Time Warner Cable 2009 Annual Report Download - page 90

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earnings. The Company records the ineffective portion of the gain or loss on the foreign currency forward contracts in other income
(expense), net, in the consolidated statement of operations during the current reporting period.
The effect of financial instruments designated as cash flow hedges on the consolidated statement of operations for the years ended
December 31, 2009, 2008 and 2007 was as follows (in millions):
2009 2008 2007
Location of
Gain (Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion) 2009 2008 2007
Location of
Gain (Loss)
Recognized in
Income
(Ineffective Portion) 2009 2008 2007
Amount of
Gain (Loss)
Recognized in OCI
(Effective Portion)
Amount of
Gain (Loss)
Reclassified from
Accumulated
OCI into Income
(Effective Portion)
Amount of
Gain (Loss)
Recognized in
Income
(Ineffective Portion)
Interest rate locks . . $ (1) $ (1) $— Interest expense, net $— $— $— Interest expense, net $— $— $—
Forward contracts . . 2 (8) 1 Costs of revenues (4) (4) — Costs of revenues (1) 1 —
Forward contracts . . — — —
Other income
(expense), net — — —
Other income
(expense), net 1 (1) —
Total ............ $ 1 $(9) $ 1 $(4) $(4) $— $— $— $—
The Company expects net gains of less than $1 million to be reclassified out of accumulated OCI and into earnings within the next
12 months.
Equity Award Reimbursement Obligation
Upon the exercise of Time Warner stock options held by TWC employees, TWC is obligated to reimburse Time Warner for the
excess of the market price of Time Warner common stock on the day of exercise over the option exercise price (the “intrinsic” value of the
award). Prior to the Separation, TWC recorded an equity award reimbursement obligation for the intrinsic value of vested and
outstanding Time Warner stock options held by TWC employees. This liability was adjusted each reporting period to reflect changes in
the market price of Time Warner common stock and the number of Time Warner stock options held by TWC employees with an offsetting
adjustment to TWC shareholders’ equity. Beginning on March 12, 2009, the date of the Separation, TWC began accounting for the equity
award reimbursement obligation as a derivative financial instrument because, as of such date, Time Warner is no longer a controlling
shareholder of the Company. The Company records the equity award reimbursement obligation at fair value in the consolidated balance
sheet, which is estimated using the Black-Scholes model, and, on March 12, 2009, TWC established a liability of $16 million for the fair
value of the equity award reimbursement obligation in other liabilities with an offsetting adjustment to TWC shareholders’ equity in the
consolidated balance sheet. The change in the equity award reimbursement obligation fluctuates primarily with the fair value and
expected volatility of Time Warner common stock and is recorded in earnings in the period of change. For the year ended December 31,
2009, TWC recognized a loss of $21 million in other income (expense), net, in the consolidated statement of operations for the change in
the fair value of the equity award reimbursement obligation after the Separation.
Fair Value of Derivative Financial Instruments
The Company primarily applies a market-based approach for recurring fair value measurements. The fair values of assets and
liabilities classified as derivative financial instruments are as follows as of December 31, 2009 (in millions):
Market Value at
December 31,
2009
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Interest rate swaps ..................................... $ 25 $ — $ 25 $ —
Forward contracts ..................................... 1 — 1 —
Total assets .......................................... $ 26 $ — $ 26 $ —
Liabilities:
Interest rate swaps ..................................... $ (37) $ — $ (37) $ —
Forward contracts ..................................... (1) — (1) —
Equity award reimbursement obligation ..................... (35) — — (35)
Total liabilities ....................................... $ (73) $ — $ (38) $ (35)
78
TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)