Charter 2005 Annual Report Download - page 134

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2005 FORM 10-K
Notes to Consolidated Financial Statements (continued)
are aggregated into essentially inseparable asset groups to Substantially all acquisitions occurred prior to January 1, 2002.
conduct the valuations. The asset groups generally represent The Company did not record any value associated with the
geographic clustering of the Company’s cable systems into customer relationship intangibles related to those acquisitions.
groups by which such systems are managed. Management For acquisitions subsequent to January 1, 2002 the Company did
believes such grouping represents the highest and best use of assign a value to the customer relationship intangible, which is
those assets. amortized over its estimated useful life.
The Company’s valuations, which are based on the present In September 2004, the SEC staff issued EITF Topic D-108
value of projected after tax cash flows, result in a value of which requires the direct method of separately valuing all
property, plant and equipment, franchises, customer relationships intangible assets and does not permit goodwill to be included in
and its total entity value. The value of goodwill is the difference franchise assets. The Company adopted Topic D-108 in its
between the total entity value and amounts assigned to the impairment assessment as of September 30, 2004 that resulted in
other assets. a total franchise impairment of approximately $3.3 billion. The
Franchises, for valuation purposes, are defined as the future Company recorded a cumulative effect of accounting change of
economic benefits of the right to solicit and service potential $765 million (approximately $875 million before tax effects of
customers (customer marketing rights), and the right to deploy $91 million and minority interest effects of $19 million) for the
and market new services such as interactivity and telephone to year ended December 31, 2004 representing the portion of the
the potential customers (service marketing rights). Fair value is Company’s total franchise impairment attributable to no longer
determined based on estimated discounted future cash flows including goodwill with franchise assets. The effect of the
using assumptions consistent with internal forecasts. The adoption was to increase net loss and loss per share by
franchise after-tax cash flow is calculated as the after-tax cash $765 million and $2.55, respectively, for the year ended
flow generated by the potential customers obtained and the new December 31, 2004. The remaining $2.4 billion of the total
services added to those customers in future periods. The sum of franchise impairment was attributable to the use of lower
the present value of the franchises’ after-tax cash flow in years 1 projected growth rates and the resulting revised estimates of
through 10 and the continuing value of the after-tax cash flow future cash flows in the Company’s valuation, and was recorded
beyond year 10 yields the fair value of the franchise. as impairment of franchises in the Company’s accompanying
The Company follows the guidance of Emerging Issues consolidated statements of operations for the year ended
Task Force (‘‘EITF’’) Issue 02-17, Recognition of Customer December 31, 2004. Sustained analog video customer losses by
Relationship Intangible Assets Acquired in a Business Combination, in the Company in the third quarter of 2004 primarily as a result
valuing customer relationships. Customer relationships, for valu- of increased competition from direct broadcast satellite providers
ation purposes, represent the value of the business relationship and decreased growth rates in the Company’s high-speed
with existing customers and are calculated by projecting future Internet customers in the third quarter of 2004, in part, as a
after-tax cash flows from these customers including the right to result of increased competition from digital subscriber line
deploy and market additional services such as interactivity and service providers led to the lower projected growth rates and
telephone to these customers. The present value of these after- the revised estimates of future cash flows from those used at
tax cash flows yields the fair value of the customer relationships. October 1, 2003.
As of December 31, 2005 and 2004, indefinite-lived and finite-lived intangible assets are presented in the following table:
December 31,
2005 2004
Gross Net Gross Net
Carrying Accumulated Carrying Carrying Accumulated Carrying
Amount Amortization Amount Amount Amortization Amount
Indefinite-lived intangible assets:
Franchises with indefinite lives $9,806 $ — $9,806 $9,845 $ —$9,845
Goodwill 52 — 52 52 —52
$9,858 $ — $9,858 $9,897 $ —$9,897
Finite-lived intangible assets:
Franchises with finite lives $27 $7 $20 $37 $4 $33
For the years ended December 31, 2005 and 2004, the net approximately $37 million and $13 million, respectively, of
carrying amount of indefinite-lived franchises was reduced by franchises that were previously classified as finite-lived were
$52 million and $490 million, respectively, related to the sale of reclassified to indefinite-lived, based on the Company’s renewal of
cable systems (see Note 4). Additionally, in 2004 and 2005, these franchise assets in 2004 and 2005. Franchise amortization
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