Charter 2007 Annual Report Download - page 44

included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with capital-
ized direct labor, (ii) direct variable costs associated with capital-
izable activities, consisting primarily of installation and
construction vehicle costs, (iii) the cost of support personnel,
such as dispatchers, who directly assist with capitalizable installa-
tion activities, and (iv) indirect costs directly attributable to
capitalizable activities.
While we believe our existing capitalization policies are
appropriate, a significant change in the nature or extent of our
system activities could affect management’s judgment about the
extent to which we should capitalize direct labor or overhead in
the future. We monitor the appropriateness of our capitalization
policies, and perform updates to our internal studies on an
ongoing basis to determine whether facts or circumstances
warrant a change to our capitalization policies. We capitalized
internal direct labor and overhead of $194 million, $204 million,
and $190 million, respectively, for the years ended December 31,
2007, 2006, and 2005.
Useful lives of property, plant and equipment. We evaluate the
appropriateness of estimated useful lives assigned to our property,
plant and equipment, based on annual analyses of such useful
lives, and revise such lives to the extent warranted by changing
facts and circumstances. Any changes in estimated useful lives as
a result of these analyses are reflected prospectively beginning in
the period in which the study is completed. Our analysis
completed in the fourth quarter of 2007 indicated changes in the
useful lives of certain of our property, plant, and equipment based
on technological changes in our plant. As a result, we expect
depreciation expense to decrease in 2008 by approximately
$80 million. The impact of such changes to our results in 2007
was not material. The effect of a one-year decrease in the
average remaining useful life of our property, plant and equip-
ment would be an increase in depreciation expense for the year
ended December 31, 2007 of approximately $295 million. The
effect of a one-year increase in the weighted average useful life of
our property, plant and equipment would be a decrease in
depreciation expense for the year ended December 31, 2007 of
approximately $152 million.
Depreciation expense related to property, plant and equip-
ment totaled $1.3 billion, $1.3 billion, and $1.4 billion, represent-
ing approximately 24%, 26%, and 30% of costs and expenses for
the years ended December 31, 2007, 2006, and 2005, respectively.
Depreciation is recorded using the straight-line composite
method over management’s estimate of the estimated useful lives
of the related assets as listed below:
Cable distribution systems 7-20 years
Customer equipment and installations 3-5 years
Vehicles and equipment 1-5 years
Buildings and leasehold improvements 5-15 years
Furniture, fixtures and equipment 5 years
Impairment of property, plant and equipment, franchises and goodwill.
As discussed above, the net carrying value of our property, plant
and equipment is significant. We also have recorded a significant
amount of cost related to franchises, pursuant to which we are
granted the right to operate our cable distribution network
throughout our service areas. The net carrying value of franchises
as of December 31, 2007 and 2006 was approximately $8.9 billion
(representing 61% of total assets) and $9.2 billion (representing
61% of total assets), respectively. Furthermore, our noncurrent
assets include approximately $67 million of goodwill.
We adopted SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002. SFAS No. 142 requires that franchise
intangible assets that meet specified indefinite-life criteria no
longer be amortized against earnings, but instead must be tested
for impairment annually based on valuations, or more frequently
as warranted by events or changes in circumstances. In determin-
ing whether our franchises have an indefinite-life, we considered
the likelihood of franchise renewals, the expected costs of
franchise renewals, and the technological state of the associated
cable systems, with a view to whether or not we are in
compliance with any technology upgrading requirements speci-
fied in a franchise agreement. We have concluded that as of
December 31, 2007, 2006, and 2005 substantially all of our
franchises qualify for indefinite-life treatment under SFAS No. 142.
Costs associated with franchise renewals are amortized on a
straight-line basis over 10 years, which represents management’s
best estimate of the average term of the franchises. Franchise
amortization expense was $3 million, $2 million, and $4 million
for the years ended December 31, 2007, 2006, and 2005, respec-
tively. We expect that amortization expense on franchise assets
will be approximately $2 million annually for each of the next
five years. Actual amortization expense in future periods could
differ from these estimates as a result of new intangible asset
acquisitions or divestitures, changes in useful lives, and other
relevant factors. Our goodwill is also deemed to have an indefi-
nite life under SFAS No. 142.
SFAS No. 144, Accounting for Impairment or Disposal of Long-
Lived Assets, requires that we evaluate the recoverability of our
property, plant and equipment and amortizing franchise assets
upon the occurrence of events or changes in circumstances
indicating that the carrying amount of an asset may not be
recoverable. Such events or changes in circumstances could
include such factors as the impairment of our indefinite-life
franchises under SFAS No. 142, changes in technological
advances, fluctuations in the fair value of such assets, adverse
changes in relationships with local franchise authorities, adverse
changes in market conditions, or a deterioration of current or
expected future operating results. Under SFAS No. 144, a long-
lived asset is deemed impaired when the carrying amount of the
asset exceeds the projected undiscounted future cash flows
associated with the asset. No impairments of long-lived assets to
be held and used were recorded in the years ended December 31,
2007, 2006, and 2005. However, approximately $56 million,
$159 million, and $39 million of impairment on assets held for
sale were recorded for the years ended December 31, 2007, 2006,
and 2005, respectively. We are also required to evaluate the
recoverability of our indefinite-life franchises, as well as goodwill,
on an annual basis or more frequently as deemed necessary.
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CHARTER COMMUNICATIONS, INC. 2007 FORM 10-K