Charter 2012 Annual Report Download - page 88

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012, 2011 AND 2010
(dollars in millions, except share or per share data or where indicated)
F- 13
programming and customer premise equipment along with changes to our organizational structure and strategies. After
consideration of these qualitative factors, the Company concluded that it is more likely than not that the fair value of the franchise
assets in each unit of accounting exceeds the carrying value of such assets and therefore did not perform a quantitative analysis
in 2012.
If we are required to perform a quantitative analysis to test the Company's franchise assets for impairment, the Company determines
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 is 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.
The Company estimates discounted future cash flows using reasonable and appropriate assumptions including among others,
penetration rates for video, high-speed Internet, and telephone; revenue growth rates; operating margins; and capital expenditures.
The assumptions are derived based on the Company’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 the Company’s
valuations are inherently subject to significant uncertainties, many of which are beyond its 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 quantitative franchise valuations
completed for the years ended December 31, 2011 and 2010 showed franchise values in excess of book values and thus resulted
in no impairment.
Goodwill is tested for impairment as of November 30 of each year, or more frequently as warranted by events or changes in
circumstances. Accounting guidance also permits a qualitative assessment for goodwill to determine whether it is more likely
than not that the carrying value of a reporting unit exceeds its fair value. If, after this qualitative assessment, the Company
determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount then no further
quantitative testing would be necessary. If the Company is required to perform the two-step test under the accounting guidance,
the 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, consistent with
the units of accounting used for franchise impairment testing, were consolidated into one reporting unit as of November 30, 2012.
Likewise the fair values of the reporting units, when performing the second step of the goodwill impairment test, are determined
using a consistent income approach model as that used for franchise impairment testing. As with the Company's franchise
impairment testing, the Company elected to perform a qualitative assessment for its goodwill impairment testing and concluded
that none of its reporting units are impaired based on the new or prior reporting units. The Company’s 2011 and 2010 quantitative
impairment analyses also did not result in any goodwill impairment charges.
Customer relationships, for valuation purposes, represent the value of the business relationship with existing customers (less the
anticipated customer churn), and are calculated by projecting the discrete future after-tax cash flows from these customers, including
the right to deploy and market additional services to these customers. The present value of these after-tax cash flows yields the
fair value of the customer relationships. 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. Customer relationships are evaluated
upon the occurrence of events or changes in circumstances indicating that the carrying amount of an asset may not be recoverable.
The 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 the Company expects to continue to use each trademark indefinitely, trademarks have been assigned an indefinite life and are
tested annually for impairment using either a qualitative analysis or quantitative analysis as elected by management. The qualitative
analysis in 2012 did not identify any factors that would indicate that it was more likely than not that the fair value of trademarks
were less than the carrying value and thus resulted in no impairment. The Company’s 2011 and 2010 quantitative impairment
analyses did not result in any trademark impairment charges.