During the later 1990s, as the Internet blossomed around the world, Global Crossing thrived in the business of paving the Internet superhighway: laying cables to transport data crisscrossing the globe and charging a toll for the use of those cables. In 1999, the company’s market capitalization reached $40 billion. In anticipation of the burgeoning demand, Global Crossing took on more than $7 billion of debt to lay 1.7 million miles of fibre-optic cable.
By 2001, the Internet boom had turned to bust. As this occurred, Global Crossing contracted with other telecom firms, such as Qwest Communications, to allow them to use the company’s cables in future years. In the second quarter of 2001, Global Crossing sold some $600 million of fibreoptic capacity, amounting to almost 20% of revenues.
Separately, Qwest Communications also had its own set of cables. Due to the multi-modal nature of the Internet, the networks of Qwest and Global Crossing had significant overlap while remaining distinct from each other. Like Global Crossing, Qwest also sold some of its fibre-optic capacity to other companies, including Global Crossing. Global Crossing recorded these purchases of fibreoptic capacity as capital investments and subsequently depreciated them over several years when the fibre could be used to generate revenues.
Required:
Evaluate the appropriateness of Global Crossing's accounting policies raised by the above facts.