Charter 2003 Annual Report Download - page 41

consist of compensation and overhead costs associated with these support functions. The costs of discon-
necting service at a customer's dwelling or reconnecting service to a previously installed dwelling are charged
to operating expense in the period incurred. Costs for repairs and maintenance are charged to operating
expense as incurred, while equipment replacement and betterments, including replacement of cable drops
from the pole to the dwelling, are capitalized.
Direct labor costs directly associated with capital projects are capitalized. We capitalize direct labor costs
associated with personnel based upon the speciÑc time devoted to network construction and customer
installation activities. Capitalizable activities performed in connection with customer installations include:
‚ Scheduling a ""truck roll'' to the customer's dwelling for service connection;
‚ VeriÑcation of serviceability to the customer's dwelling (i.e., determining whether the customer's
dwelling is capable of receiving service by our cable network and/or receiving advanced or data
services);
‚ Customer premise activities performed by in-house Ñeld technicians and third-party contractors in
connection with customer installations, installation of network equipment in connection with the
installation of expanded services and equipment replacement and betterment; and
‚ Verifying the integrity of the customer's network connection by initiating test signals downstream from
the headend to the customer's digital set-top terminal.
We capitalized internal direct labor costs of $88 million, $173 million and $171 million, for the years
ended December 31, 2003, 2002 and 2001, respectively. Capitalized internal direct labor costs decreased in
2003 compared to 2002 primarily due to the substantial completion of the upgrade of our systems and a
decrease in the amount of capitalizable installation costs.
Judgment is required to determine the extent to which indirect costs (""overhead'') are incurred as a
result of speciÑc capital activities, and therefore should be capitalized. We capitalize overhead using an
overhead rate applied to the amount of direct labor capitalized. We have established the overhead rates based
on an analysis of the nature of costs incurred in support of capitalizable activities and a determination of the
portion of costs that is directly attributable to capitalizable activities. The primary costs that are included in
the determination of the overhead rate are (i) employee beneÑts and payroll taxes associated with capitalized
direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of
installation and construction vehicle costs, (iii) the cost of support personnel, such as dispatch, that directly
assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable
activities.
While we believe our existing capitalization policies are appropriate, a signiÑcant change in the nature or
extent of our system activities could aÅect management's judgment about the extent to which we should
capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies,
and perform updates to our internal overhead study on a periodic basis to determine whether facts or
circumstances warrant a change to our capitalization policies. We capitalized overhead of $86 million,
$162 million and $134 million, respectively, for the years ended December 31, 2003, 2002 and 2001.
Useful lives of property, plant and equipment. We evaluate the appropriateness of estimated useful lives
assigned to our property, plant and equipment, and revise such lives to the extent warranted by changing facts
and circumstances. Beginning in January 2000, we commenced a signiÑcant initiative to rebuild and upgrade
portions of our cable network. We reduced the useful lives of certain assets with a book value of $1.1 billion in
2000 and an additional $125 million in 2001. These assets were expected to be replaced and retired through
that process in approximately one to three years, representing management's best estimate of the expected
pattern of the retirement from service of such assets. A signiÑcant change in assumptions about the extent or
timing of future asset usage or retirements could materially aÅect future depreciation expense.
Depreciation expense related to property, plant and equipment totaled $1.5 billion, $1.4 billion and
$1.2 billion, representing approximately 34%, 16% and 24% of costs and expenses, for the years ended
December 31, 2003, 2002 and 2001, respectively. Of these amounts, approximately $183 million and
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