Time Warner Cable 2009 Annual Report Download - page 81

plan assets, the interest factor implied by the discount rate and the expected rate of compensation increases. Refer to Note 14 for further
details regarding the determination of these assumptions.
Income Taxes
Prior to the Separation, TWC was not a separate taxable entity for U.S. federal and various state income tax purposes and its results
were included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The income tax benefits and
provisions, related tax payments, and current and deferred tax balances have been prepared as if TWC operated as a stand-alone taxpayer
for all periods presented including periods through the date of the Separation. Under the tax sharing arrangement between TWC and Time
Warner, TWC is obligated to make tax sharing payments to Time Warner in amounts equal to the taxes it would have paid if it were a
separate taxpayer and Time Warner is obligated to make payments to TWC for TWC tax attributes used by Time Warner, but only as and
when TWC as a standalone taxpayer would have been able to use such attributes itself. The Company received net cash tax payments
from Time Warner of $44 million in 2009 and made cash tax payments to Time Warner of $9 million in 2008 and $263 million in 2007.
Income taxes are provided using the asset and liability method. Under this method, income taxes (i.e., deferred tax assets, deferred
tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the
current year and include the results of any difference between GAAP and tax reporting. Deferred income taxes reflect the tax effect of net
operating losses, capital losses, and general business credit carryforwards and the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under enacted tax laws and rates.
Valuation allowances are established when management determines that it is more likely than not that some portion or the entire deferred
tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment.
From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Examples of
such transactions include business acquisitions and dispositions, including dispositions designed to be tax free, issues related to
consideration paid or received, and certain financing transactions. Significant judgment is required in assessing and estimating the tax
consequences of these transactions. The Company prepares and files tax returns based on interpretation of tax laws and regulations. In the
normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may
result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial
reporting purposes, the Company establishes a reserve for uncertain income tax positions unless such positions are determined to be
“more likely than not” of being sustained upon examination, based on their technical merits. That is, for financial reporting purposes, the
Company only recognizes tax benefits taken on the tax return that it believes are “more likely than not” of being sustained. There is
considerable judgment involved in determining whether positions taken on the tax return are “more likely than not” of being sustained.
The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various
taxing authorities, as well as changes in tax laws, regulations and interpretations. The consolidated tax provision of any given year
includes adjustments to prior year income tax accruals that are considered appropriate and any related estimated interest. The Company’s
policy is to recognize, when applicable, interest and penalties on uncertain income tax positions as part of income tax expense. Refer to
Note 12 for further details.
Equity-based Compensation
The Company measures 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 consolidated statement of operations over the period during which an employee is required to
provide service in exchange for the award (generally four years subject to graded vesting conditions). The Company’s policy is to recognize the
cost on a straight-line basis over the requisite service period. The Company uses the Black-Scholes model to estimate the grant date fair value of
a stock option. Because the option-pricing model requires the use of subjective assumptions, changes in these assumptions can materially affect
the fair value of stock options granted. The volatility assumption is determined using primarily implied volatilities data from the Company’s
traded options. Because TWC’s common stock has a limited trading history, the volatility assumption is calculated using a 75%-25% weighted
average of implied volatility of TWC traded options and the historical stock price volatility of a comparable peer group of publicly traded
companies. The expected term, which represents the period of time that options granted are expected to be outstanding, is estimated based on
the historical exercise experience of TWC employees. The risk-free rate assumed in valuing the stock options is based on the U.S. Treasury
yield curve in effect at the time of grant for the expected term of the option. The Company determines the expected dividend yield percentage
by dividing the expected annual dividend by the market price of TWC Common Stock at the date of grant. Refer to Note 13 for further details
regarding the Company’s equity-based compensation plan.
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TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)