Charter 2004 Annual Report Download - page 37

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
We make judgments regarding the installation and con- $335 million, respectively, for the years ended December 31,
struction activities to be capitalized. We capitalize direct labor 2004, 2003 and 2002. Capitalized internal direct labor and
and certain indirect costs (‘‘overhead’’) using standards devel- overhead costs substantially decreased in 2004 and 2003
oped from actual costs and applicable operational data. We compared to 2002 primarily due to the substantial completion of
calculate standards for items such as the labor rates, overhead the upgrade of our systems and a decrease in the amount of
rates and the actual amount of time required to perform a capitalizable installation costs.
capitalizable activity. For example, the standard amounts of time Useful lives of property, plant and equipment. We
required to perform capitalizable activities are based on studies evaluate the appropriateness of estimated useful lives assigned to
of the time required to perform such activities. Overhead rates our property, plant and equipment, based on annual studies of
are established based on an analysis of the nature of costs such useful lives, and revise such lives to the extent warranted
incurred in support of capitalizable activities and a determination by changing facts and circumstances. Any changes in estimated
of the portion of costs that is directly attributable to capitaliz- useful lives as a result of these studies, which were not
able activities. The impact of changes that resulted from these significant in the periods presented, will be reflected prospec-
studies were not significant in the periods presented. tively beginning in the period in which the study is completed.
Labor costs directly associated with capital projects are The effect of a one-year decrease in the weighted average
capitalized. We capitalize direct labor costs associated with remaining useful life of our property, plant and equipment
personnel based upon the specific time devoted to network would be an increase in depreciation expense for the year ended
construction and customer installation activities. Capitalizable December 31, 2004 of approximately $296 million. The effect of
activities performed in connection with customer installations a one-year increase in the weighted average useful life of our
include such activities as: property, plant and equipment would be a decrease in deprecia-
tion expense for the year ended December 31, 2004 of
(Scheduling a ‘‘truck roll’’ to the customer’s dwelling for approximately $198 million.
service connection; Depreciation expense related to property, plant and equip-
(Verification of serviceability to the customer’s dwelling (i.e., ment totaled $1.5 billion, $1.5 billion and $1.4 billion, represent-
determining whether the customer’s dwelling is capable of ing approximately 21%, 34% and 16% of costs and expenses, for
receiving service by our cable network and/or receiving the years ended December 31, 2004, 2003 and 2002, respec-
advanced or data services); tively. Depreciation is recorded using the straight-line composite
method over management’s estimate of the estimated useful
(Customer premise activities performed by in-house field lives of the related assets as listed below:
technicians and third-party contractors in connection with
customer installations, installation of network equipment in Cable distribution systems 7-20 years
connection with the installation of expanded services and Customer equipment and installations 3-5 years
equipment replacement and betterment; and Vehicles and equipment 1-5 years
Buildings and leasehold improvements 5-15 years
(Verifying the integrity of the customer’s network connec- Furniture and fixtures 5 years
tion by initiating test signals downstream from the headend
Impairment of property, plant and equipment,
to the customer’s digital set-top terminal.
franchises and goodwill. As discussed above, the net carry-
Judgment is required to determine the extent to which
ing value of our property, plant and equipment is significant. We
overhead is incurred as a result of specific capital activities, and
also have recorded a significant amount of cost related to
therefore should be capitalized. The primary costs that are
franchises, pursuant to which we are granted the right to
included in the determination of the overhead rate are
operate our cable distribution network throughout our service
(i) employee benefits and payroll taxes associated with capital-
areas. The net carrying value of franchises as of December 31,
ized direct labor, (ii) direct variable costs associated with
2004 and 2003 was approximately $9.9 billion (representing 56%
capitalizable activities, consisting primarily of installation and
of total assets) and $13.7 billion (representing 64% of total
construction vehicle costs, (iii) the cost of support personnel,
assets), respectively. Furthermore, our noncurrent assets include
such as dispatch, that directly assist with capitalizable installa-
approximately $52 million of goodwill.
tion activities, and (iv) indirect costs directly attributable to
We adopted SFAS No. 142 on January 1, 2002.
capitalizable activities.
SFAS No. 142 requires that franchise intangible assets that meet
While we believe our existing capitalization policies are
specified indefinite-life criteria no longer be amortized against
appropriate, a significant change in the nature or extent of our
earnings, but instead must be tested for impairment annually
system activities could affect management’s judgment about the
based on valuations, or more frequently as warranted by events
extent to which we should capitalize direct labor or overhead in
or changes in circumstances. In determining whether our
the future. We monitor the appropriateness of our capitalization
franchises have an indefinite-life, we considered the exclusivity
policies, and perform updates to our internal studies on an
of the franchise, the expected costs of franchise renewals, and
ongoing basis to determine whether facts or circumstances
the technological state of the associated cable systems with a
warrant a change to our capitalization policies. We capitalized
view to whether or not we are in compliance with any
direct labor and overhead of $164 million, $174 million and
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