Charter 2013 Annual Report Download - page 51

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Franchises are aggregated into essentially inseparable units of accounting to conduct valuations. The units of accounting represent
geographical clustering of our cable systems into groups. We assess qualitative factors to determine whether the existence of
events or circumstances leads to a determination that it is more likely than not that an indefinite lived intangible asset has been
impaired. If, after this qualitative assessment, we determine that it is not more likely than not that an indefinite lived intangible
asset has been impaired, then no further quantitative testing is necessary. In completing our 2013 and 2012 impairment testing,
we evaluated the impact of various factors to the expected future cash flows attributable to our units of accounting and to the
assumed discount rate which would be used to present value those cash flows. Such factors included macro-economic and industry
conditions including the capital markets, regulatory, and competitive environment, and costs of programming and customer premise
equipment along with changes to our organizational structure and strategies. After consideration of these qualitative factors, we
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 2013 or 2012.
If we are required to perform a quantitative analysis to test our franchise assets for impairment, we determine the estimated fair
value 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 assuming a discount rate. 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.
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. We
estimate discounted future cash flows using reasonable and appropriate assumptions 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 quantitative franchise valuations completed for the year ended December 31, 2011 showed franchise values in excess of book
values and thus resulted in no impairment.
Valuation, impairment and amortization of customer relationships. The net carrying value of customer relationships as of
December 31, 2013 and 2012 was approximately $1.4 billion (representing 8% of total assets) and $1.4 billion (representing 9%
of total assets), respectively. 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. The use of different valuation assumptions or definitions
of franchises 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, 2013, 2012 and 2011.
Customer relationships are amortized on an accelerated method over useful lives of 8-15 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, 2013, 2012 and 2011 was approximately $284 million, $280 million and $306 million, respectively.
Valuation and impairment of goodwill. The net carrying value of goodwill as of December 31, 2013 and 2012 was approximately
$1.2 billion (representing 7% of total assets) and $953 million (representing 6% of total assets), respectively. 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, we determine 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 we are
required to perform the two-step test under the accounting guidance, the first step involves a comparison of the estimated fair
value of each reporting unit to its carrying amount. If the estimated fair value of a reporting unit exceeds its carrying amount,