Charter 2006 Annual Report Download - page 97

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 FORM 10-K
Notes to Consolidated Financial Statements (continued)
6. PROPERTY, PLANT AND EQUIPMENT and market new services, such as interactivity and telephone, to
the potential customers (service marketing rights). Fair value is
Property, plant and equipment consists of the following as of determined based on estimated discounted future cash flows
December 31, 2006 and 2005: using assumptions consistent with internal forecasts. The
franchise after-tax cash flow is calculated as the after-tax cash
2006 2005 flow generated by the potential customers obtained (less the
Cable distribution systems $ 7,035 $ 7,014 anticipated customer churn), and the new services added to
Customer equipment and installations 4,219 3,955 those customers in future periods. The sum of the present value
Vehicles and equipment 474 473 of the franchises’ after-tax cash flow in years 1 through 10 and
Buildings and leasehold improvements 526 584
Furniture, fixtures and equipment 607 563 the continuing value of the after-tax cash flow beyond year 10
12,861 12,589 yields the fair value of the franchise.
Less: accumulated depreciation (7,644) (6,749) The Company follows the guidance of Emerging Issues
$ 5,217 $ 5,840 Task Force (‘‘EITF’’) Issue 02-17, Recognition of Customer
Relationship Intangible Assets Acquired in a Business Combination, in
The Company periodically evaluates the estimated useful valuing customer relationships. Customer relationships, for valu-
lives used to depreciate its assets and the estimated amount of ation purposes, represent the value of the business relationship
assets that will be abandoned or have minimal use in the future. with existing customers (less the anticipated customer churn),
A significant change in assumptions about the extent or timing and are calculated by projecting future after-tax cash flows from
of future asset retirements, or in the Company’s use of new these customers, including the right to deploy and market
technology and upgrade programs, could materially affect future additional services such as interactivity and telephone to these
depreciation expense. customers. The present value of these after-tax cash flows yields
Depreciation expense for the years ended December 31, the fair value of the customer relationships. Substantially all
2006, 2005 and 2004 was $1.3 billion, $1.4 billion and acquisitions occurred prior to January 1, 2002. The Company
$1.4 billion, respectively. did not record any value associated with the customer relation-
ship intangibles related to those acquisitions. For acquisitions
7. FRANCHISES AND GOODWILL
subsequent to January 1, 2002 the Company did assign a value
Franchise rights represent the value attributed to agreements to the customer relationship intangible, which is amortized over
with local authorities that allow access to homes in cable service its estimated useful life.
areas acquired through the purchase of cable systems. Manage- In September 2004, the SEC staff issued EITF Topic D-108
ment estimates the fair value of franchise rights at the date of which requires the direct method of separately valuing all
acquisition and determines if the franchise has a finite life or an intangible assets and does not permit goodwill to be included in
indefinite-life as defined by SFAS No. 142, Goodwill and Other franchise assets. The Company adopted Topic D-108 in its
Intangible Assets. Franchises that qualify for indefinite-life treat- impairment assessment as of September 30, 2004. Such impair-
ment under SFAS No. 142 are tested for impairment annually ment assessment resulted in a total franchise impairment of
each October 1 based on valuations, or more frequently as approximately $3.3 billion. The Company recorded a cumulative
warranted by events or changes in circumstances. Such test effect of accounting change of $765 million (approximately
resulted in a total franchise impairment of approximately $875 million before tax effects of $91 million and minority
$3.3 billion during the third quarter of 2004. The 2005 and 2006 interest effects of $19 million) for the year ended December 31,
annual impairment tests resulted in no impairment. Franchises 2004 representing the portion of the Company’s total franchise
are aggregated into essentially inseparable asset groups to impairment attributable to no longer including goodwill with
conduct the valuations. The asset groups generally represent franchise assets. The effect of the adoption was to increase net
geographic clustering of the Company’s cable systems into loss and loss per share by $765 million and $2.55, respectively,
groups by which such systems are managed. Management for the year ended December 31, 2004. The remaining $2.4 bil-
believes such grouping represents the highest and best use of lion of the total franchise impairment was attributable to the use
those assets. of lower projected growth rates and the resulting revised
The Company’s valuations, which are based on the present estimates of future cash flows in the Company’s valuation, and
value of projected after tax cash flows, result in a value of was recorded as impairment of franchises in the Company’s
property, plant and equipment, franchises, customer relation- accompanying consolidated statements of operations for the
ships, and its total entity value. The value of goodwill is the year ended December 31, 2004. Sustained analog video cus-
difference between the total entity value and amounts assigned tomer losses by the Company in the third quarter of 2004
to the other assets. primarily as a result of increased competition from direct
Franchises, for valuation purposes, are defined as the future broadcast satellite providers and decreased growth rates in the
economic benefits of the right to solicit and service potential Company’s high-speed Internet customers in the third quarter of
customers (customer marketing rights), and the right to deploy 2004, in part, as a result of increased competition from digital
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