Charter 2004 Annual Report Download - page 122

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
5. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company’s valuations, which are based on the present
value of projected after tax cash flows, result in a value of
Activity in the allowance for doubtful accounts is summarized as property, plant and equipment, franchises, customer relationships
follows for the years presented: and its total entity value. The value of goodwill is the difference
Year Ended December 31, between the total entity value and amounts assigned to the
2004 2003 2002 other assets.
Franchises, for valuation purposes, are defined as the future
Balance, beginning of year $17 $19 $ 33
Charged to expense 92 79 108 economic benefits of the right to solicit and service potential
Uncollected balances written off, net of customers (customer marketing rights), and the right to deploy
recoveries (94) (81) (122) and market new services such as interactivity and telephony to
the potential customers (service marketing rights). Fair value is
Balance, end of year $15 $17 $ 19
determined based on estimated discounted future cash flows
using assumptions consistent with internal forecasts. The
6. PROPERTY, PLANT AND EQUIPMENT
franchise after-tax cash flow is calculated as the after-tax cash
Property, plant and equipment consists of the following as of flow generated by the potential customers obtained and the new
December 31, 2004 and 2003: services added to those customers in future periods. The sum of
the present value of the franchises’ after-tax cash flow in years 1
2004 2003
through 10 and the continuing value of the after-tax cash flow
Cable distribution systems $ 6,596 $ 6,347 beyond year 10 yields the fair value of the franchise. Prior to the
Customer equipment and installations 3,500 3,160
Vehicles and equipment 433 430 adoption of EITF Topic D-108, Use of the Residual Method to
Buildings and leasehold improvements 578 583 Value Acquired Assets Other than Goodwill, discussed below, the
Furniture and fixtures 493 444 Company followed a residual method of valuing its franchise
11,600 10,964 assets, which had the effect of including goodwill with the
Less: accumulated depreciation (5,311) (3,950) franchise assets.
$ 6,289 $ 7,014 The Company follows the guidance of EITF Issue 02-17,
The Company periodically evaluates the estimated useful Recognition of Customer Relationship Intangible Assets Acquired in a
lives used to depreciate its assets and the estimated amount of Business Combination, in valuing customer relationships. Customer
assets that will be abandoned or have minimal use in the future. relationships, for valuation purposes, represent the value of the
A significant change in assumptions about the extent or timing business relationship with existing customers and are calculated
of future asset retirements, or in the Company’s use of new by projecting future after-tax cash flows from these customers
technology and upgrade programs, could materially affect future including the right to deploy and market additional services
depreciation expense. such as interactivity and telephony to these customers. The
Depreciation expense for the years ended December 31, present value of these after-tax cash flows yield the fair value of
2004, 2003 and 2002 was $1.5 billion, $1.5 billion and the customer relationships. Substantially all acquisitions occurred
$1.4 billion respectively. prior to January 1, 2002. The Company did not record any
value associated with the customer relationship intangibles
7. FRANCHISES AND GOODWILL related to those acquisitions. For acquisitions subsequent to
January 1, 2002 the Company did assign a value to the customer
On January 1, 2002, the Company adopted Statement of
relationship intangible, which is amortized over its estimated
Financial Accounting Standards (‘‘SFAS’’) No. 142, which
useful life.
eliminates the amortization of indefinite-lived intangible assets.
In September 2004, the SEC staff issued Topic D-108
Accordingly, beginning January 1, 2002, all franchises that
which requires the direct method of separately valuing all
qualify for indefinite-life treatment under SFAS No. 142 are no
intangible assets and does not permit goodwill to be included in
longer amortized against earnings but instead are tested for
franchise assets. The Company performed an impairment
impairment annually based on valuations, or more frequently as
assessment as of September 30, 2004, and adopted Topic D-108
warranted by events or changes in circumstances. Based on the
in that assessment resulting in a total franchise impairment of
guidance prescribed in Emerging Issues Task Force (‘‘EITF’’)
approximately $3.3 billion. The Company recorded a cumulative
Issue No. 02-7, Unit of Accounting for Testing of Impairment of
effect of accounting change of $765 million (approximately
Indefinite-Lived Intangible Assets, franchises are aggregated into
$875 million before tax effects of $91 million and minority
essentially inseparable asset groups to conduct the valuations.
interest effects of $19 million) for the year ended December 31,
The asset groups generally represent geographic clustering of
2004 representing the portion of the Company’s total franchise
the Company’s cable systems into groups by which such
impairment attributable to no longer including goodwill with
systems are managed. Management believes such grouping
franchise assets. The effect of the adoption was to increase net
represents the highest and best use of those assets.
loss and loss per share by $765 million and $2.55 for the year
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