DIRECTV 2005 Annual Report Download - page 87

THE DIRECTV GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS —(continued)
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 year ended December 31, 2003, operating costs
would have increased by $89.3 million.
The following table sets forth our income (loss) from continuing operations before cumulative
effect of accounting changes and net income (loss) on a pro forma basis as if the change in accounting
for subscriber acquisition, upgrade and retention costs had been applied retroactively for the years
ended December 31, 2004 and December 31, 2003:
2004 2003
(Dollars in Millions,
Except Per Share
Amounts)
Reported income (loss) from continuing operations before cumulative effect of
accounting changes ............................................ $(1,056.4) $(375.3)
Reported basic and diluted income (loss) per common share ............. (0.77) (0.27)
Pro forma income (loss) from continuing operations ...................... (1,056.4) (430.3)
Pro forma basic and diluted income (loss) per common share ............ (0.77) (0.31)
Reported net income (loss) ........................................ (1,949.2) (361.8)
Reported basic and diluted income (loss) per common share ............. (1.41) (0.26)
Pro forma net income (loss) ........................................ (1,638.7) (416.8)
Pro forma basic and diluted income (loss) per common share ............ (1.18) (0.30)
Variable Interest Entities. In January 2003, the Financial Accounting Standards Board, or FASB,
issued Interpretation No. 46 (revised December 2003), ‘‘Consolidation of Variable Interest Entities—an
interpretation of ARB No. 51,’’ or FIN 46. FIN 46 requires the consolidation of a variable interest
entity, or VIE, where an equity investor achieves a controlling financial interest through arrangements
other than voting interests, and it is determined that the investor will absorb a majority of the expected
losses and/or receive the majority of residual returns of the VIE. We applied this interpretation
beginning on July 1, 2003 for entities created prior to February 1, 2003. We determined that the
partially-owned LOCs providing DIRECTV programming services in Venezuela and Puerto Rico, of
which we owned 19.5% and 40.0%, respectively, were VIEs. As a result, on July 1, 2003, we began
consolidating the Venezuelan and Puerto Rican LOCs resulting in an increase in total assets of
$55.1 million, which included $29.1 million of cash. The adoption of this interpretation resulted in us
recording an after-tax charge in 2003 of $64.6 million to cumulative effect of accounting changes in the
Consolidated Statements of Operations.
Prior to July 1, 2003, we accounted for our investments in the Venezuelan and Puerto Rican LOCs
under the equity method of accounting. As a result of the transactions completed upon DLA LLC’s
emergence from bankruptcy in 2004, the Venezuelan and Puerto Rican LOC’s are now wholly-owned
consolidated subsidiaries of DLA LLC.
Stock-Based Compensation. As discussed above, beginning on January 1, 2003, we adopted the
fair value based method of accounting for stock-based employee compensation of SFAS No. 123,
‘‘Accounting for Stock-Based Compensation’’ as amended by SFAS No. 148, ‘‘Accounting for Stock-
Based Compensation—Transition and Disclosure—an Amendment of SFAS No. 123.’’ Under this
method, compensation expense equal to the fair value of the stock-based award at grant is recognized
over the course of its vesting period. We elected to follow the prospective method of adoption, which
74