DIRECTV 2005 Annual Report Download - page 83

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THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS —(continued)
Third party customer acquisition costs represent direct costs we incur to acquire new DIRECTV
subscribers through third parties, which include our national retailers as well as independent satellite
television retailers, dealers, regional Bell operating companies and others. These costs also consist of
third party commissions, print and television advertising and subsidies we incur for DIRECTV System
equipment, if any. Although paid in advance, the retailer or dealer earns substantially all commissions
paid for third party customer acquisitions over 12 months from the date of subscriber activation.
Should the subscriber cancel DIRECTV↦ service during the 12 month service period, we are
reimbursed for the unearned portion of the commission by the retailer or dealer and record a decrease
to third party customer acquisition costs.
Direct customer acquisition costs consist primarily of hardware, installation, advertising, marketing
and customer call center expenses we incur for new DIRECTV subscribers added through our direct
customer acquisition program.
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), HD (high-definition), 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 continue to capitalize costs under our subscriber lease programs. See ‘‘Accounting Changes’’
below for further discussion of the change in accounting method.
Cash and Cash Equivalents
Cash and 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.
Inventories consist of finished goods for DIRECTV System equipment and DIRECTV System access
cards.
Property, Satellites and Depreciation
We carry property and satellites at cost, net of accumulated depreciation. The amount we
capitalize for satellites currently being constructed and those that have been successfully launched
include the costs of construction, launch, launch insurance, incentive obligations and related capitalized
interest. 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.
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