Insight Communicates the Need to Restate

New York-based cable operator, private but with public debt, will revise 2006 report to reflect change in tax-accounting treatment.
Stephen TaubAugust 7, 2007

Insight Communications Co. said it will restate its 2006 annual report to correct the accounting for non-cash income tax expense and deferred income taxes in prior years.

The New York-based cable operator, which went private in 2005, said the prior accounting treatment caused it to understate its net loss for the year ended 2006. The company estimated that the understatement totaled $7.6 million in 2006, $7.6 million in 2005, and $8 million in 2004. For years prior to 2004, it added, the correction will result in a total increase in net loss of about $73.9 million.

Insight still reports financial results to the Securities and Exchange Commission because of high-yield bonds publicly outstanding.

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The error was identified after its accounting firm, Ernst & Young, advised management of the issue. The correction will not affect revenues, operating income, cash flows, or liquidity for any period, the company said, nor will it affect the company’s pre-tax operating results or net operating loss carryforwards.

Insight stressed that its restatement will not result in a default under its debt agreements, nor will it constitute a material breach under other contractual obligations. The company said the correction relates to the tax impact of intangible assets arising from certain business combinations, primarily tax-deductible franchise costs, which are amortized as an expense for tax purposes over 15 years, but which have not been amortized for financial reporting purposes since the Jan. 1, 2002, adoption of SFAS No. 142, applying to goodwill and other intangible assets.

The company said it records deferred income tax expense and a deferred tax liability related to the tax-deductible franchise costs. However, in preparing its financial statements, it historically had netted the deferred tax liability related to franchise costs against deferred tax assets, primarily relating to its net operating loss carryforwards, and provided a valuation allowance on the net asset balance.

Because the deferred tax liability could have an indefinite life, it should not have been netted against deferred tax assets with a definite life when determining the required valuation allowance, according to the regulatory filing. As a result, Insight said, it did not record the appropriate valuation allowance and related deferred income tax expense. The deferred tax liability should have remained on the balance sheet indefinitely, it said, unless there were an impairment of franchise costs for financial reporting purposes or the related business entity were disposed of through a sale or otherwise.

Insight said it will correct its financial statements for the March quarters in 2007 and 2006 in an amended quarterly report. It also will correct statements for the June 2006 quarter in a filing covering the latest June quarter, due to be filed by August 14.

It will also correct statements for the September 2006 quarter when it reports for the next September quarter, on or before Nov. 14.