Time Warner Cable 2012 Annual Report Download - page 92

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TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
purchases programming services) and/or (ii) sales of multiple products and/or services (e.g., the Company sells video, high-
speed data and voice services to a customer).
Contemporaneous Purchases and Sales
In the normal course of business, TWC enters into multiple-element transactions where the Company is simultaneously
both a customer and a vendor with the same counterparty. For example, when negotiating the terms of programming
purchase contracts with cable networks, TWC may at the same time negotiate for the sale of advertising to the same cable
network. Arrangements, although negotiated contemporaneously, may be documented in one or more contracts.
The Company’s accounting policy for each transaction negotiated contemporaneously is to record each element of the
transaction based on the respective estimated fair values of the products or services purchased and the products or services
sold. The judgments made in determining fair value in such transactions impact the amount of revenue, expenses and net
income recognized over the respective terms of the transactions, as well as the respective periods in which they are
recognized.
In determining the fair value of the respective elements, TWC refers to quoted market prices (where available),
historical transactions or comparable cash transactions. The most frequent transactions of this type that the Company
encounters involve funds received from its vendors. The Company records cash consideration received from a vendor as a
reduction in the price of the vendor’s product unless (i) the consideration is for the reimbursement of a specific, incremental,
identifiable cost incurred, in which case the Company would record the cash consideration received as a reduction in such
cost or (ii) the Company is providing an identifiable benefit in exchange for the consideration, in which case the Company
recognizes revenue for this element.
With respect to vendor advertising arrangements being negotiated simultaneously with the same cable network, TWC
assesses whether each piece of the arrangement is at fair value. The factors that are considered in determining the individual
fair value of the programming vary from arrangement to arrangement and include (i) the existence of a “most-favored-
nation” clause or comparable assurances as to fair market value with respect to programming, (ii) a comparison to fees paid
under a prior contract and (iii) a comparison to fees paid for similar networks. In determining the fair value of the advertising
arrangement, the Company considers advertising rates paid by other advertisers on the Company’s systems with similar
terms.
Sales of Multiple Products or Services
If the Company enters into sales contracts for the sale of multiple products or services, then the Company evaluates
standalone selling price for each deliverable in the transaction. For example, the Company sells video, high-speed data and
voice services to subscribers in a bundled package at a rate lower than if the subscriber purchases each product on an
individual basis. Revenue received from such subscribers is allocated to each product in a pro-rata manner based on the
standalone selling price of each of the respective services on an individual basis. As another example, if a subscriber moves
from a bundled package containing two services to a bundled package containing three services, the increase in the total
revenue received is not attributed to the additional service. Rather, the total revenue received from such subscribers are
allocated to each of the three products in a pro-rata manner based on the relative selling price of each of the respective
services on an individual basis.
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 revenue is recorded on a gross basis, any commissions or other payments to
third parties are recorded as expense so that the net amount (gross revenue 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.
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