Time Magazine 2014 Annual Report Download - page 82

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
failure to adjust for a downward change in estimates of ultimate revenues would result in the understatement of production
costs amortization for the period. The Company recorded production cost amortization of $4.229 billion, $3.873 billion and
$4.092 billion in 2014, 2013 and 2012, respectively. Included in production cost amortization are film impairments primarily
related to pre-release theatrical films of $86 million, $51 million and $92 million in 2014, 2013 and 2012, respectively.
Licensed Programming Inventory
In the normal course of business, the Company’s Turner and Home Box Office segments enter into agreements to license
programming exhibition rights from licensors. A programming inventory asset related to these rights and a corresponding
liability to the licensor 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 is available for its first showing or telecast, and (iv) the license period has commenced.
There are variations in the amortization methods of these rights, depending on whether the network is advertising-supported
(e.g., TNT and TBS) or not advertising-supported (e.g., HBO and Turner Classic Movies).
For the Company’s advertising-supported networks, the Company’s general policy is to amortize each program’s costs on
a straight-line basis (or per-play basis, if greater) over its license period. However, for certain types of programming, the
initial airing has more value than subsequent airings. In these circumstances, the Company will use an accelerated method of
amortization. For example, if the Company is licensing the right to air a movie multiple times over a certain period, the
movie is being shown for the first time on a Company network (a “Network Movie Premiere”) and the Network Movie
Premiere advertising is sold at a premium rate, a larger portion of the movie’s programming inventory cost is amortized upon
the initial airing of the movie, with the remaining cost amortized on a straight-line basis (or per-play basis, if greater) over
the remaining license period. The accelerated amortization upon the first airing versus subsequent airings is determined
based on a study of historical and estimated future advertising sales for similar programming. For rights fees paid for sports
programming arrangements (e.g., National Basketball Association, The National Collegiate Athletic Association (“NCAA”)
Men’s Division I Basketball championship events (the “NCAA Tournament”) and Major League Baseball), such rights fees
are amortized using a revenue-forecast model, in which the rights fees are amortized using the ratio of current period
advertising revenue to total estimated remaining advertising revenue over the term of the arrangement.
For premium pay television services that are not advertising-supported, each licensed program’s costs are amortized on a
straight-line basis over its license period or estimated period of use, beginning with the month of initial exhibition. When the
Company has the right to exhibit feature theatrical programming in multiple windows over a number of years, the Company
uses historical audience viewership as its basis for determining the amount of programming amortization attributable to each
window.
The Company carries its licensed programming inventory at the lower of unamortized cost or estimated net realizable
value. For networks that generate both Advertising and Subscription revenues (e.g., TBS and TNT), the Company generally
evaluates the net realizable value of unamortized programming costs based on the network’s programming taken as a whole.
In assessing whether the programming inventory for a particular advertising-supported network is impaired, the Company
determines the net realizable value for all of the network’s programming inventory based on a projection of the network’s
estimated combined Subscription revenues and Advertising revenues less certain direct costs of delivering the programming.
Similarly, for premium pay television services that are not advertising-supported, the Company performs its evaluation of the
net realizable value of unamortized programming costs based on the premium pay television services’ licensed programming
taken as a whole. Specifically, the Company determines the net realizable value for all of its premium pay television service
licensed programming based on projections of estimated Subscription revenues less certain costs of delivering and
distributing the licensed programming. However, changes in management’s intended usage of a specific program, such as a
decision to no longer exhibit that program and forego the use of the rights associated with the program license, would result
in a reassessment of that program’s net realizable value, which could result in an impairment.
66