Home Shopping Network 2008 Annual Report Download - page 48

HSN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
45
Cable and Satellite Distribution Fees
Cable and satellite distribution fees relate to fees paid in connection with annual or multi-year cable and
satellite contracts for carriage of HSN's programming. Fees that are paid upfront are amortized on a straight-line
basis over the terms of the respective contracts. Unpaid fees are accrued.
Cable and satellite distribution fees and amortization totaled $86.1 million, $91.8 million and $88.7 million
for the years ended December 31, 2008, 2007 and 2006, respectively, and are included in "Selling and marketing
expense" in the accompanying consolidated statements of operations. Prepaid cable and satellite distribution fees
due within 12 months were $1.6 million and $5.0 million at December 31, 2008 and 2007, respectively, and are
included in "Prepaid expenses and other current assets" in the accompanying consolidated balance sheets. The long-
term portions of upfront payments relating to multi-year cable and satellite contracts were $7.6 million and
$11.6 million at December 31, 2008 and 2007, respectively, and are included in "Other non-current assets" in the
accompanying consolidated balance sheets. Accrued cable and satellite distribution fees were $17.9 million and
$32.6 million at December 31, 2008 and 2007, respectively, and are included in "Accrued expenses and other
current liabilities" in the accompanying consolidated balance sheets.
Advertising
Advertising costs principally represent offline costs, including catalog production and distribution costs,
and online advertising costs. Advertising costs are expensed in the period incurred, except for Cornerstone's direct
costs of producing and distributing its catalogs, which are capitalized. These capitalized costs are amortized over the
expected future revenue stream, which is generally three months from the date catalogs are mailed. Such capitalized
costs totaled $23.0 million and $26.8 million at of December 31, 2008 and 2007, respectively, and are included in
"Prepaid expenses and other current assets" in the accompanying consolidated balance sheets.
Of these amounts, $13.6 million and $18.6 million at December 31, 2008 and 2007, respectively, related to
catalogs that had not yet been mailed. Advertising expense was $256.4 million, $282.5 million and $278.1 million
for the years ended December 31, 2008, 2007 and 2006, respectively.
Amortization of Non-Cash Marketing
Amortization of non-cash marketing consists of non-cash marketing and advertising provided to HSNi by
IAC. The non-cash marketing was secured by IAC from Universal Television as part of the transaction pursuant to
which Vivendi Universal Entertainment LLLP ("VUE") was created, and the subsequent transaction by which IAC
sold its partnership interests in VUE. HSNi used the non-cash advertising for television advertising on various NBC
Universal network and cable channels without any cash cost.
Income Taxes
HSNi accounts for income taxes under the liability method, and deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely
than not that the deferred tax asset will not be realized. HSNi records interest and penalties on potential tax
contingencies as a component of income tax expense and records interest net of any applicable related income tax
benefit.
Effective January 1, 2007, HSNi adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109" ("FIN 48"). As a result of the adoption of FIN 48, HSNi recognizes liabilities for uncertain tax
positions based on the two-step process prescribed by the interpretation. The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second