DIRECTV 2002 Annual Report Download - page 87

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HUGHES ELECTRONICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
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 Operations and Available Separate Consolidated Net Income (Loss) in “Other, net.” Hughes
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 $1.2 million at
December 31, 2002 is expected to be recognized in earnings over the next three years.
Stock Compensation
Hughes issues GM Class H common stock options to employees with grant prices equal to the fair
value of the underlying security at the date of grant. No compensation cost has been recognized for
options in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees” in the consolidated statements of operations.
Had Hughes followed the fair value based method of accounting for stock-based compensation
under SFAS No. 123, “Accounting for Stock-Based Compensation,” for the years ended December 31,
2002, 2001 and 2000, pro forma earnings (loss) used for computation of available separate
consolidated net income (loss) would have been $(1,112.4) million, $(946.5) million and $585.3 million,
respectively. See Note 13 for additional information regarding the pro forma effect on earnings of
recognizing compensation cost based on the estimated fair value of the stock options granted, as
required by SFAS No. 123.
As discussed more completely below in Note 3, Hughes will adopt the fair value based method of
accounting for stock-based compensation of SFAS No. 123 for all stock-based compensation granted
after December 31, 2002. As a result, Hughes will expense the fair market value of stock-based
compensation newly granted to employees pursuant to SFAS No. 123.
Advertising and Research and Development Costs
Advertising and research and development costs are expensed as incurred. Advertising expenses
were $170.5 million in 2002, $163.0 million in 2001 and $129.6 million in 2000. Expenditures for
research and development were $71.7 million in 2002, $85.8 million in 2001 and $104.5 million in
2000.
Market Concentrations and Credit Risk
Hughes provides services and extends credit to a number of wireless communications equipment
customers and to a large number of consumers, both in the United States and Latin America.
DIRECTV has significant accounts receivable from the National Rural Telecommunications
Cooperative (“NRTC”) and one of the NRTC’s largest affiliates, Pegasus Satellite Television, Inc.
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