DIRECTV 2003 Annual Report Download - page 81

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THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
The Company carries all derivative financial instruments in the Consolidated Balance Sheets at fair value
based on quoted market prices. The Company uses derivative contracts to minimize the financial impact of
changes in the fair value of recognized assets, liabilities, and unrecognized firm commitments, or the variability
of cash flows associated with forecasted transactions in accordance with internal risk management policies.
Changes in fair value of designated, qualified and effective fair value hedges are recognized in earnings as offsets
to the changes in fair value of the related hedged items. Changes in fair value of designated, qualified and
effective cash flow hedges are deferred and recorded as a component of OCI until the hedged transactions occur
and are recognized in earnings. The ineffective portion and changes related to amounts excluded from the
effectiveness assessment of a hedging derivative’s change in fair value are immediately recognized in the
Consolidated Statements of Income in “Other, net.” The Company assesses, both at the inception of the hedge
and on an on-going basis, whether the derivatives are highly effective. Hedge accounting is prospectively
discontinued when hedge instruments are no longer highly effective.
The net deferred loss from effective cash flow hedges, net of taxes, in OCI of $2.5 million at December 31,
2003 is expected to be recognized in earnings over the next two years.
Debt Issuance Costs
Costs incurred to issue debt are deferred and amortized to interest expense using the straight-line method
over the term of the respective obligation.
Stock-Based Compensation
The Company issues common stock options to employees with exercise prices equal to the fair value of the
underlying security at the date of grant. The Company also grants restricted stock units to employees. Beginning on
January 1, 2003, the Company adopted the fair value based method of accounting for stock-based employee
compensation of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of SFAS No. 123.”
Under this method, compensation expense equal to the fair value of the stock-based award at grant is recognized
over the course of its vesting period. The Company elected to follow the prospective method of adoption, which
results in the recognition of fair value based compensation cost in the Consolidated Statements of Income for stock
options and other stock-based awards granted to employees or modified on or after January 1, 2003. Stock options
and other stock-based awards granted prior to January 1, 2003 continue to be accounted for under the intrinsic value
method of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”
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