Charter 2010 Annual Report Download - page 54

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or customer relationships, such as our inclusion of the value of
selling additional services to our current customers within customer
relationships versus franchises, could significantly impact our
valuations and any resulting impairment.
We evaluate the recoverability of customer relationships upon the
occurrence of events or changes in circumstances indicating that
the carrying amount of an asset may not be recoverable. Customer
relationships are deemed impaired when the carrying value exceeds
the projected undiscounted future cash flows associated with the
customer relationships. No impairment of customer relationships was
recorded in the years ended December 31, 2010, 2009 or 2008.
Customer relationships are amortized on an accelerated method over
useful lives of 11-15 years based on the period over which current
customers are expected to generate cash flows. Amortization expense
related to customer relationships for the years ended December 31,
2010, 2009, and 2008 was approximately $331 million, $29 million,
and $1 million, respectively.
Impairment of goodwill. e net carrying value of goodwill as of
December 31, 2010 and 2009 was approximately $951 million
(representing 6% of total assets). Goodwill was recorded in 2009 as
the excess of reorganization value on the Effective Date over amounts
assigned to the other assets.
Goodwill is tested for impairment as of November 30 of each year, or
more frequently as warranted by events or changes in circumstances.
e first step involves a comparison of the estimated fair value of
each of our reporting units to its carrying amount. If the estimated
fair value of a reporting unit exceeds its carrying amount, goodwill of
the reporting unit is not considered impaired and the second step of
the goodwill impairment is not necessary. If the carrying amount of a
reporting unit exceeds its estimated fair value, then the second step of
the goodwill impairment test must be performed, and a comparison
of the implied fair value of the reporting unit’s goodwill is compared
to its carrying amount to determine the amount of impairment,
if any. Reporting units are consistent with the units of accounting
used for franchise impairment testing. Likewise the fair values of the
reporting units are determined using a consistent income approach
model as that used for franchise impairment testing. Our 2010,
2009, and 2008 impairment analyses did not result in any goodwill
impairment charges. At December 31, 2010 a 10% decline in the
fair value of each of our reporting units would have resulted in $5
million of impairment in one reporting unit and a 20% decline
would have resulted in $29 million of aggregate impairment in two
of our reporting units.
Impairment of trademarks. e net carrying value of trademarks as
of December 31, 2010 and 2009 was approximately $158 million
(representing 1% of total assets). Trademarks are tested annually for
impairment, or more frequently as warranted by events or changes
in circumstances. e fair value of trademarks is determined using
the relief-from-royalty method which applies a fair royalty rate to
estimated revenue. Royalty rates are estimated based on a review of
market royalty rates in the communications and entertainment industries.
As we expect to continue to use each trade name indefinitely, trademarks
have been assigned an indefinite life and are tested annually for
impairment. e valuation in 2010 showed trademark values in
excess of book value, and thus resulted in no impairment.
Income taxes
All of Charter’s operations are held through Charter Holdco and its
direct and indirect subsidiaries. Charter Holdco and the majority
of its subsidiaries are generally limited liability companies that
are not subject to income tax. However, certain of these limited
liability companies are subject to state income tax. In addition, the
indirect subsidiaries that are corporations are subject to federal and
state income tax. All of the remaining taxable income, gains, losses,
deductions and credits of Charter Holdco pass through to Charter.
In connection with the Plan, Charter, CII, Mr. Allen and Charter
Holdco entered into an exchange agreement (the “Exchange
Agreement”), pursuant to which CII had the right to require Charter
to (i) exchange all or a portion of CII’s membership interest in
Charter Holdco or 100% of CII for $1,000 in cash and shares of
Charter’s Class A common stock in a taxable transaction, or (ii)
merge CII with and into Charter, or a wholly-owned subsidiary of
Charter, in a tax-free transaction (or undertake a tax-free transaction
similar to the taxable transaction in subclause (i)), subject to CII
meeting certain conditions. In addition, Charter had the right,
under certain circumstances involving a change of control of Charter
to require CII to effect an exchange transaction of the type elected
by CII from subclauses (i) or (ii) above, which election is subject to
certain limitations.
On December 28, 2009, CII exercised its right, under the Exchange
Agreement with Charter, to exchange 81% of its common