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Charter resolves balance sheet dispute, restates its earnings

It's an odd market when a company makes a $2.6 billion balance-sheet adjustment to fix an accounting dispute, restates two years of earnings, and sees its stock trade up.

But that's what happened to ailing Charter Communications last week when it resolved a dispute with auditor KPMG that had delayed its quarterly 10-Q filing with the Securities and Exchange Commission. Even a short, five-day delay is never good news.

Even though talking about "billions," the wrestling match was less than some investors feared, because it doesn't really reflect on Charter's operating results or capital structure.

Charter's stock ticked up 30%—though, for essentially a penny stock, that only takes a 20-cent swing these days. More significant, Charter's bonds rallied, with one series rising from 47 cents on the dollar to 52 cents.

"You didn't know what was involved in the dispute, and now you know," said one bond trader.

Not that it was a great week for Charter CEO Carl Vogel. Months after a grand jury was convened to investigate Charter's finances, the SEC finally got into the act, opening what the company called "an informal inquiry" into the whether the MSO had mislead investors about its subscriber counts.

So what was the dispute? Brace yourself. It centers on the different value of intangible assets on the company's public books, the GAAP books (as in "generally accepted accounting principles") and its tax books. KPMG felt that Charter had understated the asset value of franchise rights from the 18 different acquisitions it made during 1999 and 2000. A cable franchise—the right to operate a cable system within a given town—is carried as an intangible asset and, in accounting, actually comprises the bulk of the value of a cable system, far more than the physical wires and headend.

Charter had been carrying its franchises at $17 billion. KPMG thought it should be $1.4 billion more.

However, a Charter executive explained, that creates some tax issues as the greater asset value is amortized, 1/15 each year. Each little write-off means there's a greater gain when the franchise is ultimately sold.

That, in turn, means there's an additional tax on the gain. And that deferred tax liability actually compounds. KPMG ruled that the deferred tax liability should be increased by $1.2 billion. (That creates an additional $200 million of equity on the company's books, which would be a good sign if it were more than bookkeeping entries.)

Because of the added amortization expense from the higher level of assets, Charter then had to restate its earnings over three years. "This doesn't affect cash. It doesn't affect the amount of taxes we actually owe," said the Charter executive. "It's highly technical."