Time Magazine 2011 Annual Report Download - page 95

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table reconciles the beginning and ending balances of net assets and liabilities classified as
Level 3 and identifies the total gains (losses) the Company recognized during the years ended December 31,
2011 and 2010, respectively, on such assets and liabilities that were included in the Consolidated Balance Sheet
as of December 31, 2011 and 2010, respectively (millions):
Derivatives
December 31,
2011
December 31,
2010
Balance as of the beginning of the period .......................... $ (9) $ 20
Total gains (losses):
Included in operating income .................................. 9 17
Included in other loss, net .................................... 2 16
Included in other comprehensive income ......................... — —
Settlements .................................................. 2 (7)
Issuances .................................................... (1) (55)
Transfers in and/or out of Level 3 ................................ — —
Balance as of the end of the period ............................... $ 3 $ (9)
Net gain for the period included in net income related to assets and
liabilities still held as of the end of the period ..................... $ 11 $ 18
Other Financial Instruments
The Company’s other financial instruments, including debt, are not required to be carried at fair value. Based
on the interest rates prevailing at December 31, 2011, the fair value of Time Warner’s debt exceeded its carrying
value by approximately $3.549 billion and, at December 31, 2010, the fair value of Time Warner’s debt exceeded
its carrying value by approximately $2.269 billion. Unrealized gains or losses on debt do not result in the
realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless
the debt is retired prior to its maturity. The carrying value for the majority of the Company’s other financial
instruments approximates fair value due to the short-term nature of the financial instruments or because the
financial instruments are of a longer-term nature and are recorded on a discounted basis. For the remainder of the
Company’s other financial instruments, differences between the carrying value and fair value are not significant
at December 31, 2011. The fair value of financial instruments is generally determined by reference to the market
value of the instrument as quoted on a national securities exchange or an over-the-counter market. In cases where
a quoted market value is not available, fair value is based on an estimate using present value or other valuation
techniques.
Non-Financial Instruments
The majority of the Company’s non-financial instruments, which include goodwill, intangible assets,
inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis.
However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible
assets) such that a non-financial instrument is required to be evaluated for impairment, a resulting asset
impairment would require that the non-financial instrument be recorded at the lower of cost or its fair value.
In determining the fair value of its films, the Company employs a DCF methodology with assumptions for
cash flows for periods not exceeding ten years. Key inputs employed in the DCF methodology include estimates
of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is
based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium
representing the risk associated with producing a particular film. The fair value of any film costs associated with
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