DIRECTV 2004 Annual Report Download - page 76

THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (continued)
In addition, the calculation of our tax liabilities involves evaluations and judgments of uncertainties in interpretations of
complex tax regulations by various taxing authorities. We provide for the appropriate amount when it is probable and estimable
that an income tax liability will be due. As additional information becomes available, or we resolve these uncertainties with the
taxing authorities, revisions to those liabilities may be required resulting in additional provision or benefit from income taxes in
our Consolidated Statements of Operations. While it is often difficult to predict the final outcome or the timing of resolution, we
believe that our accruals reflect the most probable outcome of known tax contingencies. For a discussion of our current tax
matters, see Note 21.
Advertising and Research and Development Costs
We expense advertising and research and development costs as incurred and include these expenses in “General and
administrative expenses” in the Consolidated Statements of Operations. Advertising expenses, net of payments received from
programming content providers for marketing support, were $170.1 million in 2004, $199.0 million in 2003 and $189.1 million
in 2002. Expenditures for research and development were $49.0 million in 2004, $54.6 million in 2003 and $66.2 million in
2002.
Market Concentrations and Credit Risk
We sell programming services and extend credit, in amounts generally not exceeding $100 each, to a large number of individual
residential subscribers throughout the United States and Latin America. As applicable, we maintain allowances for anticipated
losses.
Accounting Changes
Subscriber Acquisition, Upgrade and Retention Costs. Effective January 1, 2004, we changed our method of accounting for
subscriber acquisition, upgrade and retention costs. Previously, we deferred a portion of these costs, equal to the amount of
profit to be earned from the subscriber, typically over the 12 month subscriber contract, and amortized to expense over the
contract period. We now expense all subscriber acquisition, upgrade and retention costs as incurred as subscribers activate the
DIRECTV service. We determined that expensing such costs was preferable to the prior accounting method after considering
the accounting practices of competitors and companies within similar industries and the added clarity and ease of understanding
our reported results for investors. As a result of the change, on January 1, 2004, we expensed our deferred subscriber acquisition
cost balance of $503.9 million that was included in “Prepaid expenses and other” in the Consolidated Balance Sheets as of
December 31, 2003 as a cumulative effect of accounting change. The amount of the cumulative effect was $310.5 million, net
of taxes. Had the new method of accounting been applied during the years ended December 31, 2003 and 2002, operating costs
would have increased by $89.3 million and $117.0 million, respectively.
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