Time Warner Cable 2006 Annual Report Download - page 112

Restatement of Prior Financial Information
As previously disclosed, the SEC had been conducting an investigation into certain accounting and disclosure
practices of TWC’s parent company, Time Warner. On March 21, 2005, Time Warner announced that the SEC had
approved Time Warner’s proposed settlement, which resolved the SEC’s investigation of Time Warner. Under the
terms of the settlement with the SEC, Time Warner agreed, without admitting or denying the SEC’s allegations, to
be enjoined from future violations of certain provisions of the securities laws and to comply with the cease-and-de-
sist order issued by the SEC to AOL LLC (formerly America Online, Inc. (“AOL”)), a subsidiary of Time Warner, in
May 2000. Time Warner also agreed to appoint an independent examiner, who was to either be or hire a certified
public accountant. The independent examiner was to review whether Time Warner’s historical accounting for
certain transactions (as well as any subsequent amendments) with 17 counterparties identified by the SEC staff,
principally involving online advertising revenues and including three cable programming affiliation agreements
with related online advertising elements, was appropriate, and provide a report to Time Warner’s Audit and Finance
Committee of its conclusions. The transactions that were to be reviewed were entered into (or amended) between
June 1, 2000 and December 31, 2001, including subsequent amendments thereto, and involved online advertising
and related transactions for which the majority of the revenue was recognized by Time Warner before January 1,
2002.
During the third quarter of 2006, the independent examiner completed his review, in which he concluded that
certain of the transactions under review with 15 counterparties, including the three cable programming affiliation
agreements with advertising elements, had been accounted for improperly because the historical accounting did not
reflect the substance of the arrangements. Under the terms of its SEC settlement, Time Warner was required to
restate any transactions that the independent examiner determined were accounted for improperly. Accordingly,
Time Warner restated its consolidated financial results for each of the years ended December 31, 2000 through
December 31, 2005 and for the six months ended June 30, 2006. The impact of the adjustments is reflected in
amendments filed by Time Warner with the SEC on September 13, 2006. In addition, TWC restated its consolidated
financial results for the years ended December 31, 2001 through December 31, 2005 and for the six months ended
June 30, 2006. The restated consolidated financial results are reflected in TWC’s Current Report on Form 8-K filed
with the SEC on February 13, 2007, as well as in the financial statements presented herein.
The three transactions impacting TWC are ones in which TWC entered into cable programming affiliation
agreements at the same time it committed to deliver (and did subsequently deliver) network and online advertising
services to those same counterparties. Total Advertising revenues recognized by TWC under these transactions
were approximately $274 million (approximately $134 million in 2001 and approximately $140 million in 2002).
Included in the $274 million was $56 million related to operations that have been subsequently classified as
discontinued operations. In addition to reversing the recognition of revenue, based on the independent examiner’s
conclusions, the Company has recorded corresponding reductions in the cable programming costs over the life of
the related cable programming affiliation agreements (which range from 10 to 12 years) that were acquired
contemporaneously with the execution of the advertising agreements. This has the effect of increasing earnings
beginning in 2003 and continuing through future periods.
The net effect of restating these transactions is that TWC’s net income was reduced by approximately
$60 million in 2001 and $61 million in 2002 and was increased by approximately $12 million in each of 2003, 2004
and 2005, and by approximately $6 million for the first six months of 2006 (the impact for the year ended
December 31, 2006 was an increase to the Company’s net income of approximately $12 million). While the
restatement resulted in changes in the classification of cash flows within cash provided by operating activities, it has
not impacted total cash flows during the periods.
Basis of Consolidation
The consolidated financial statements of TWC include 100% of the assets, liabilities, revenues, expenses,
income, loss and cash flows of all companies in which TWC has a controlling voting interest, as well as allocations
107
TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)