Time Warner Cable 2006 Annual Report Download - page 73

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RESULTS OF OPERATIONS
Changes in Basis of Presentation
Stock-based Compensation
Historically, TWC employees have participated in various Time Warner equity plans. TWC has established the
Time Warner Cable Inc. 2006 Stock Incentive Plan (the “2006 Plan”). The Company expects that its employees will
participate in the 2006 Plan starting in 2007 and thereafter will not continue to participate in Time Warner’s equity
plan. TWC employees who have outstanding equity awards under the Time Warner equity plans will retain any
rights under those Time Warner equity awards pursuant to their terms regardless of their participation in the 2006
Plan. The Company has adopted the provisions of FAS 123R as of January 1, 2006. The provisions of FAS 123R
require a company to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is recognized in the statement of operations
over the period during which an employee is required to provide service in exchange for the award. FAS 123R also
amends FASB Statement No. 95, Statement of Cash Flows, to require that excess tax benefits, as defined, realized
from the exercise of stock options be reported as a financing cash inflow rather than as a reduction of taxes paid in
cash flow from operations.
Prior to the adoption of FAS 123R, the Company had followed the provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation (“FAS 123”), which allowed the Company to follow the intrinsic value
method set forth in Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees, and disclose the pro forma effects on net income (loss) had the fair value of the equity awards been
expensed. In connection with adopting FAS 123R, the Company elected to adopt the modified retrospective
application method provided by FAS 123R and, accordingly, financial statement amounts for all prior periods
presented herein reflect results as if the fair value method of expensing had been applied from the original effective
date of FAS 123 (see Note 1 to the accompanying consolidated financial statements for a discussion on the impact of
the adoption of FAS 123R).
Prior to the adoption of FAS 123R, for disclosure purposes, the Company recognized stock-based compen-
sation expense for awards with graded vesting by treating each vesting tranche as a separate award and recognizing
compensation expense ratably for each tranche. For equity awards granted subsequent to the adoption of FAS 123R,
the Company treats such awards as a single award and recognizes stock-based compensation expense on a straight-
line basis (net of estimated forfeitures) over the employee service period. Stock-based compensation expense is
recorded in costs of revenues or selling, general and administrative expense depending on the employee’s job
function.
Additionally, when recording compensation cost for equity awards, FAS 123R requires companies to estimate
the number of equity awards granted that are expected to be forfeited. Prior to the adoption of FAS 123R, for
disclosure purposes, the Company recognized forfeitures when they occurred, rather than using an estimate at the
grant date and subsequently adjusting the estimated forfeitures to reflect actual forfeitures. Accordingly, the
Company recorded a benefit of $2 million, net of tax, as the cumulative effect of a change in accounting principle
upon the adoption of FAS 123R in 2006, to recognize the effect of estimating the number of Time Warner equity-
based awards granted to TWC employees prior to January 1, 2006 that are not ultimately expected to vest. Total
equity-based compensation expense (which includes expense recognized related to Time Warner stock options,
restricted stock and restricted stock units) recognized in 2006, 2005 and 2004 was $33 million, $53 million and
$70 million, respectively.
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
On December 31, 2006, the Company adopted the provisions of FASB Statement No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Benefits (“FAS 158”). FAS 158 addresses the
68
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION — (Continued)