Charter 2005 Annual Report Download - page 44

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
(representing 56% of total assets), respectively. Furthermore, our its estimated fair market value. We determine fair market value
noncurrent assets include approximately $52 million of goodwill. based on estimated discounted future cash flows, using reasona-
We adopted SFAS No. 142, Goodwill and Other Intangible ble and appropriate assumptions that are consistent with internal
Assets, on January 1, 2002. SFAS No. 142 requires that franchise forecasts. Our assumptions include these and other factors:
intangible assets that meet specified indefinite-life criteria no penetration rates for analog and digital video, high-speed
longer be amortized against earnings, but instead must be tested Internet and telephone, revenue growth rates, expected operat-
for impairment annually based on valuations, or more frequently ing margins and capital expenditures. Considerable management
as warranted by events or changes in circumstances. In judgment is necessary to estimate future cash flows, and such
determining whether our franchises have an indefinite-life, we estimates include inherent uncertainties, including those relating
considered the exclusivity of the franchise, the expected costs of to the timing and amount of future cash flows and the discount
franchise renewals, and the technological state of the associated rate used in the calculation.
cable systems with a view to whether or not we are in Based on the guidance prescribed in Emerging Issues Task
compliance with any technology upgrading requirements. We Force (‘‘EITF’’) Issue No. 02-7, Unit of Accounting for Testing of
have concluded that as of December 31, 2005, 2004 and 2003 Impairment of Indefinite-Lived Intangible Assets, franchises were
more than 99% of our franchises qualify for indefinite-life aggregated into essentially inseparable asset groups to conduct
treatment under SFAS No. 142, and that less than one percent the valuations. The asset groups generally represent geographic
of our franchises do not qualify for indefinite-life treatment due clustering of our cable systems into groups by which such
to technological or operational factors that limit their lives. systems are managed. Management believes such groupings
Costs of finite-lived franchises, along with costs associated with represent the highest and best use of those assets.
franchise renewals, are amortized on a straight-line basis over Our valuations, which are based on the present value of
10 years, which represents management’s best estimate of the projected after tax cash flows, result in a value of property, plant
average remaining useful lives of such franchises. Franchise and equipment, franchises, customer relationships and our total
amortization expense was $4 million, $4 million and $9 million entity value. The value of goodwill is the difference between the
for the years ended December 31, 2005, 2004 and 2003, total entity value and amounts assigned to the other assets. The
respectively. We expect that amortization expense on franchise use of different valuation assumptions or definitions of franchises
assets will be approximately $2 million annually for each of the or customer relationships, such as our inclusion of the value of
next five years. Actual amortization expense in future periods selling additional services to our current customers within
could differ from these estimates as a result of new intangible customer relationships versus franchises, could significantly
asset acquisitions or divestitures, changes in useful lives and impact our valuations and any resulting impairment.
other relevant factors. Our goodwill is also deemed to have an Franchises, for valuation purposes, are defined as the future
indefinite life under SFAS No. 142. economic benefits of the right to solicit and service potential
SFAS No. 144, Accounting for Impairment or Disposal of Long- customers (customer marketing rights), and the right to deploy
Lived Assets, requires that we evaluate the recoverability of our and market new services such as interactivity and telephone to
property, plant and equipment and franchise assets which did the potential customers (service marketing rights). Fair value is
not qualify for indefinite-life treatment under SFAS No. 142 determined based on estimated discounted future cash flows
upon the occurrence of events or changes in circumstances using assumptions consistent with internal forecasts. The
which indicate that the carrying amount of an asset may not be franchise after-tax cash flow is calculated as the after-tax cash
recoverable. Such events or changes in circumstances could flow generated by the potential customers obtained and the new
include such factors as the impairment of our indefinite-life services added to those customers in future periods. The sum of
franchises under SFAS No. 142, changes in technological the present value of the franchises’ after-tax cash flow in years 1
advances, fluctuations in the fair value of such assets, adverse through 10 and the continuing value of the after-tax cash flow
changes in relationships with local franchise authorities, adverse beyond year 10 yields the fair value of the franchise. Prior to the
changes in market conditions or a deterioration of operating adoption of EITF Topic D-108, Use of the Residual Method to
results. Under SFAS No. 144, a long-lived asset is deemed Value Acquired Assets Other than Goodwill, discussed below, we
impaired when the carrying amount of the asset exceeds the followed a residual method of valuing our franchise assets,
projected undiscounted future cash flows associated with the which had the effect of including goodwill with the franchise
asset. No impairments of long-lived assets to be held and used assets.
were recorded in the years ended December 31, 2005, 2004 or We follow the guidance of EITF Issue 02-17, Recognition of
2003, however, approximately $39 million of impairment on Customer Relationship Intangible Assets Acquired in a Business
assets held for sale was recorded for the year ended Decem- Combination, in valuing customer relationships. Customer rela-
ber 31, 2005. We were also required to evaluate the recover- tionships, for valuation purposes, represent the value of the
ability of our indefinite-life franchises, as well as goodwill, as of business relationship with our existing customers and are
January 1, 2002 upon adoption of SFAS No. 142, and on an calculated by projecting future after-tax cash flows from these
annual basis or more frequently as deemed necessary. customers including the right to deploy and market additional
Under both SFAS No. 144 and SFAS No. 142, if an asset is services such as interactivity and telephone to these customers.
determined to be impaired, it is required to be written down to The present value of these after-tax cash flows yields the fair
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