Charter 2011 Annual Report Download - page 50

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Intangible assets
In connection with the application of fresh start accounting, franchises and customer relationships were valued using an income
approach and were valued at $5.3 billion and $2.4 billion, respectively, as of December 1, 2009. The relief from royalty method
was used to value trademarks at $158 million as of December 1, 2009. The fresh start adjustments also resulted in the recording
of goodwill of $951 million. See discussion below for a description of the methods used to value intangible assets.
Impairment of franchises. The net carrying value of franchises as of December 31, 2011 and 2010 was approximately $5.3 billion
(representing 34% of total assets) and $5.3 billion (representing 33% of total assets), respectively. Franchise rights represent the
value attributed to agreements or authorizations with local and state authorities that allow access to homes in cable service areas.
For valuation purposes, they are defined as the future economic benefits of the right to solicit and service potential customers
(customer marketing rights), and the right to deploy and market new services, such as Internet and telephone, to potential customers
(service marketing rights).
Franchise intangible assets that meet specified indefinite life criteria must be tested for impairment annually, or more frequently
as warranted by events or changes in circumstances. In determining 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 specified in a franchise
agreement. We have concluded that as of December 31, 2011 and 2010 all of our franchises qualify for indefinite life treatment.
The fair value of franchises for impairment testing is determined based on estimated discrete discounted future cash flows using
assumptions consistent with internal forecasts. The franchise after-tax cash flow is calculated as the after-tax cash flow generated
by the potential customers obtained (less the anticipated customer churn), and the new services added to those customers in future
periods. The sum of the present value of the franchises' after-tax cash flow in years 1 through 10 and the continuing value of the
after-tax cash flow beyond year 10 yields the fair value of the franchises. Franchises are expected to generate cash flows indefinitely
and are tested for impairment annually, or more frequently as warranted by events or changes in circumstances. Franchises are
aggregated into essentially inseparable units of accounting to conduct the valuations. The units of accounting generally represent
geographical clustering of our cable systems into groups by which such systems are managed. Management believes such grouping
represents the highest and best use of those assets.
We determined the estimated fair value of each unit of accounting utilizing an income approach model based on the present value
of the estimated discrete future cash flows attributable to each of the intangible assets identified for each unit assuming a discount
rate. This approach makes use of unobservable factors such as projected revenues, expenses, capital expenditures, and a discount
rate applied to the estimated cash flows. The determination of the discount rate was based on a weighted average cost of capital
approach, which uses a market participant’s cost of equity and after-tax cost of debt and reflects the risks inherent in the cash flows.
We estimated discounted future cash flows using reasonable and appropriate assumptions including among others, penetration
rates for basic and digital video, high-speed Internet, and telephone; revenue growth rates; operating margins; and capital
expenditures. The assumptions are derived based on Charter’s and its peers’ historical operating performance adjusted for current
and expected competitive and economic factors surrounding the cable industry. The estimates and assumptions made in our
valuations are inherently subject to significant uncertainties, many of which are beyond our control, and there is no assurance that
these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation
that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense
growth rates, the amount and timing of capital expenditures and the discount rate utilized.
The franchise valuation completed for each of the years ended December 31, 2011 and 2010 showed franchise values in excess
of book values and thus resulted in no impairment. We recorded non-cash franchise impairment charges of $2.2 billion for the
year ended December 31, 2009. The impairment charges recorded in 2009 was primarily the result of the impact of the economic
downturn along with increased competition. The valuations used in our impairment assessments involve numerous assumptions
as noted above. While economic conditions applicable at the time of the valuations indicate the combination of assumptions utilized
in the valuations are reasonable, as market conditions change so will the assumptions, with a resulting impact on the valuations
and consequently the potential impairment charge. At December 31, 2011, a 20% decline in the estimated fair value of our franchise
assets in each of our units of accounting would have resulted in an impairment charge of approximately $3 million in one of our
units of accounting. Management has no reason to believe that any one unit of accounting is more likely than any other to incur
impairments of its intangible assets.