Time Warner Cable 2006 Annual Report Download - page 116

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Revenues and Costs
Cable revenues are principally derived from video, high-speed data and Digital Phone subscriber fees and
advertising. Subscriber fees are recorded as revenue in the period the service is provided. Subscription revenues
received from subscribers who purchase bundled services at a discounted rate are allocated to each product in a pro-
rata manner based on the individual product’s determined fair value. Installation revenues obtained from subscriber
service connections are recognized in accordance with FASB Statement No. 51, Financial Reporting by Television
Cable Companies, as a component of Subscription revenues as the connections are completed since installation
revenues recognized are less than the related direct selling costs. Advertising revenues, including those from
advertising purchased by programmers, are recognized in the period that the advertisements are exhibited.
Video programming, high-speed data and Digital Phone costs are recorded as the services are provided. Video
programming costs are recorded based on the Company’s contractual agreements with its programming vendors.
These contracts are generally multi-year agreements that provide for the Company to make payments to the
programming vendors at agreed upon rates, which represent fair market value, based on the number of subscribers
to which the Company provides the service. If a programming contract expires prior to entering into a new
agreement, management is required to estimate the programming costs during the period there is no contract in
place. Management considers the previous contractual rates, inflation and the status of the negotiations in
determining its estimates. When the programming contract terms are finalized, an adjustment to programming
expense is recorded, if necessary, to reflect the terms of the new contract. Management must also make estimates in
the recognition of programming expense related to other items, such as the accounting for free periods, “most-
favored-nation” clauses and service interruptions, as well as the allocation of consideration exchanged between the
parties in multiple-element transactions. Additionally, judgments are also required by management when the
Company purchases multiple services from the same cable programming vendor. In these scenarios, the total
consideration provided to the programming vendor is required to be allocated to the various services received based
upon their respective fair values. Because multiple services from the same programming vendor are often received
over different contractual periods and often have different contractual rates, the allocation of consideration to the
individual services will have an impact on the timing of the Company’s expense recognition.
Launch fees received by the Company from programming vendors are recognized as a reduction of expense on
a straight-line basis over the life of the related programming arrangement. Amounts received from programming
vendors representing the reimbursement of marketing costs are recognized as a reduction of marketing expenses as
the marketing services are provided.
Advertising costs are expensed upon the first exhibition of related advertisements. Marketing expense
(including advertising), net of reimbursements from programmers, was $414 million in 2006, $306 million in
2005 and $272 million in 2004.
Multiple-element Transactions
Multiple-element transactions involve situations where judgment must be exercised in determining fair value
of the different elements in a bundled transaction. As the term is used here, multiple-element arrangements can
involve:
• Contemporaneous purchases and sales. The Company sells a product or service (e.g., advertising services) to
a customer and at the same time purchases goods or services (e.g., programming);
• Sales of multiple products and/or services. The Company sells multiple products or services to a counter-
party (e.g., the Company sells video, Digital Phone and high-speed data services to a customer); and/or
• Purchases of multiple products and/or services, or the settlement of an outstanding item contemporaneous
with the purchase of a product or service. The Company purchases multiple products or services from a
111
TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)