Home Shopping Network 2008 Annual Report Download - page 35

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advertising effort would otherwise be without these credits. As a result, management believes that treating the NBC
Universal Advertising as an expense does not appropriately reflect its true cost/benefit relationship, nor does it best
reflect HSNi's long-term level of advertising expenditures. Nonetheless, while the benefits directly attributable to
television advertising are always difficult to determine, and especially so with respect to the NBC Universal
Advertising due to its incrementality and heavy concentration, it is likely that HSNi does derive benefits from it,
though management believes such benefits are generally less than those received through its regular marketing and
advertising for the reasons stated above. Adjusted EBITDA therefore has the limitation of including those benefits
while excluding the associated expense.
Amortization of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an
acquisition, the intangible assets of the acquired company, such as distribution agreements, customer relationships
and merchandise agreements, are valued and amortized over their estimated lives. HSNi believes that since
intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of
transaction costs.
Depreciation, gains and losses on asset dispositions and long-lived asset impairment charges are non-cash
items relating to our long-lived assets and have been excluded from Adjusted EBITDA. Goodwill and intangible
asset impairment charges are also non-cash expenses that have been excluded from Adjusted EBITDA.
Reconciliation of Adjusted EBITDA
See Note 6 of Notes to Consolidated Financial Statements for the reconciliation between operating (loss)
income and Adjusted EBITDA for the years ended December 31, 2008, 2007 and 2006.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of HSNi's accounting policies
contained in Note 2 of Notes to Consolidated Financial Statements in regard to significant areas of judgment. HSNi's
management is required to make certain estimates and assumptions during the preparation of its consolidated
financial statements in accordance with GAAP. These estimates and assumptions impact the reported amount of
assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial
statements. They also impact the reported amount of net income during any period. Actual results could differ from
those estimates. Because of the size of the financial statement elements to which they relate, some of HSNi's
accounting policies and estimates have a more significant impact on its consolidated financial statements than
others. What follows is a discussion of some of HSNi's more significant accounting policies and estimates.
Recoverability of Long-Lived Assets
HSNi reviews the carrying value of all long-lived assets, primarily property and equipment and definite-
lived intangible assets, for impairment whenever triggering events or changes in circumstances indicate that the
carrying value of an asset may be impaired. In accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), impairment is considered to have occurred whenever the carrying
value of a long-lived asset exceeds the sum of the undiscounted cash flows that is expected to result from the use
and eventual disposition of the asset. The impairment is measured by comparing the fair value of the asset to its
carrying value. Our valuation methodologies include, but are not limited to, discounting the future cash flows from
the asset being tested. Significant judgments include determining if a triggering even has occurred, determining the
future cash flows from the assets and applying the appropriate discount rate when measuring the fair value. The
determination of cash flows is based upon assumptions that may not occur.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
HSNi assesses the impairment of goodwill and identifiable intangible assets at least annually during the
fourth quarter and whenever events or changes in circumstances indicate that the carrying value may not be
recoverable. In performing this review, HSNi is required to make an assessment of the implied fair value of its
goodwill and intangible assets. If it is determined that the implied fair value of goodwill and/or intangible assets is