Charter 2004 Annual Report Download - page 38

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
technology upgrading requirements. We have concluded that as the valuations. The asset groups generally represent geographic
of December 31, 2004, 2003 and 2002 more than 99% of our clustering of our cable systems into groups by which such
franchises qualify for indefinite-life treatment under systems are managed. Management believes such groupings
SFAS No. 142, and that less than one percent of our franchises represent the highest and best use of those assets. We
do not qualify for indefinite-life treatment due to technological determined that our franchises were impaired upon adoption of
or operational factors that limit their lives. Costs of finite-lived SFAS No. 142 on January 1, 2002 and as a result recorded the
franchises, along with costs associated with franchise renewals, cumulative effect of a change in accounting principle of
are amortized on a straight-line basis over 10 years, which $206 million (approximately $572 million before minority
represents management’s best estimate of the average remaining interest effects of $306 million and tax effects of $60 million). As
useful lives of such franchises. Franchise amortization expense required by SFAS No. 142, the standard has not been
was $4 million for the year ended December 31, 2004 and retroactively applied to results for the period prior to adoption.
$9 million for each of the years ended December 31, 2003 and Our valuations, which are based on the present value of
2002. We expect that amortization expense on franchise assets projected after tax cash flows, result in a value of property, plant
will be approximately $3 million annually for each of the next and equipment, franchises, customer relationships and our total
five years. Actual amortization expense in future periods could entity value. The value of goodwill is the difference between the
differ from these estimates as a result of new intangible asset total entity value and amounts assigned to the other assets. The
acquisitions or divestitures, changes in useful lives and other use of different valuation assumptions or definitions of franchises
relevant factors. Our goodwill is also deemed to have an or customer relationships, such as our inclusion of the value of
indefinite life under SFAS No. 142. selling additional services to our current customers within
SFAS No. 144, Accounting for Impairment or Disposal of Long- customer relationships versus franchises, could significantly
Lived Assets, requires that we evaluate the recoverability of our impact our valuations and any resulting impairment.
property, plant and equipment and franchise assets which did Franchises, for valuation purposes, are defined as the future
not qualify for indefinite-life treatment under SFAS No. 142 economic benefits of the right to solicit and service potential
upon the occurrence of events or changes in circumstances customers (customer marketing rights), and the right to deploy
which indicate that the carrying amount of an asset may not be and market new services such as interactivity and telephony to
recoverable. Such events or changes in circumstances could the potential customers (service marketing rights). Fair value is
include such factors as the impairment of our indefinite-life determined based on estimated discounted future cash flows
franchises under SFAS No. 142, changes in technological using assumptions consistent with internal forecasts. The
advances, fluctuations in the fair value of such assets, adverse franchise after-tax cash flow is calculated as the after-tax cash
changes in relationships with local franchise authorities, adverse flow generated by the potential customers obtained and the new
changes in market conditions or poor operating results. Under services added to those customers in future periods. The sum of
SFAS No. 144, a long-lived asset is deemed impaired when the the present value of the franchises’ after-tax cash flow in years 1
carrying amount of the asset exceeds the projected undiscounted through 10 and the continuing value of the after-tax cash flow
future cash flows associated with the asset. No impairments of beyond year 10 yields the fair value of the franchise. Prior to the
long-lived assets were recorded in the years ended Decem- adoption of EITF Topic D-108, Use of the Residual Method to
ber 31, 2004, 2003 or 2002. We were also required to evaluate Value Acquired Assets Other than Goodwill, discussed below, we
the recoverability of our indefinite-life franchises, as well as followed a residual method of valuing our franchise assets,
goodwill, as of January 1, 2002 upon adoption of SFAS No. 142, which had the effect of including goodwill with the franchise
and on an annual basis or more frequently as deemed necessary. assets.
Under both SFAS No. 144 and SFAS No. 142, if an asset is We follow the guidance of EITF Issue 02-17, Recognition of
determined to be impaired, it is required to be written down to Customer Relationship Intangible Assets Acquired in a Business
its estimated fair market value. We determine fair market value Combination, in valuing customer relationships. Customer rela-
based on estimated discounted future cash flows, using reasona- tionships, for valuation purposes, represent the value of the
ble and appropriate assumptions that are consistent with internal business relationship with our existing customers and are
forecasts. Our assumptions include these and other factors: calculated by projecting future after-tax cash flows from these
penetration rates for analog and digital video and high-speed customers including the right to deploy and market additional
data, revenue growth rates, expected operating margins and services such as interactivity and telephony to these customers.
capital expenditures. Considerable management judgment is The present value of these after-tax cash flows yields the fair
necessary to estimate future cash flows, and such estimates value of the customer relationships. Substantially all our acquisi-
include inherent uncertainties, including those relating to the tions occurred prior to January 1, 2002. We did not record any
timing and amount of future cash flows and the discount rate value associated with the customer relationship intangibles
used in the calculation. related to those acquisitions. For acquisitions subsequent to
Based on the guidance prescribed in Emerging Issues Task January 1, 2002, we did assign a value to the customer
Force (‘‘EITF’’) Issue No. 02-7, Unit of Accounting for Testing of relationship intangible, which is amortized over its estimated
Impairment of Indefinite-Lived Intangible Assets, franchises were useful life.
aggregated into essentially inseparable asset groups to conduct
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