Time Warner Cable 2014 Annual Report Download - page 83

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TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fair Value Estimates
Business Combinations
Upon the acquisition of a business, the fair value of the assets acquired and liabilities assumed must be estimated.
This requires judgments regarding the identification of acquired assets and liabilities assumed, some of which may not
have been previously recorded by the acquired business, as well as judgments regarding the valuation of all identified
acquired assets and assumed liabilities. The assets acquired and liabilities assumed are determined by reviewing the
operations, interviewing management and reviewing the financial, contractual and regulatory information of the acquired
business. Once the acquired assets and assumed liabilities are identified, the fair values of the assets and liabilities are
estimated using a variety of approaches that require significant judgments. For example, intangible assets are typically
valued using a discounted cash flow (“DCF”) analysis, which requires estimates of the future cash flows that are
attributable to the intangible asset. A DCF analysis also requires significant judgments regarding the selection of discount
rates that are intended to reflect the risks that are inherent in the projected cash flows, the determination of terminal
growth rates, and judgments about the useful life and pattern of use of the underlying intangible asset. As another
example, the valuation of acquired property, plant and equipment requires judgments about current market values,
replacement costs, the physical and functional obsolescence of the assets and their remaining useful lives. A failure to
appropriately assign fair values to acquired assets and assumed liabilities could significantly impact the amount and
timing of future depreciation and amortization expense, as well as significantly overstate or understate assets or liabilities.
Derivative Financial Instruments
Derivative financial instruments are recognized in the consolidated balance sheet as either assets or liabilities at fair
value and are designated, if certain conditions are met, as either (a) a hedge of the exposure to changes in the fair value of
a recognized asset or liability or an unrecognized firm commitment (a “fair value hedge”) or (b) a hedge of the exposure
to variable cash flows of a forecasted transaction or a hedge of the foreign currency exposure of a forecasted transaction
denominated in a foreign currency (a “cash flow hedge”). For a derivative financial instrument designated as a fair value
hedge (e.g., the Company’s interest rate swaps), the gain or loss on the derivative financial instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being
hedged. As a result, the consolidated statement of operations includes the impact of changes in the fair value of both the
derivative financial instrument and the hedged item, which reflects in earnings the extent to which the hedge is ineffective
in achieving offsetting changes in fair value. For a derivative financial instrument designated as a cash flow hedge (e.g.,
the Company’s cross-currency swaps), the effective portion of the gain or loss on the derivative financial instrument is
initially reported in equity as a component of accumulated other comprehensive income (loss), net, and subsequently
reclassified into earnings when the hedged item (e.g., a forecasted transaction denominated in a foreign currency) affects
earnings. The ineffective portion of the gain or loss is reported in earnings immediately. Derivative financial instruments
are used to manage the risks associated with fluctuations in interest rates and foreign currency exchange rates and are not
entered into for speculative or trading purposes.
The fair value of interest rate swaps is determined using a DCF analysis based on the terms of the contract. This
valuation requires estimates of future interest rates and judgments about the future credit worthiness of the Company and
each counterparty over the terms of the contracts. Similarly, the fair value of cross-currency swaps is determined using a
DCF analysis based on the terms of the contracts. This valuation requires estimates of future interest rates, forward
exchange rates and judgments about the future credit worthiness of the Company and each counterparty over the terms of
the contracts. Refer to Note 11 for further details.
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