Time Magazine 2011 Annual Report Download - page 82

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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Accounting for Pension Plans
Time Warner and certain of its subsidiaries have both funded and unfunded defined benefit pension plans,
the substantial majority of which are noncontributory, covering a majority of domestic employees and, to a lesser
extent, have various defined benefit plans, primarily noncontributory, covering international employees. Pension
benefits are based on formulas that reflect the participating employees’ years of service and compensation. Time
Warner uses a December 31 measurement date for its plans. The pension expense recognized by the Company is
determined using certain assumptions, including the expected long-term rate of return on plan assets, the interest
factor implied by the discount rate and the rate of compensation increases. Additional information about plan
amendments and the determination of pension-related assumptions is presented in Note 13.
Equity-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is recognized in Costs of revenues or
Selling, general and administrative expenses depending on the job function of the grantee on a straight-line basis
(net of estimated forfeitures) over the period during which an employee is required to provide services in
exchange for the award. Also, excess tax benefits realized are reported as a financing cash inflow.
The grant-date fair value of a stock option is estimated using the Black-Scholes option-pricing model.
Because the Black-Scholes option-pricing model requires the use of subjective assumptions, changes in these
assumptions can materially affect the fair value of the options. The Company determines the volatility
assumption for these stock options using implied volatilities data from its traded options. The expected term,
which represents the period of time that options granted are expected to be outstanding, is estimated based on the
historical exercise behavior of Time Warner employees. Groups of employees that have similar historical
exercise behavior are considered separately for valuation purposes. The risk-free rate assumed in valuing the
options is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
The Company determines the expected dividend yield percentage by dividing the expected annual dividend by
the market price of Time Warner common stock at the date of grant. For more information, see Note 12.
Revenues and Costs
Networks
Subscription revenues are recognized as programming services are provided to cable system operators,
satellite distribution services, telephone companies and other distributors (collectively, “affiliates”) based on
negotiated contractual programming rates (or estimated programming rates if a contract has expired and a new
contract has not been negotiated) for each affiliate. Management considers factors such as the previous
contractual rates, inflation, current payments by the affiliate and the status of the negotiations in determining any
estimates. When the new distribution contract terms are finalized, an adjustment to Subscription revenues is
recorded, if necessary, to reflect the new terms. Such adjustments historically have not been significant.
Advertising revenues are recognized, net of agency commissions, in the period that the advertisements are
aired. If there is a targeted audience guarantee, revenues are recognized for the actual audience delivery with
revenue deferred for any shortfall until the guaranteed audience delivery is met, typically through the provision
of additional air time. Advertising revenues from websites are recognized as impressions are delivered or the
services are performed.
In the normal course of business, the Networks segment enters into agreements to license programming
exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding
liability to the distributor are recorded (on a discounted basis if the license agreements are long-term) when
(i) the cost of the programming is reasonably determined, (ii) the programming material has been accepted in
accordance with the terms of the agreement, (iii) the programming (or any program in a package of
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