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SHEARMAN & STERLING LETTERHEAD
October 4, 2006
VIA EDGAR TRANSMISSION
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Ms. Kathryn T. Jacobson
Securities and Exchange Commission
Division of Corporation Finance
100 F Street NE, Mail Stop 3720
Washington, DC 20549
Phone: 202-551-3365
Re: CBS Corporation
Form 10-K for Fiscal Year Ended December 31, 2005
Filed March 16, 2006
Form 10-Q for the Quarter Ended June 30, 2006
Filed August 8, 2006
File No. 1-09553
Dear Ms. Jacobson:
On behalf of our client, CBS Corporation ("CBS" or the "Company"), set
forth below are the comments (the "Comments") of the staff (the "Staff") of the
Securities and Exchange Commission (the "Commission") received in your letter
dated September 7, 2006 concerning the Company's Form 10-K for the fiscal year
ended December 31, 2005 and Form 10-Q for the quarter ended June 30, 2006. For
the purposes of this letter, the Company refers to its Form 10-K for the fiscal
year ended December 31, 2005 as its "2005 Form 10-K"; its Form 10-Qs for the
quarters ended March 31, 2006, June 30, 2006 and September 30, 2006 as its
"first quarter 2006 Form 10-Q," its "second quarter 2006 Form 10-Q," and its
"third quarter 2006 Form 10-Q," respectively; and its Form 10-K for the fiscal
year ended December 31, 2006 as its "2006 Form 10-K." For your convenience, the
Company's responses follow the sequentially numbered Comments copied in bold
from your letter.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 2
Form 10-K for the fiscal year ended December 31, 2005
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Item 1. Business
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Showtime Networks, page I-10
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1. We note that Showtime offers "marketing and advertising support and
other incentives" to cable and satellite operators and distributors.
Tell us more of these arrangements, your accounting for them and your
basis in the accounting literature.
In connection with its distribution arrangements, Showtime offers
marketing and advertising support and other incentives to cable, satellite and
other distributors. Showtime accounts for these arrangements in accordance with
EITF Issue No. 01-09, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)" ("EITF 01-09").
Showtime pays its distributors to air advertising spots to promote
Showtime and/or send marketing material directly to its customers and potential
customers to attract them to subscribe to Showtime. The costs are expensed when
such costs are incurred (e.g., when the advertising spot is aired, or as the
costs related to the marketing campaign are incurred).
Showtime and the distributor negotiate the services to be performed by
the distributor and the payment of all costs associated with these advertising
and marketing campaigns separately from their negotiation over the terms
pursuant to which the distributor agrees to carry Showtime's channels. Since the
advertising and marketing services that Showtime receives are separate, distinct
and apart from the programming services that Showtime provides to the
distributor, the Company respectfully notes that the criteria in paragraph 9a of
EITF 01-09 has been met. In addition, as Showtime's extensive experience with
advertising and marketing campaigns permits it to reasonably estimate the fair
value of the advertising and marketing services, the Company respectfully notes
that the criteria in paragraph 9b of EITF 01-09 has been met. In the event that
the fair value estimated by Showtime is less than the amount of consideration
paid to the distributor, that excess amount would be included as a reduction of
revenue.
Accordingly, because Showtime meets the criteria in paragraph 9 of EITF
01-09, the advertising and marketing costs relating to such arrangements are
reported in the statement of operations as selling, general and administrative
expenses.
Please refer to the Company's response to the Staff's Comment No. 10
for proposed disclosure relating to the subject matter of this Comment.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 3
Management's Discussion and Analysis of Results of Operations and Financial
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Condition, page II-24
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2. We note your disclosure that your accounts receivable securitization
programs "result in the sale of receivables on a non-recourse basis to
unrelated third parties on a one-year renewable basis, thereby reducing
accounts receivable and debt on the Company's Consolidated Balance
Sheets." We further note that the "terms of the revolving
securitization arrangements require that the receivable pools subject
to the programs meet certain performance ratios." Please confirm to us
that the sale meets all the conditions in paragraph 9 of SFAS 140.
The Company is currently a party to two separate receivable
securitization programs with third party financial institutions. The Company
respectfully notes that its accounts receivable securitization programs meet the
three conditions listed in paragraph 9 of SFAS 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140").
In accordance with paragraph 9a of SFAS 140 and after consideration of
the guidance provided by paragraphs 27 and 28 of SFAS 140, when the applicable
receivables are transferred by the Company pursuant to program agreements, the
receivables so transferred are isolated from and beyond the reach of the Company
and its creditors. Accordingly, in the event of a bankruptcy proceeding of the
Company under the bankruptcy code, the receivables transferred would not
constitute "property of the estate" of the Company.
In accordance with paragraph 9b of SFAS 140, each transferee under the
securitization programs has the right to pledge or exchange the assets it
receives and no condition both constrains the transferee from taking advantage
of its right to pledge or exchange and provides more than a trivial benefit to
the transferor.
In accordance with paragraph 9c of SFAS 140, the Company does not
maintain effective control over the transferred receivables. There is no
recourse to or collection risk borne by the Company in the event of any payment
default or deficiency of any account debtor in the programs. The Company does
not have rights of redemption or repurchase of the transferred receivables.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 4
Critical Accounting Policies, page II-26
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3. We refer to your disclosures on page II-62 regarding the adoption of
SFAS 123R. Please expand such disclosures for inclusion herein to
include the information prescribed in the interpretive response to
Question 5 under SAB Topic 14D.1 as follows:
o Explanation of the method used to estimate the expected volatility
of your share price.
o Basis for your conclusions in using a combination of historical and
implied volatility.
o Summary of the evaluation of the factors listed in Questions 2
and 3 of the above section as part of the MD&A disclosures.
The Company respectfully notes that the Company did not adopt SFAS No.
123 (revised 2004) "Share-Based Payment" ("SFAS 123R") until January 1, 2006,
and therefore disclosure regarding the adoption of SFAS 123R was not included in
the Critical Accounting Policies section of the Company's 2005 Form 10-K. In the
Company's first quarter 2006 Form 10-Q, the Company included in its Critical
Accounting Policies a discussion of the method used to estimate the Black
Scholes assumptions, including expected volatility. The Company respectfully
notes that in this Form 10-Q, it followed the guidance in Question No. 5 of
Staff Accounting Bulletin ("SAB") Topic 14D.1, including the requirement to
disclose how it determined the expected volatility assumption.
The Company respectfully notes that Question No. 2 of SAB Topic 14D.1
is not applicable to the Company's disclosure since the Company did not rely on
historical volatility when estimating expected volatility in 2006 due to the
limited amount of trading history for CBS Corp. B Class B Common Stock. In its
future filings, beginning with its third quarter 2006 Form 10-Q, the Company
will include a summary of the evaluation of the factors listed in Question No. 3
of SAB Topic 14D.1 in its Critical Accounting Policies and financial statement
footnote disclosure. The proposed disclosure is as follows:
"When calculating expected stock price volatility, the Company placed
exclusive reliance on implied volatility due to the limited amount of
trading history for CBS Corp. Class B Common Stock. In addition, given the
existence of an actively traded market for CBS Corp. options, the Company
was able to derive implied volatility using publicly traded options to
purchase CBS Corp. Class B Common Stock that were trading near the grant
date of the employee stock options at a similar exercise
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 5
price and a remaining term of greater than one year. Although there is
an active market for these publicly traded CBS Corp. options, the
Company believes that due to their short trading history, the
volatility of these options alone may not be indicative of expected
volatility. As a result, the expected stock price volatility was
determined using an average of the implied volatility of these options
and the implied volatility of publicly traded options for entities with
similar business characteristics within the Company's industry."
Critical Accounting Policies, page II-26
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4. Please revise to provide more robust disclosures with respect to your
accounting for the production and distribution of television
programming. Describe in detail the judgments made in the application
of these policies and the likelihood of materially different reported
results if different assumptions or conditions were to prevail.
The Company respectfully notes that the primary judgments that relate
to the accounting for the production and distribution of television programming
relate to the timing of the establishment of a secondary market, and estimates
of related secondary market revenues and of future participation costs for
purposes of applying the individual-film-forecast-computation method of
amortizing capitalized television programming and determining participation
expense.
In response to the Staff's Comment, the Company will, in future
filings, beginning with its 2006 Form 10-K, include the following proposed
disclosure to its Critical Accounting Policies:
"The Company accounts for the production and distribution of television
programming in accordance with the Statement of Position 00-2 "Accounting
by Producers or Distributors of Films" ("SOP 00-2"). SOP 00-2 requires
management's judgment as it relates to the timing of the establishment of a
secondary market for its television programming, and total estimated
revenues to be earned and costs to be incurred throughout the life of each
television program. These estimates are used to determine the amortization
of capitalized television programming, expensing of participation costs,
and any necessary net realizable value adjustments to capitalized
television programming costs. For each television program, management bases
these estimates on the performance of the television programming in the
initial markets, the existence of future firm commitments to sell
additional episodes of the program, and the past performance of similar
television programs. These estimates are updated regularly based on
information available as the television program
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 6
progresses through its life cycle. Overestimating secondary market
revenues or a failure to adjust for a downward change in the total
estimated revenue could result in the understatement of the
amortization of capitalized television programming costs, result in
future net realizable value adjustments and impact the determination of
participation expense."
Please refer to the Company's response to the Staff's Comments No. 8 and
No. 9 for further proposed disclosures.
Consolidated Balance Sheets, page II-38
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5. Tell us and disclose in a note to the financial statements the nature
of other liabilities of $3,751.7 million.
Other liabilities, which are non-current, consist primarily of residual
liabilities of previously disposed businesses, program rights, participation
liabilities, deferred compensation and other employee benefit accruals. The
Company respectfully notes that none of the components of other liabilities
exceeded 5% of total liabilities in any of the periods presented, and thus did
not require separate disclosure in accordance with S-X Rule 5-02.24.
In response to the Staff's Comment, in future filings, beginning with
the third quarter 2006 Form 10-Q, the Company will include the following
proposed disclosure in the notes to its financial statements:
"Other liabilities consist primarily of residual liabilities of previously
disposed businesses, program rights, participation liabilities, deferred
compensation and other employee benefit accruals."
In addition, in the event that any individual component of this line
item exceeds 5% of total liabilities in any future period, the Company will
present such component separately on the face of its balance sheet in accordance
with S-X Rule 5-02.24.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 7
1) Summary of Significant Accounting Policies
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Inventory, page II-43
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6. We note your television product includes direct production costs,
production overhead and acquisition costs. Provide us with more details
of the nature of these costs. Tell us how you comply with paragraphs
30-33 of SOP 00-2 in your accounting for these costs.
The Company respectfully notes that direct production costs, the most
significant component of capitalized television programming costs, include costs
for talent, directors, producers, production crew, and other direct costs such
as set design and location expense which directly relate to specific programs.
Production overhead includes costs for certain individuals and departments with
significant responsibility for production of the television programs.
Acquisition costs are the costs incurred to acquire rights to books or stage
plays, or original screenplays.
The Company allocates production overhead costs to its television
programs, in accordance with paragraph 30 of SOP 00-2. The Company respectfully
notes that it does not include general and administrative expenses, costs of
overall deals, or the costs of abandoned programming, in production overhead.
With respect to overall deal arrangements, the Company respectfully
notes that, in accordance with paragraph 31 of SOP 00-2, it expenses all of the
costs associated with such arrangements, unless the costs incurred can be
identified with the acquisition, adaptation, or development of a specific
television program. The Company allocates to individual television programs a
reasonable proportion of the costs of overall deals as television production
costs and accounts for those costs in accordance with paragraph 32 of SOP 00-2.
The Company respectfully notes that in accordance with the guidance in
paragraph 32 of SOP 00-2, it periodically reviews television programs in the
development stage (including adaptations). All capitalized costs for television
programming costs not set for production within three years from the time of the
first capitalization transaction are expensed by a charge to its statement of
operations, unless there is a committed plan to sell such property.
The Company respectfully notes that it follows the guidance in
paragraph 33 of SOP 00-2 with respect to the accounting for capitalized
television programming costs. As noted in the Company's responses to the Staff's
Comments No. 8 and No. 9, until the Company can establish estimates of secondary
market revenues, such as from television station and/or cable network sales,
costs in excess of contracted revenues are expensed as incurred. Once secondary
market
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 8
revenues are established, the Company capitalizes subsequent television
programming costs and applies the individual-film-forecast-computation method of
amortization, in accordance with paragraphs 34-37 of SOP 00-2.
1) Summary of Significant Accounting Policies
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Inventory, page II-43
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7. Tell us how your participation cost estimates comply with paragraphs
41-42 of SOP 00-2.
The Company respectfully notes that it follows the guidance in
paragraphs 41 and 42 of SOP 00-2 as it relates to the accounting for total
(i.e., ultimate) participation costs. Specifically, the Company includes
ultimate participation costs in its individual-film-forecast computation to
determine current period participation costs. If, at any balance sheet date, the
participation cost liability for an individual television program exceeds the
estimated unpaid ultimate participation costs for such individual television
program, the excess liability is accounted for first as a reduction of
unamortized film costs for that television program, and then as a credit to
income. For fully amortized television programming for which the Company
generates revenue, such as for television library titles, the Company accrues
associated participation costs as the related revenue is recognized.
1) Summary of Significant Accounting Policies
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Inventory, page II-43
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8. Your disclosure regarding estimated remaining total lifetime revenues
addresses only initial domestic syndication and basic cable revenues,
but does not make any reference to secondary market revenue. Tell us
whether you include estimates of secondary market revenue or any other
estimates of revenue per paragraph 39 of SOP 00-2. Also, tell us how
your estimated remaining total lifetime revenues used in your
amortization methodology complies with the "ultimate revenue" concept
per paragraphs 38-40 of SOP 00-2.
The Company respectfully notes that, in accordance with paragraph 38
and 39 of SOP 00-2, estimated lifetime revenues include estimates of secondary
market revenues such as foreign syndication, home entertainment, and
merchandising, in addition to estimates of domestic syndication and basic cable
revenues. The estimates are included in ultimate revenues only when the Company
can demonstrate, through its experience, that episodes already produced, as well
as those for which a firm commitment exists, can be successfully licensed in the
secondary markets. In accordance with paragraph 40 of SOP 00-2, the Company does
not
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 9
discount ultimate revenues to its present value; and foreign revenue estimates
are translated based on current spot exchange rates. The Company will include
the following proposed disclosure in its future filings, beginning with its 2006
Form 10-K (as an additional paragraph in Note 1, Summary of Significant
Accounting Policies):
"Estimates for all secondary market revenues such as domestic and foreign
syndication, basic cable, home entertainment and merchandising are not
included in the estimated lifetime revenues of a television series until it
is demonstrated that the program can be successfully licensed in such
secondary market."
1) Summary of Significant Accounting Policies
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Inventory, page II-43
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9. Refer to page I-8 in which you disclosed that the "network license fee
for a series episode is normally lower than the costs of producing each
series episode; however, the Company's objective is to recoup its costs
and earn a profit through domestic syndication of episodes after their
network runs and/ or by licensing international exhibitions of the
episodes." Considering that the profitability of your series appears to
be largely dependent on secondary markets, please clarify your
disclosure to address your accounting for initial and subsequent film
costs. Refer to paragraph 33 of SOP 00-2.
In future filings, beginning with its 2006 Form 10-K, the Company
proposes to include the following disclosure (as an additional paragraph in Note
1, Summary of Significant Accounting Policies):
"Television programming costs (which include direct production costs,
production overhead and acquisition costs) are stated at the lower of
amortized cost or net realizable value. Estimates for remaining total
lifetime revenues are limited to the amount of revenue contracted for each
episode in the initial market. Accordingly, television programming costs
and participation costs incurred in excess of the amount of revenue
contracted for each episode in the initial market are expensed as incurred
on an episode by episode basis. Once it can be demonstrated that the
program can be successfully licensed in the secondary market, estimates for
all secondary market revenues such as domestic and foreign syndication,
basic cable, home entertainment and merchandising are included in the
estimated lifetime revenues of such television programming. Television
programming costs incurred subsequent to the establishment of the secondary
market are initially capitalized and amortized, and estimated liabilities
for participations are accrued, based on the
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 10
proportion that current period revenues bear to the estimated remaining
total lifetime revenues. These estimates are periodically reviewed and
adjustments, if any, will result in changes to amortization rates and
estimated accruals for participations."
1) Summary of Significant Accounting Policies
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Revenue Recognition, page II-44
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10. Tell us if subscriber fees are recognized gross versus net of
incentives and other consideration paid to cable and satellite
operators and distributors. Refer to paragraph 9 and Example 15 of EITF
01-9. Also, tell us whether advertising revenues are recognized net of
agency commissions. Revise your disclosures accordingly.
The Company respectfully notes that subscriber fees, which represent
subscription revenues for cable networks, and costs related to incentives for
advertising and marketing consideration paid to cable, satellite and other
distributors are recognized on a gross basis, as the criteria in paragraphs 9a
and 9b of EITF 01-09 are met (please refer to the Company's response to the
Staff's Comment No. 1). The Company respectfully notes that it does not have any
arrangements similar to those described in example 15 of EITF 01-09. In response
to the Staff's Comment, the Company will include the following proposed
disclosure in its future filings, beginning with its 2006 Form 10-K (as an
additional paragraph in Note 1, Summary of Significant Accounting Policies):
"Subscriber fees for cable networks are recognized in the period the
service is provided. Costs for advertising and marketing services provided
by cable, satellite and other distributors is recorded in selling, general
and administrative expenses in accordance with the guidance in Emerging
Issues Task Force No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)."
The Company respectfully notes that advertising revenues are recognized
net of agency commissions. In response to the Staff's Comment, the Company will
include the following proposed disclosure in its future filings, beginning with
its 2006 Form 10-K (as an additional paragraph in Note 1, Summary of Significant
Accounting Policies):
"Advertising revenues, net of agency commissions, are recognized in the
period during which advertising is exhibited."
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 11
1) Summary of Significant Accounting Policies
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Revenue Recognition, page II-44
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11. Please expand your discussion on revenue recognition to address advance
cash payments and advance billings in connection with your license
agreements for television product. Please provide us with your proposed
disclosures.
The Company respectfully notes that its deferred revenue primarily
consists of advanced billings under television license agreements for which the
underlying revenue has not been recognized in accordance with paragraph 7 of SOP
00-2 and unearned revenue related to advertising sales for which the targeted
audience rating has not been met. In response to the Staff's Comment, the
Company will include the following proposed disclosure in its future filings,
beginning with its 2006 Form 10-K (as an additional paragraph in the Revenue
Recognition section of Note 1, Summary of Significant Accounting Policies):
"Deferred revenue primarily consists of advanced billings to licensees
under television licensing arrangements and unearned advertising revenue
related to television advertising arrangements for which the revenue has
not yet been earned. The amounts classified as current are expected to be
earned within the next twelve months."
1) Summary of Significant Accounting Policies
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Revenue Recognition, page II-44
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12. Tell us what you mean by "available for telecast" or "available for
exhibition" when recognizing revenues from a television series covered
by a license agreement. Also, tell us how you comply with paragraphs
11-14 of SOP 00-02.
Television programming under a licensing agreement is "available for
telecast" or "available for exhibition" when the television programming is
completed, delivered, accepted and there are no restrictions on the customer's
ability to begin its initial exploitation or exhibition of the television
program. The Company respectfully notes that it follows paragraphs 11-14 of SOP
00-2 when recognizing revenues from television series covered by a license
agreement.
The Company enters into licensing agreements with, among others,
broadcast networks, TV stations and cable networks in the domestic and foreign
markets. Each license agreement specifically identifies an exhibition window in
which the licensee has legal rights to exhibit the programming. Revenues are
recognized only when the program is completed and delivered by the Company,
accepted by the licensee, and the television program is not subject to any
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 12
restrictions on the licensee's ability to begin its initial exploitation or
exhibition of the television program.
1) Summary of Significant Accounting Policies
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Sales of Multiple Products or Services, page II-44
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13. We are unable to locate from your filing any reference to arrangements
involving multiple products and services. Please:
o Tell us the nature of these arrangements and your specific
accounting for them.
o Tell us if these multiple arrangements include multiple film
arrangements and film-related products. In this regard, we
refer you to paragraphs 16, 17 and 26 of SOP 00-2 as
applicable.
The Company respectfully notes that it has not historically disclosed
the detailed nature of specific multi-element arrangements as they have not been
material to the Company's consolidated financial statements. However, given the
emergence of multi-element arrangements in our industry, the Company believed it
to be appropriate to include disclosure, in the Significant Accounting Policy
section of its financial statement footnotes, of its compliance with EITF Issue
No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). If
these multi-element arrangements continue to grow in significance, the Company
will expand its existing disclosure to include the specific nature of these
agreements in its future filings.
The Company respectfully notes that, although these arrangements have
not been material, its primary multi-element revenue arrangements are with
respect to the sale of multiple advertising spots and/or advertising across
multiple platforms, such as our network television and our Internet websites,
and licensing of multiple television programs under the same agreement.
With respect to these arrangements, the Company follows the guidance in
EITF 00-21 and the guidance in paragraphs 16-17 of SOP 00-2, as appropriate. For
example, with respect to the sale of multiple advertising spots, in accordance
with EITF 00-21, each individual spot has an ascertainable known fair value on a
stand-alone basis as comparable spots are sold separately (paragraph 9a); there
is objective and reliable evidence of the fair value of the undelivered items,
by reference to stand-alone sales of similar advertising spots in similar day
parts (paragraph 9b); and the vendor would typically have "right of return" with
respect to audience under-delivery if the television program in which the
advertisement was placed failed to achieve a certain audience rating (paragraph
9c). Once the elements are divided into separate units of accounting,
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 13
those units are assigned a fair value in the manner described above and revenue
recognition is applied, as appropriate, for each individual unit.
The Company may enter into license agreements with respect to multiple
television programs pursuant to which the Company receives a flat fee from a
licensee. In those situations, the Company applies the guidance in paragraphs 16
and 17 of SOP 00-2. The overall contract revenues are allocated to the
individual television programs covered by the agreement based on their relative
fair values. Because the performance (for example, on network or domestic cable
television) of the television product covered by these agreements is known prior
to the execution of these license agreements, each television program within the
license agreement is assigned a rating to reflect its quality (for example, "A,"
"B," and "C" ratings, with "A" being the top performing shows) and that
categorization serves as the basis for allocating the overall contract price to
the individual television programs licensed under these agreements. The Company
respectfully notes that this approach is consistent with the guidance in
paragraph 17 of SOP 00-2.
The Company respectfully notes that its revenue recognition policies
are consistent with paragraph 16 of SOP 00-2 in that it does not recognize
revenue from licensing agreements unless the corresponding television program
has met all the conditions in paragraph 7 of SOP 00-2.
As previously noted, these multi-element arrangements have not been
material to the Company's consolidated financial statements.
2) Discontinued Operations, page II-50
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14. Tell us more about your aircraft financing leases, your accounting for
them and why they are included in discontinued operations. Refer to
your basis in the accounting literature.
The aircraft leases that are included in the Company's discontinued
operations were part of the financial services segment of Westinghouse, a
predecessor company, which in 1992 adopted a plan to exit from such business.
The plan calls for the run-off of the leases in accordance with contractual
terms and these leases are expected to be liquidated through the year 2015.
Since 1992, the leases have been accounted for as a discontinued operation in
accordance with APB 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"). Upon adoption of
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), in accordance with
paragraph 51, the Company continues to classify its aircraft lease portfolio as
a discontinued operation. The Company respectfully notes that this presentation
is also consistent
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 14
with the provisions of EITF D-104, "Clarification of Transition Guidance in
Paragraph 51 of SFAS 144" ("EITF D-104"). That guidance permits an entity to
continue to present as a discontinued operation, a segment that was previously
considered a discontinued operation under APB 30 when SFAS 144 was initially
applied, provided the business is being run-off because of contractual
obligations.
3) Goodwill and Intangible Assets, page II-51
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15. We note your disclosure that you reduced the carrying value of goodwill
at the CBS Television reporting unit and the Radio reporting unit
during the fourth quarter of 2005. This disclosure implies that you
have identified only 1 reporting unit for your radio stations and only
1 reporting unit for your television stations. Addressing paragraph 30
of SFAS 142 and EITF D-101, tell us how you determined your reporting
units and tell us what those reporting units are.
Television
As described in the Company's response to the Staff's Comment No. 18,
the Television reportable segment has one operating segment determined in
accordance with the criteria in paragraph 10 of SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131").
Within the Television operating segment at December 31, 2005, there
were three components - CBS Television (which included broadcast networks,
television stations and King World); CBS Paramount Television; and Showtime
Networks. (CSTV Networks became a part of this operating segment upon its
acquisition in January 2006.) These three components were determined to be
reporting units based on the criteria in paragraph 30 of SFAS 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") and the additional guidance provided in
EITF D-101, "Clarification of Reporting Unit Guidance in Paragraph 30 of FASB
Statement No. 142" ("EITF D-101"). Paragraph 30 of SFAS 142 states that "a
reporting unit is an operating segment or one level below an operating segment."
The Company's three reporting units at December 31, 2005 are one level below its
Television operating segment, consistent with this guidance. Specifically, the
reporting units were determined based on the following factors:
o Each of the components within the Television operating segment
constitutes a business as defined in EITF Issue No. 98-3, "Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets
or of a Business." In making that determination, the Company considered
the fact that each of the three components of Television
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 15
contains inputs and processes such that they could stand on their own
and conduct normal operations if they were to be separated.
o Detailed, discrete financial information, including a balance sheet and
statement of operations is available for each of these three components
of Television.
o The discrete financial information for each of these three components
of Television is regularly reviewed by segment management.
Radio
The Radio reportable segment has one operating segment determined in
accordance with the criteria in paragraph 10 of SFAS 131. In making that
determination, the Company respectfully notes that the criteria in paragraphs
10a (business activities) and 10c (discrete financial information) are met at
the Radio operating segment level (as well as at the Radio component level); but
as the Company's CODM assesses performance and makes resource allocations at the
Radio operating segment level, the criterion set forth in paragraph 10b is only
met at the Radio operating segment level (and not at the Radio component level).
For purposes of determining the components of the Radio operating
segment, the Company considered the guidance in paragraph 30 of SFAS 142 and
determined that there are five components within this operating segment. The
components are five geographic regions, each of which contains various
individual radio stations. The Company concluded, in accordance with paragraph
30 of SFAS 142, that the five components comprise a single reporting unit
because these five components have similar economic characteristics. In reaching
that conclusion, in accordance with paragraph 30 of SFAS 142, the Company
considered the elements of paragraph 17 of SFAS 131 as well as the additional
factors discussed in EITF D-101, as follows:
o Paragraph 17 of SFAS 131 sets forth five characteristics to be
considered in determining similarity, namely, the nature of the
products and services; the nature of the production processes; the type
or class of customer for the products and services; methods used to
distribute the products and services; and the nature of the regulatory
environment. The five regional components of the Radio operating
segment are similar in each of these areas, specifically:
o The "product" sold by such radio stations within each regional
component is advertising time which is sold locally,
regionally, and nationally.
o The programming aired by such stations is radio programming.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 16
o The customers for each region are national, regional and local
advertisers.
o The process by which national, regional and local advertising
spots are sold within each region is similar.
o The radio stations within each region are subject to the same
regulatory environment, and all operate under licenses granted
by the Federal Communications Commission.
o EITF D-101 also discusses four additional qualitative factors that
should be considered to determine similarity of components. The Company
respectfully notes that consideration of those factors also supports
the conclusion that the five Radio components have similar economic
characteristics.
o EITF D-101 states that "the manner in which an entity operates
its business and the nature of those operations" is a factor to
consider in determining whether components should be combined
into one reporting unit. Radio manages its regions and
underlying stations on a portfolio basis. There is one
management team that oversees the regions. One of the primary
objectives of Radio management is to establish leading
franchises in news, sports, and personality programming across
the country. To that end, Radio frequently enters into
programming arrangements for the benefit of many of its
stations. For example, stations across the country utilize the
same programming from CBS Radio Network, as well as other
programming, such as sports, weather and traffic, acquired from
other large programming providers. In addition, many stations
utilize programming from syndicated programming arrangements
(for example, morning talk and financial programs) negotiated on
their behalf. This widespread programming distribution provides
national advertisers the ability to efficiently target certain
demographics and reach a broad group of customers across the
country. This broader, portfolio strategy has enabled Radio to
sell advertising on a more widespread, national basis across all
of their stations, and gain access to national advertisers. The
ability to attract national advertisers and take advantage of
widely distributed popular programming arrangements would be
difficult to achieve if Radio operated each station or region
independently.
o EITF D-101 also lists as a factor whether goodwill is
recoverable from the separate operations of each component
business or from many components working in concert. To address
this factor, it is relevant to consider how the majority of the
Radio goodwill was initially derived. The Company acquired the
majority of Radio in May 2000 (and purchased the minority interest
held by the public in 2001). The goodwill acquired, including the
premium that the Company paid, was the result of the national
leadership position that Radio held in the marketplace and the
ability to leverage this national footprint by, among other things,
selling advertising on a
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 17
national basis across all of its stations and the ability to
enter into syndicated programming arrangements that can be used
by stations across the country, as described above. Because
Radio is managed on a portfolio basis, which provides Radio with
national advertising cash flows as well as more attractive and
lower cost programming, the overall cash flows of Radio is
greater than they would be if the stations were operated
independently, or on a regional basis. Accordingly, the goodwill
attributable to CBS Radio is expected to be recovered from the
radio stations working in concert, as opposed to from the
stations operating independently.
o EITF D-101 also states that "the extent to which the component
businesses share assets and other resources" is a factor in
determining whether component businesses should be combined into
one reporting unit. As mentioned above, the underlying stations
share network and syndicated programming arrangements, and also
share key systems, such as the system to track advertising
spots. In addition, the stations also share functional resources
and services provided, or entered into on their behalf, such as
ratings arrangements with ratings companies, lease agreements,
treasury and cash management services, tax support, employee
benefits, technology support and insurance.
o EITF D-101 also states that the extent that components benefit
from common research and development projects is also a factor
in determining whether components should be combined. The
Company respectfully notes that there are a number of technology
and programming initiatives developed from which the stations
benefit. For example, Radio's participation in the HD Digital
Alliance Association (a group comprising several different radio
companies) resulted in the acceleration of the conversion from
analog to digital broadcasts for many of its stations. Also,
Radio has recently developed new radio formats, such as "Free
FM" and "Jack," which it has rolled out to many of its stations.
Finally, Radio's experimentation with streaming, podcasting, and
website development has resulted in the streaming of programming
for approximately half of its radio station portfolio.
8) Investments in Affiliated Companies, page II-55
- --------------------------------------------------
16. We note your disclosure that the aggregate market value of the
Company's publicly traded investments ... was not below the total
carrying value on the Consolidated Balance Sheet. Tell us if your
impairment assessment is based on each individual investment or on all
publicly traded investments as a whole.
The Company respectfully notes that it assesses each individual
investment for impairment separately in accordance with APB 18, "The Equity
Method of Accounting for
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 18
Investments in Common Stock," or SFAS 115, "Accounting for Certain Investments
in Debt and Equity Securities," as appropriate. In response to the Staff's
Comment, the Company will clarify its disclosure in this regard in its future
filings, beginning with its 2006 Form 10-K.
11) Stockholders' Equity, page II-59
- ------------------------------------
Long-term Incentive Plans, II-60
- --------------------------------
17. We note on page II-62 that you updated the methodology for certain
Black Scholes assumptions concerning historical volatility and the
expected term. Please:
o Tell us in detail how you determined your volatility
assumption and tell us your consideration of SAB Topic 14D.1.
The Company respectfully notes that a combination of both historical
and implied volatility was utilized during 2005 since several factors led the
Company to believe that historical volatility alone may not be indicative of
expected volatility. These factors include the paying of dividends which
commenced during 2003 and the effect of significant transactions including the
Viacom/CBS merger in 2000 and the split-off of Blockbuster in 2004.
The Company followed the guidance in Question 2 of SAB Topic 14D.1 with
respect to calculating historical volatility and accordingly used the annualized
monthly historical volatility over the expected term. Certain historical periods
were removed due to unusual market conditions following events such as September
11, 2001, since the Company believed that historical share prices for a period
after these events were not relevant in estimating expected volatility and these
events are not expected to occur during the expected term of the employee stock
options.
When evaluating its reliance on implied volatility, the Company
considered the factors in Question 3 of SAB Topic 14D.1 and determined that
there was sufficient market activity for its Class B Common Stock and publicly
traded options to purchase its Class B Common Stock. The Company derived an
implied volatility from publicly traded options with a similar exercise price
that were trading near a date corresponding with the grant date of the employee
stock options. Since there were no options trading with a remaining term that
was similar to the terms of the employee options being granted, the Company used
publicly traded options to purchase its Class B Common Stock with a term that
was between one and three years.
In 2006, as further discussed in the Company's response to the Staff's
Comment No. 19, the Company changed its method of estimating expected stock
price volatility to rely exclusively
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 19
on implied volatility as CBS Corp. Class B Common Stock only began trading on
January 1, 2006.
o Tell us how the separation of Viacom impacted your conclusion
on historical volatility. Refer to paragraph A21 of SFAS 123R.
The Company respectfully notes that the separation of former Viacom was
not taken into consideration when estimating historical volatility since
substantially all of the 2005 stock options were granted before the decision was
made to separate former Viacom.
o Tell us the nature of "forward looking estimates of volatility
provided by third party financial institutions." Considering
that you have historical evidence available, tell us why this
additional information is necessary to estimate expected
volatility and how this information impacts your volatility
assumption.
Since publicly traded stock options to purchase CBS Corp. Class B
Common Stock had a maximum term of one to three years, the Company also
consulted with two independent third party investment banking firms to obtain an
estimate of what the indicative implied volatility would be assuming stock
options with the same characteristics as the employee stock options (including
their term) were trading in the market place. The implied volatility obtained
from these estimates was similar to the implied volatility of publicly traded
options to purchase CBS Corp. Class B Common Stock. The Company used a
combination of both historical and implied volatility during 2005 since the
Company believed that historical volatility alone may not be indicative of
expected volatility.
o Tell us if the third party financial institutions are independent.
The Company respectfully notes that the third party financial
institutions were independent.
o While you are not required to make reference to (independent)
third party experts, when you do you should also disclose the
name of the expert and include the consents of the expert. If
you decide to delete your reference to third party expert, you
should revise to provide disclosures that explain the method
and assumptions used by management to determine the valuation.
Revise to comply with this comment in future filings.
The Company respectfully notes that beginning with its second quarter
2006 Form 10-Q, the Company deleted references to third party experts and
included a discussion of the method
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 20
used to determine volatility. Please refer to the Company's response to the
Staff's Comment No. 3 for its proposed disclosure related hereto.
o Tell us why you believe that the use of the "simplified
method" results in a more refined estimate of the expected
term when compared to your historical share option exercise
experience as a reasonable basis for estimating expected term.
Refer to the interpretive response to Question 6 under SAB
Topic 14D.2.
The Company respectfully notes that, in accordance with the guidance in
Question 6 under SAB Topic 14D.2, the "simplified method" of estimating expected
term may be used in the short term when the Company chooses not to rely on its
historical stock option exercise data and alternative information is not easily
available. Beginning in 2005, new option grants were set to expire after 8
years, whereas, historically, options were set to expire 10 years from the date
of grant. As a result, the Company determined that historical stock option
exercise experience may not be indicative of future exercise behavior and
therefore did not provide a reasonable basis for estimating expected term.
Form 10-Q for the Quarterly Period Ended June 30, 2006
- ------------------------------------------------------
Description of Business, page 6
- -------------------------------
18. We note your Television reportable segment is comprised of your
networks, including CBS, UPN, Showtime and CSTV; your television
stations; and your production and syndication business, including
Paramount Television and King World. Please identify for us your
operating segments within your Television reportable segment. Explain
to us in detail how you identified your operating segments with
reference to SFAS 131. Finally, if you have operating segments within
your Television reportable segment, tell us why it is appropriate to
aggregate these operating segments.
The Company respectfully notes that there is one operating segment
within the Television reportable segment. In making that determination, the
Company considered the three criteria in paragraph 10 of SFAS 131, noting that
the criteria in paragraphs 10a (business activities) and 10c (discrete financial
information) are met at the Television operating segment level, as well as at
the Television component level - the components being CBS Television, CBS
Paramount Television, Showtime Networks, and CSTV Networks (acquired in January
2006). However, with respect to the criterion in paragraph 10b, the Company
notes that the Company's Chief Executive Officer ("CEO") is the CODM, consistent
with paragraph 12 of SFAS 131, and in that role, regularly assesses performance
and approves capital allocation decisions only at the
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 21
Television operating segment level and not at the Television component level.
Further, the CODM reviews annual budgets, performance, and planned capital
allocations at the Television operating segment level with the Company's Board
of Directors. Accordingly, the Company respectfully notes that the criterion in
paragraph 10b is not met at the Television component level.
In reaching the conclusion that the Company's CEO is the CODM, the
Company also respectfully notes that while detailed annual budgets that contain
disaggregated information about the above components is reviewed at levels below
that of the CODM, approval of the overall budget for the Company as well as
approvals for all budgeted capital allocations are approved by the Company's
CEO.
In addition to the above considerations, the Company also considered
the guidance in paragraph 14 of SFAS 131. That paragraph states that an
"operating segment [generally] has a segment manager who is directly accountable
to and maintains regular contact with the chief operating decision maker to
discuss operating activities, financial results, forecasts, or plans for the
segment" and that "the term segment manager identifies a function, not
necessarily a manager with a specific title." In the case of the Television
operating segment, the Company's Executive Vice President - Operations, who is
the operating segment manager for Television, regularly reviews and discusses
the operating results and budgets of the Television segment with the CODM.
As explained above, the Company respectfully notes that it does not
have more than one operating segment within its Television reportable segment
and as such, the aggregation criteria in paragraph 17 of SFAS 131 are not
applicable.
Stock Options, page 9
- ---------------------
19. Tell us in detail how you determined the expected stock price
volatility during 2006 and why you believe your approach is
appropriate. Tell us how your approach differs from that employed
during 2005.
The expected stock price volatility was determined using an average of
the implied volatility of publicly traded options to purchase CBS Corp. Class B
Common Stock and the implied volatility of publicly traded options for entities
with similar business characteristics within our industry. The Company chose to
rely exclusively on implied volatility when determining expected volatility due
to the limited amount of historical trading information available for CBS Corp.
Class B Common Stock. In addition, in accordance with Question 4 of SAB Topic
14D.1, the Company chose exclusive reliance on implied volatility as the
following factors are present: the Company
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 22
utilizes a valuation model that is based upon a constant volatility assumption;
the implied volatility is derived from options that are actively traded; the
market prices of both the traded options and underlying shares are measured at a
similar point in time to each other and near a date corresponding with the grant
date; the traded options have a similar exercise price as the employee stock
options; and the remaining term of the traded options on which the estimate is
based was greater than one year.
According to Question 6 of SAB Topic 14D.1 and paragraphs A22 and A32C
of SFAS 123R, newly public entities may base their estimate of expected
volatility on the implied volatility of publicly traded options for similar
entities whose share or option prices are publicly available. As a result, the
Company believes that this method is appropriate.
During 2005, as described in the Company's response to the Staff's
Comment No. 17, prior to the separation of former Viacom, the Company relied on
a combination of historical volatility of former Viacom class B common stock and
the implied volatility of publicly traded options to purchase former Viacom
class B common stock as there was sufficient historical information and trading
history of former Viacom stock options available.
Please refer to the Company's response to the Staff's Comment No. 3 for
its proposed disclosure related hereto.
* * * *
We hereby acknowledge on behalf of the Company that:
o The Company is responsible for the adequacy and accuracy of
the disclosure in the filings;
o Staff comments or changes to disclosure in response to Staff
comments do not foreclose the Commission from taking any
action with respect to the filings; and
o The Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Ms. Kathryn T. Jacobson
Securities and Exchange Commission October 4, 2006
Page 23
If you have any questions concerning the matters referred to in this
letter, please call the undersigned at (212) 848-7325.
Sincerely,
/s/ Stephen T. Giove
Stephen T. Giove
cc: Leslie Moonves, President and Chief Executive Officer
Fredric G. Reynolds, Executive Vice President and Chief Financial Officer
Susan Gordon, Senior Vice President, Controller and Chief Accounting
Officer
Louis J. Briskman, Executive Vice President and General Counsel
Charles K. Gifford, Chairman of the Audit Committee
Robert Conklin, PricewaterhouseCoopers LLP