Charter 2006 Annual Report Download - page 48

CHARTER COMMUNICATIONS, INC. 2006 FORM 10-K
franchises under SFAS No. 142, changes in technological those customers in future periods. The sum of the present value
advances, fluctuations in the fair value of such assets, adverse of the franchises’ after-tax cash flow in years 1 through 10 and
changes in relationships with local franchise authorities, adverse the continuing value of the after-tax cash flow beyond year 10
changes in market conditions, or a deterioration of operating yields the fair value of the franchise. Prior to the adoption of
results. Under SFAS No. 144, a long-lived asset is deemed EITF Topic D-108, Use of the Residual Method to Value Acquired
impaired when the carrying amount of the asset exceeds the Assets Other than Goodwill, discussed below, we followed a
projected undiscounted future cash flows associated with the residual method of valuing our franchise assets, which had the
asset. No impairments of long-lived assets to be held and used effect of including goodwill with the franchise assets.
were recorded in the years ended December 31, 2006, 2005, or We follow the guidance of EITF Issue 02-17, Recognition of
2004, however, approximately $159 million and $39 million of Customer Relationship Intangible Assets Acquired in a Business
impairment on assets held for sale was recorded for the years Combination, in valuing customer relationships. Customer rela-
ended December 31, 2006 and 2005, respectively. We are also tionships, for valuation purposes, represent the value of the
required to evaluate the recoverability of our indefinite-life business relationship with our existing customers (less the
franchises, as well as goodwill, on an annual basis or more anticipated customer churn), and are calculated by projecting
frequently as deemed necessary. future after-tax cash flows from these customers, including the
Under both SFAS No. 144 and SFAS No. 142, if an asset is right to deploy and market additional services such as interactiv-
determined to be impaired, it is required to be written down to ity and telephone to these customers. The present value of these
its estimated fair market value. We determine fair market value after-tax cash flows yields the fair value of the customer
based on estimated discounted future cash flows, using reasona- relationships. Substantially all our acquisitions occurred prior to
ble and appropriate assumptions that are consistent with internal January 1, 2002. We did not record any value associated with
forecasts. Our assumptions include these and other factors: the customer relationship intangibles related to those acquisi-
Penetration rates for analog and digital video, high-speed tions. For acquisitions subsequent to January 1, 2002, we did
Internet, and telephone; revenue growth rates; and expected assign a value to the customer relationship intangible, which is
operating margins and capital expenditures. Considerable man- amortized over its estimated useful life.
agement judgment is necessary to estimate future cash flows, The valuations used in our impairment assessments involve
and such estimates include inherent uncertainties, including numerous assumptions as noted above. While economic condi-
those relating to the timing and amount of future cash flows, tions, applicable at the time of the valuation, indicate the
and the discount rate used in the calculation. combination of assumptions utilized in the valuations are
Based on the guidance prescribed in Emerging Issues Task reasonable, as market conditions change so will the assumptions,
Force (‘‘EITF’’) Issue No. 02-7, Unit of Accounting for Testing of with a resulting impact on the valuation and consequently the
Impairment of Indefinite-Lived Intangible Assets, franchises were potential impairment charge. At October 1, 2006, a 10% and 5%
aggregated into essentially inseparable asset groups to conduct decline in the estimated fair value of our franchise assets in each
the valuations. The asset groups generally represent geographic of our asset groupings would have resulted in an impairment
clustering of our cable systems into groups by which such charge of approximately $60 million and $0, respectively.
systems are managed. Management believes such groupings In September 2004, EITF Topic D-108, Use of the Residual
represent the highest and best use of those assets. Method to Value Acquired Assets Other than Goodwill, was issued,
Our valuations, which are based on the present value of which requires the direct method of separately valuing all
projected after tax cash flows, result in a value of property, plant intangible assets and does not permit goodwill to be included in
and equipment, franchises, customer relationships, and our total franchise assets. We performed an impairment assessment as of
entity value. The value of goodwill is the difference between the September 30, 2004, and adopted Topic D-108 in that assess-
total entity value and amounts assigned to the other assets. The ment resulting in a total franchise impairment of approximately
use of different valuation assumptions or definitions of franchises $3.3 billion. We recorded a cumulative effect of accounting
or customer relationships, such as our inclusion of the value of change of $765 million (approximately $875 million before tax
selling additional services to our current customers within effects of $91 million and minority interest effects of $19 mil-
customer relationships versus franchises, could significantly lion) for the year ended December 31, 2004 representing the
impact our valuations and any resulting impairment. portion of our total franchise impairment attributable to no
Franchises, for valuation purposes, are defined as the future longer including goodwill with franchise assets. The effect of the
economic benefits of the right to solicit and service potential adoption was to increase net loss and loss per share by
customers (customer marketing rights), and the right to deploy $765 million and $2.55, respectively, for the year ended
and market new services, such as interactivity and telephone, to December 31, 2004. The remaining $2.4 billion of the total
the potential customers (service marketing rights). Fair value is franchise impairment was attributable to the use of lower
determined based on estimated discounted future cash flows projected growth rates and the resulting revised estimates of
using assumptions consistent with internal forecasts. The future cash flows in our valuation, and was recorded as
franchise after-tax cash flow is calculated as the after-tax cash impairment of franchises in our consolidated statements of
flow generated by the potential customers obtained (less the operations for the year ended December 31, 2004. Sustained
anticipated customer churn) and the new services added to analog video customer losses by us and our industry peers in
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