) remained capitalized to property, plant and equipment rather than expensed.

     Application of Overhead Costs Adjustment

     An error was discovered in the application of overhead costs to capital projects.

Each of the errors noted above resulted in an understatement of operating expenses and an overstatement of property, plant and equipment.

     Other Adjustments

     In addition, as part of the restatement of the June 30, 2010 interim consolidated financial statements, the Company also adjusted other items, including certain adjustments to revenue that were identified in connection with the preparation of the consolidated financial statements for the year ended December 31, 2010, which individually were not considered to be material, but were material when aggregated with the three adjustments noted above. These adjustments are primarily related to (a) errors in the calculation of certain regulatory penalties, and (b) errors in revenue associated with certain customer billing, special project billings and intercompany/official lines.

     The aggregate impact of these adjustments resulted in an increase to the Company’s previously reported pre-tax loss for the three and six month period ended June 30, 2010 of approximately $17.6 million and $28.3 million, respectively, which is mainly attributable to a reduction to reported revenues of approximately $2.4 million and $6.0 million, respectively, an increase to the Company’s previously reported operating expenses of approximately $18.3 million and $25.5 million, respectively, offset by a decrease in other expense of $3.2 million and $3.2 million, respectively. The aggregate impact of the adjustments for the three and six months ended June 30, 2010 resulted in an increase in net loss of approximately $17.6 million and $28.3 million, net of taxes, respectively, and a decrease in the Company’s reported capital expenditures of approximately $6.7 million and $11.4 million, respectively.

     The Company expects that these adjustments will not have a material impact on the Company’s overall liquidity in the future.