DIRECTV 2004 Annual Report Download - page 72

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THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
Upgrade and Retention Costs
Upgrade and retention costs in the Consolidated Statements of Operations consist primarily of costs for loyalty programs
offered to existing subscribers. The costs for loyalty programs include the costs of installing or providing hardware under our
movers program (for subscribers relocating to a new residence), multiple set-top receiver offers, DVR (digital video recorder)
and local channel upgrade programs and other similar initiatives, and third party commissions we incur for the sale of additional
set-top receivers to existing subscribers.
Effective January 1, 2004, we changed our method of accounting for upgrade and retention costs to expense the cost of
installation and hardware under our loyalty programs. Previously, we deferred a portion of upgrade and retention costs equal to
the amount of profit to be earned from the subscriber, typically over the 12 month subscriber contract, and amortized these costs
to expense over the contract period. We included the deferred portion of the costs in “Prepaid expenses and other” in the
Consolidated Balance Sheets. See “Accounting Changes” below for further discussion of the change in accounting method.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments we purchase with original maturities of three months or less.
Inventories
We state inventories at the lower of cost or market principally using the average cost method.
The following table sets forth the amounts we recorded for inventories, net, at December 31:
2004
2003
(Dollars in Millions)
Finished goods
$
124.6
$
158.3
Productive material and supplies
—
64.2
Work in process
—
81.1
Total
124.6
303.6
Less provision for excess or obsolete inventory
0.2
33.3
Inventories, net
$
124.4
$
270.3
Property, Satellites and Depreciation
We carry property and satellites at cost. Satellite costs include construction costs, launch costs, launch insurance, incentive
obligations, direct development costs and capitalized interest. Capitalized satellite costs represent satellites under construction
and the cost of successful satellite launches. Capitalized customer leased set-top receiver costs include the cost of hardware and
installation. We generally compute depreciation using the straight-line method over the estimated useful lives of the assets. We
amortize leasehold improvements over the lesser of the life of the asset or term of the lease.
Goodwill and Intangible Assets
Intangible assets with indefinite lives consist of Federal Communications Commission, or FCC, licenses for DTH broadcasting
frequencies, or Orbital Slots. We do not amortize goodwill and Orbital Slots, but rather they
63