Time Warner Cable 2008 Annual Report Download - page 113

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such subscribers are allocated to each product in a pro-rata manner based on the fair value of each of the respective
services.
Purchases of Multiple Products or Services
The Company’s policy for cost recognition in instances where multiple products or services are purchased
contemporaneously from the same counterparty is consistent with the Company’s policy for the sale of multiple
deliverables to a customer. Specifically, if the Company enters into a contract for the purchase of multiple products
or services, the Company evaluates whether it has fair value evidence for each product or service being purchased. If
the Company has fair value evidence for each product or service being purchased, it accounts for each separately,
based on the relevant cost recognition accounting policies. If the Company is unable to determine fair value for one
or more of the purchased elements, the Company recognizes the cost of the transaction on a straight-line basis over
the term of the agreement.
This policy also applies in instances where the Company settles a dispute at the same time the Company
purchases a product or service from that same counterparty. For example, the Company may settle a dispute on an
existing programming contract with a programming vendor at the same time that it enters into a new programming
contract with the same programming vendor. Because the Company is negotiating both the settlement of the dispute
and a new programming contract, each of the elements is evaluated to ensure it is accounted for at fair value. The
amount allocated to the settlement of the dispute, if determinable and supportable, would be recognized imme-
diately, whereas the amount allocated to the new programming contract would be accounted for prospectively,
consistent with the accounting for other similar programming agreements. In the event the fair value of the two
elements could not be established, the net amount paid or payable to the vendor would be recognized over the term
of the new or amended programming contract.
Gross Versus Net Revenue Recognition
In the normal course of business, the Company acts as or uses an intermediary or agent in executing
transactions with third parties. The accounting issue presented by these arrangements is whether the Company
should report revenue based on the gross amount billed to the ultimate customer or on the net amount received from
the customer after commissions and other payments to third parties. To the extent revenues are recorded on a gross
basis, any commissions or other payments to third parties are recorded as expense so that the net amount (gross
revenues less expense) is reflected in Operating Income. Accordingly, the impact on Operating Income is the same
whether the Company records revenue on a gross or net basis.
For example, TWC is assessed franchise fees by franchising authorities, which are passed on to the customer.
The accounting issue presented by these arrangements is whether TWC should report revenues based on the gross
amount billed to the ultimate customer or on the net amount received from the customer after payments to
franchising authorities. The Company has determined that these amounts should be reported on a gross basis.
TWC’s policy is that, in instances where the fees are being assessed directly to the Company, amounts paid to the
governmental authorities and amounts received from the customers are recorded on a gross basis. That is, amounts
paid to the governmental authorities are recorded as costs of revenues and amounts received from the customer are
recorded as Subscription revenues. The amount of such franchise fees recorded on a gross basis related to video and
voice services was $524 million in 2008, $495 million in 2007 and $392 million in 2006.
Legal Contingencies
The Company is subject to legal, regulatory and other proceedings and claims that arise in the ordinary course
of business. The Company records an estimated liability for those proceedings and claims arising in the ordinary
course of business based upon the probable and reasonably estimable criteria contained in FASB Statement No. 5,
Accounting for Contingencies. The Company reviews outstanding claims with internal, as well as external, counsel
to assess the probability and the estimates of loss. The Company reassesses the risk of loss as new information
103
TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)