Time Magazine 2013 Annual Report Download - page 91

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In most cases, the form of the co-financing arrangement is the sale of an interest in a film to an investor.
Warner Bros. generally records the amounts received for the sale of an 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, 2013, 2012 and 2011, net participation
costs related to third party investors of $522 million, $444 million and $336 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, 2013 and 2012 were not significant. In accounting for this
arrangement, the Company records Advertising revenues for the advertisements aired on Turner’s networks and
amortizes 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 $2.579 billion in 2013, $2.458 billion in 2012 and
$2.980 billion in 2011.
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
interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are
subject to examination by various taxing authorities. Such examinations may result in future tax and interest
assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting
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