Time Magazine 2012 Annual Report Download - page 86

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
television, Internet and wireless rights to the NCAA Tournament in the United States and its territories and
possessions from 2011 through 2024.
In most cases, the form of the co-financing arrangement is the sale of an economic interest in a film to an
investor. The Film and TV Entertainment segment generally records the amounts received for the sale of an
economic interest as a reduction of the costs of the film, as the investor assumes full risk for that portion of the
film asset acquired in these transactions. The substance of these arrangements is that the third-party investors
own an interest in the film and, therefore, in each period the Company reflects in the Consolidated Statement of
Operations either a charge or benefit to Costs of revenues to reflect the estimate of the third-party investor’s
interest in the profits or losses incurred on the film. The estimate of the third-party investor’s interest in profits or
losses incurred on the film is determined using the film forecast computation method. For the years ended
December 31, 2012, 2011 and 2010, net participation costs related to third party investors of $444 million,
$336 million and $508 million, respectively, were recorded in Costs of revenues.
The aggregate programming rights fee, production costs, advertising revenues and sponsorship revenues
related to the NCAA Tournament and related programming are equally shared by Turner and CBS. However, if
the amount paid for the programming rights fee and production costs in any given year exceeds advertising and
sponsorship revenues for that year, CBS’ share of such shortfall is limited to specified annual amounts (the “loss
cap”), ranging from approximately $90 million to $30 million. The amounts incurred by the Company pursuant
to the loss cap during the years ended December 31, 2012 and 2011 were not significant. In accounting for this
arrangement, the Company recorded Advertising revenues for the advertisements aired on Turner’s networks and
amortized Turner’s share of the programming rights fee based on the ratio of current period advertising revenues
to its estimate of total advertising revenues over the term of the arrangement.
Advertising Costs
Time Warner expenses advertising costs as they are incurred, which generally is when the advertising is
exhibited or aired. Advertising expense to third parties was $2.465 billion in 2012, $2.987 billion in 2011 and
$2.824 billion in 2010.
Income Taxes
Income taxes are provided using the asset and liability method, such that income taxes (i.e., deferred tax
assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on
amounts refundable or payable in the current year and include the results of any difference between GAAP and
tax reporting. Deferred income taxes reflect the tax effect of net operating losses, capital losses and tax credit
carryforwards and the net tax effects of temporary differences between the carrying amount of assets and
liabilities for financial statement and income tax purposes, as determined under tax laws and rates. Valuation
allowances are established when management determines that it is more likely than not that some portion or all of
the deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in
the period of enactment. The subsequent realization of net operating loss and general business credit
carryforwards acquired in acquisitions accounted for using the purchase method of accounting is recognized in
the Consolidated Statement of Operations. Research and development credits are recorded based on the amount
of benefit the Company believes is more likely than not of being earned. The majority of such research and
development benefits have been recorded to shareholders’ equity as they resulted from stock option deductions
for which such amounts are recorded as an increase to Paid-in-capital. Tax credits received for the production of
a film or program are offset against the cost of inventory capitalized.
From time to time, the Company engages in transactions in which the tax consequences may be subject to
uncertainty. Examples of such transactions include business acquisitions and dispositions, including dispositions
designed to be tax free, and certain financing transactions. Significant judgment is required in assessing and
estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its
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