DIRECTV 2002 Annual Report Download - page 83

HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Subscriber acquisition costs primarily consist of amounts paid for third-party customer
acquisitions, which consist of the cost of commissions paid to authorized retailers and dealers for
subscribers added through their respective distribution channels which are included in the consolidated
statements of operations in “Selling, general and administrative expenses,” and the cost of installation
and hardware subsidies for subscribers added through the direct customer acquisition program which
are included in the consolidated statements of operations in “Broadcast programming and other costs.”
Additional components of subscriber acquisition costs include subsidies paid to manufacturers of
receiving equipment, if any, and the cost of print and television advertising. The cost of advertising and
manufacturer subsidies is expensed as incurred. Manufacturer subsidies for hardware activated on the
DIRECTV service prior to August 2000 are payable over five years, the present value of which was
accrued in the period of activation with interest expense recorded over the term of the obligation. The
current portion of these manufacturer subsidies are recorded in the Consolidated Balance Sheets in
“Accrued liabilities and other,” with the long-term portion recorded in “Other Liabilities and Deferred
Credits.”
Substantially all commissions paid to retailers and dealers for third-party customer acquisitions,
although paid in advance, are earned by the retailers or dealers over 12 months from the date of
subscriber activation and may be recouped by Hughes on a pro-rata basis should the subscriber
cancel the service during the 12-month service period. Accordingly, prepaid commissions are deferred
and amortized to expense over the 12-month service period. The amount deferred is limited to the
estimated average gross margin (equal to an average subscriber’s revenue to be earned over
12 months, less the related cost of programming) to be derived from the subscriber over the 12-month
period. The excess commission over the estimated gross margin and non-refundable commissions are
expensed immediately.
The cost of installation and hardware under the direct customer acquisition program is deferred
when a customer commits to 12 months of the service. The amount deferred is amortized to expense
over the commitment period and limited to the estimated gross margin (equal to the contractual
revenues to be earned from the subscriber over 12 months, less the related cost of programming)
expected to be earned over the contract term, less a reserve for estimated unrecoverable amounts.
The cost of installation and hardware in excess of the estimated gross margin and where no customer
commitment is obtained is expensed immediately.
Hughes actively monitors the recoverability of prepaid commissions and deferred installation and
hardware costs. To the extent Hughes needs to charge back prepaid commissions, Hughes offsets the
amount due against amounts payable to the retailers/dealers, and therefore, recoverability of prepaid
commissions, net of existing reserves, is reasonably assured. Generally, new subscribers secure their
accounts by providing a credit card or other identifying information and agree that a pro-rated early
termination fee of $150 will be assessed if the subscriber cancels service prior to the end of the
commitment period. As a result, with the ability to charge the subscriber an early termination fee,
together with existing reserves, the recoverability of deferred installation and hardware costs is
reasonably assured.
Cash Flows
Cash equivalents consist of highly liquid investments purchased with original maturities of three
months or less.
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