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DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION <br />Description of Business<br />Viacom Inc. including its consolidated subsidiaries (&#8220;Viacom&#8221; or the &#8220;Company&#8221;) is a leading global entertainment content company, engaging audiences on television, motion picture, Internet, mobile and video game platforms through many of the world&#8217;s best known entertainment brands. Viacom operates through two reporting segments: Media Networks, which includes MTV Networks (&#8220;MTVN&#8221;) and BET Networks (&#8220;BETN&#8221;); and Filmed Entertainment. The Media Networks segment provides entertainment content for consumers in key demographi cs attractive to advertisers, content distributors and retailers. The Filmed Entertainment segment produces, finances and distributes motion pictures and other entertainment content under the Paramount Pictures, Paramount Vantage, Paramount Classics, MTV Films and Nickelodeon Movies brands. The Filmed Entertainment segment also continues to release certain pictures under the DreamWorks brand. It also acquires films for distribution and has distribution relationships with third parties.<br />Basis of Presentation<br />Accounting Changes<br />Noncontrolling Interests<br />In December 2007, the Financial Accounting Standards Board (the &#8220;FASB&#8221;) issued new guidance which establishes and provides accounting and reporting standards for the noncontrolling interest in a consolidated subsidiary and for the deconsolidation of a subsidiary. The Company has adopted the provisions under this guidance beginning January&#160;1, 2009, via retrospective application of the pr esentation and disclosure requirements. The retrospective impact of applying this guidance was the reclassification of $5 million from mezzanine equity to noncontrolling interests as of December 31, 2006.<br /><br />In conjunction with its adoption of the new guidance for noncontrolling interests, the Company adopted the guidance for redeemable securities. The redeemable security guidance is applicable to all noncontrolling interests where the Company is subject to a put option under which it may be required to repurchase an interest in a consolidated subsidiary from the noncontrolling interest holder. The Company is currently subject to a redeemable put option for an international subsidiary payable in a foreign currency which expires in 2011. At December 31, 2009 and 2008, the redemption value of the put was approximately $168 million and $148 million, respectively, and is reflected in the Consolidated Balance Sheets as Redeemable noncontrolling interest. The retrospective impact of applyi ng this guidance was a reduction to opening Retained earnings of $194 million and a reduction to Accumulated other comprehensive income (loss) in the Consolidated Balance Sheet of $10 million as of December 31, 2006. See Note 17 for additional information on the activity related to the redeemable noncontrolling interest.<br /><br />Accounting for Uncertainty in Income Taxes<br />In July&#160;2006, the FASB issued additional guidance which clarifies the accounting for uncertainty in income taxes recognized in the Company&#8217;s financial statements. The revised guidance also prescribes a recognition threshold and measurement model for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.<br /><br />The Company adopted the provisions under this guidance on January&#16 0;1, 2007. As a result of the implementation, the Company recognized a $9 million increase in unrecognized income tax benefits, primarily related to state income tax matters, along with $14 million of related potential interest and penalties. The items were recorded as Other liabilities&#8212;noncurrent with a corresponding reduction to Retained earnings in the Consolidated Balance Sheet as of January 1, 2007.<br />&#160;<br />Subsequent Events<br />The Company has performed an evaluation of subsequent events through February 11, 2010, which is the date the financial statements were issued.<br /><br />Reclassification<br />Certain amounts have been reclassified to conform to the 2009 presentation.<br /></p></div> <div style="font-size:12pt"><p>VIACOM INC. <br />NOTES TO CONSOLIDATED FINANCIAL STATEMENTS<br />(continued)<br /><br /></p><p>NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES <br />Principles of Consolidation<br />The consolidated financial statements of the Company include the accounts of Viacom Inc., its subsidiaries and variable interest entities (VIEs) where the Company is considered the primary beneficiary, after elimination of intercompany accounts and transactions. Disclosure regarding the Company&#8217;s participation in VIEs is included in Note 3. Investments in business entities in which the Company lacks control but does have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method. The Company&#8217;s proportionate share of net income or loss of the enti ty is recorded in Equity in net losses of investee companies in the Consolidated Statements of Earnings. Related party transactions between the Company and CBS Corporation, National Amusements Inc. (&#8220;NAI&#8221;) and Midway Games, Inc. (&#8220;Midway&#8221;) have not been eliminated.<br />Revenue Recognition<br />The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when it has persuasive evidence of an arrangement, delivery has occurred, the sales price is fixed and determinable, and collectibility is reasonably assured. Determining whether some or all of these criteria have been met involves assumptions and judgments, including the evaluation of multiple element arrangements, that can have a significant impact on the timing and amount of revenue the Company reports.<br />Advertising Revenues<br />Advertising revenue earned by the Media Networks segment is recognized, net of ag ency commissions, when the advertisement is aired and the contracted audience rating is met. Should the advertisement fail to meet the contracted audience rating, the Company establishes a liability referred to as an audience deficiency unit liability. The liability is typically relieved when the audience rating is met through the provision of additional air time for the advertiser.<br />Feature Film Revenues<br />Revenue is recognized from theatrical distribution of motion pictures upon exhibition. For home entertainment product revenue, including sales to wholesalers and retailers, revenue is recognized upon the later of delivery or the date that those products are made widely available for sale by retailers. Revenue from the licensing of feature films and original programming for exhibition in television markets is recognized upon availability for airing by the licensee. Revenue for video-on-demand and similar pay-per-view arrangements are recognized as the feature films are exhibited based on end-customer purchases as reported by the distributor.<br />&#160;<br />Affiliate Fees<br />Affiliate fees are recognized by the Media Networks segment as the service is provided to cable television operators, direct-to-home satellite operators and other distributors.<br />Ancillary Revenues<br />Video game product revenues are evaluated under software revenue recognition guidance. Where a video game provides limited online features at no additional cost to the consumer, the Company generally considers such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, the Company does not defer any revenue related to products containing these limited online features. In instances where online features or additional functionality is considered a substantive deliverable in addition to the software product, the Company recognizes revenue ratably over an estimated service period. This evaluation is performed for each software product that is released.<br />Licensing associated with consumer products is typically recognized utilizing contractual royalty rates applied to sales amounts reported by licensees. Revenue for online transactions, such as electronic downloads of films, programming or product add-ons is recognized when the fee is paid by the online customer to purchase the content, the Company is notified by the online retailer that the product has been downloaded and all other revenue recognition criteria are met. Ancillary online subscription revenues are generally recognized on a straight-line basis over the service period.<br />Gross versus Net Revenue<br />The Company earns and recognizes revenues as a distributor on behalf of third parties. In such cases, determining whether revenue should be reported on a gross or net basis is based on management&#8217;s assessment of whether the Company acts as the principal or agent in the transaction. To the extent the Company acts as the principal in a transaction, revenues are reported on a gross basis. Determining whether the Company acts as principal or agent in a transaction involves judgment and is based on an evaluation of whether the Company has the substantial risks and rewards of ownership under the terms of an arrangement.<br />The Company&#8217;s most significant arrangements are in connection with certain exclusive distribution rights to and home video fulfillment services for the animated feature films produced by DreamWorks Animation SKG, Inc. and the distribution agreements with MVL Productions LLC (&#8220;Marvel&#8221;), DW Funding LLC (&#8220;DW Funding&#8221;) and CBS Corporation. Under the terms of these agreements, the Company is generally responsible for all out-of-pocket costs, primarily comprised of distribution and marketing costs. For the provision of distribution services, the Company generally retains a fee based upon a percentage of gross receipts and recovers expended distribution and marketing costs on a title-b y-title basis prior to any participation payments to the contracting parties of the films, except as pertains to certain contractually agreed upon advance payments. As primary obligor, revenue and related distribution and marketing costs for these arrangements are presented on a gross basis.<br />Sales Returns, Allowances &amp; Uncollectible Accounts<br />The Company records a provision for sales returns and allowances, including price protection incentives, at the time of sale based upon an estimate of future returns, rebates and other incentives (&#8220;estimated returns&#8221;). In determining estimated returns, the Company considers numerous sources of qualitative and quantitative evidence including forecasted sales data, customers&#8217; rights of return, units shipped and units remaining at retail, historical return rates for similar product, current economic trends, competitive environment, promotions and sales strategies. Reserves for accounts receivable are based on amo unts estimated to be uncollectible.<br />Inventory<br />Inventories related to theatrical and original media network programming content (which include direct production costs, production overhead, acquisition costs and development costs) are stated at the lower of amortized cost or fair value.<br /><br />Film inventories, which are included as a component of Inventory, net, in the Consolidated Balance Sheets, are amortized and estimated liabilities for residuals and participations are accrued using an individual-film-forecast-computation method based on the ratio of current period to estimated remaining total gross revenues (&#8220;ultimate revenues&#8221;). Ultimate revenues for feature films include revenues from all sources that are estimated to be earned within ten years from the date of a film&#8217;s initial theatrical release. For acquired film libraries, the Company&#8217;s estimate of ultimate revenues is for a period within 20 years from the date of acquisit ion. These estimates are periodically reviewed and adjustments, if any, will result in changes to inventory amortization rates, estimated accruals for residuals and participations or possibly the recognition of an impairment charge to operating income. The Company has entered into film financing arrangements that involve the sale of a partial copyright interest in a film. Amounts received under these arrangements are deducted from the film&#8217;s cost.<br />The cost of theatrical development projects is amortized over a three-year period unless they are abandoned earlier, in which case these projects are written down to their estimated net realizable value in the period the decision to abandon the project is determined. The Company has a rigorous greenlight process designed to manage the risk of loss or abandonment.<br />The Company acquires rights to programming and produces original programming to exhibit on its media networks which is also included as a component of Inventory, net, in the Consolidated Balance Sheets. The costs incurred in acquiring and producing programs are capitalized and amortized over the license period or projected useful life of the programming if shorter. Original programming development costs are expensed unless a project is greenlit for production. An impairment charge is recorded when the fair value of the original programming is less than the unamortized production cost or the programming is abandoned.<br />Acquired program rights and obligations are recorded based on the gross amount of the liability when the license period has begun, and when the program is accepted and available for airing. Acquired programming is stated at the lower of unamortized cost or net realizable value. Net realizable value of acquired rights programming is evaluated quarterly by the Company on a daypart basis, which is defined as an aggregation of programs broadcast during a particular time of day or an aggregation of programs of a similar type. The Company aggregates simil ar programming based on the specific demographic targeted by each respective program service. Net realizable value is determined by estimating advertising revenues to be derived from the future airing of the programming within the daypart as well as an allocation of affiliate fee revenue to the programming. An impairment charge may be necessary if the Company&#8217;s estimates of future cash flows of similar programming are insufficient or if programming is abandoned.<br />&#160;<br />Merchandising and other inventories are valued at the lower of cost or net realizable value. Cost is determined using the average cost method. Obsolescence reserves are based on estimates of future product demand.<br />Advertising Expense<br />The Company expenses advertising costs as they are incurred. The Company incurred total advertising expenses of $1.295 billion, $1.662 billion and $1.628&#160;billion in 2009, 2008 and 2007, respectively.<br />Business Combinations and Intangibl e Assets Including Goodwill<br />The Company accounts for business combinations using the acquisition method of accounting. Under the acquisition method, once control is obtained of a business, 100% of the assets, liabilities and certain contingent liabilities acquired, including amounts attributed to noncontrolling interests, are recorded at fair value. Goodwill represents the residual difference between the fair value of consideration paid and the net assets acquired, and transaction costs are expensed as incurred. Prior to 2009, the Company accounted for business combinations using the purchase method of accounting, which allocated the consideration to the fair value of the net assets acquired, including intangible assets, with the residual allocated to goodwill.<br /><br />Identifiable intangible assets with finite lives are amortized over their estimated useful lives, which range from 3 to 15 years. Goodwill and identifiable intangible assets with indefinite lives are not amortized , but rather are tested annually for impairment, or sooner when circumstances indicate impairment may exist.<br />Impairment<br />Amortizable intangible assets and other long-lived assets are tested for impairment utilizing an income approach based on undiscounted cash flows upon the occurrence of certain triggering events and, if impaired, written down to fair value. Goodwill and indefinite-lived intangible assets are tested for impairment using a fair value approach at the reporting unit level for goodwill. A reporting unit is the operating segment, or a business which is one level below that operating segment. For all periods presented, the Company&#8217;s reporting units are consistent with its operating segments in all material respects.<br />&#160;<br />Comprehensive Income<br />Comprehensive income includes net earnings, foreign currency translation adjustments, amortization of amounts related to defined benefit plans, unrealized gains or losses on certain deri vative financial instruments, and unrealized gains and losses on investments in equity securities which are publicly traded.<br />Earnings per Common Share<br />Basic earnings per common share excludes potentially dilutive securities and is computed by dividing Net earnings attributable to Viacom by the weighted average number of common shares outstanding during the period. The determination of diluted earnings per common share includes the potential dilutive effect of stock options, restricted share units (RSUs) and performance share units (PSUs) based upon the application of the treasury stock method. 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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.<br /><br />Uncertain tax positions are recorded based on a cumulative probability assessment if it is more likely than not &#8211; a more than 50 percent chance &#8211; that the tax position will be sustained upon examination by the appropriate tax authority with full knowledge of all relevant information. Amounts recorded for uncertain tax positions are periodically assessed, including the evaluation of new facts and circumstances, to ensure sustainability of the position. Interest and penalties related to uncertain tax positions are included in the Provision for income taxes in the Consolidated Statements of Earnings. Liabilities for uncertain tax positions are classified as Other liabilities &#8211; current or noncurrent in the Consolidat ed Balance Sheets based on when they are expected to be paid.<br />Pension and Other Postretirement Benefits<br />The Company&#8217;s defined benefit pension plans principally consist of both funded and unfunded noncontributory plans covering the majority of domestic employees and retirees. Pension and other postretirement benefits are based on formulas that reflect the employees&#8217; years of service and compensation during their employment period and participation in the plans. The unfunded plans are currently frozen to future benefit accruals. The expense recognized by the Company is determined using certain assumptions, including the expected long-term rate of return, discount rate and rate of compensation increases, among others. The Company recognizes the funded status of its defined benefit and other postretirement plans (other than a multiemployer plan) as an asset or liability in the Consolidated Balance Sheets and recognizes changes in the funded status in the year in whic h the changes occur through Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.<br />Property and Equipment<br />Property and equipment is stated at cost. Depreciation is calculated using the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of their useful lives or the life of the lease. Costs associated with repairs and maintenance of property and equipment are expensed as incurred.<br />Software Development Costs<br />The Company capitalizes qualifying software development costs, principally in connection with its video game products, incurred after technological feasibility is established. Costs are not capitalized until the underlying product development is substantially complete, which generally includes the development of a working model.<br />Stock-Based Compensation<br />The Company measures the cost of employee services received in exchange for an award of equity instruments b ased on the grant-date fair value of the award. The fair value received is recognized in earnings over the period during which an employee is required to provide service. The Company elected the modified prospective application method in adopting the fair value accounting model in 2006, which required the Company to recognize the unvested portion of the grant date fair value of awards issued prior to January 1, 2006 over the remaining vesting period. The Company utilizes the long-form method for calculating the historical pool of windfall tax benefits and excludes the impact of pro-forma deferred tax assets on partially and fully vested awards at adoption date for purposes of calculating assumed proceeds under the treasury stock method for diluted earnings per share.<br /><br />Securitizations<br />The Company sells to investors on a revolving non-recourse basis a percentage ownership interest in certain accounts receivable through wholly-owned special purpose entities. The receivable sec uritization programs are accounted for as sales. The Company retains interests in the trade accounts receivable that have not been sold to investors, and these retained interests are included in the Consolidated Balance Sheets under the caption Receivables, net. The retained interests in the receivables are shown at amounts expected to be collected by the Company, and such carrying value approximates the fair value of the Company&#8217;s retained interests. Under the securitization arrangements, the Company absorbs credit risk on the entire pool of accounts receivable which underlie the securitization up to the level of its retained interest. The Company&#8217;s historical level of charges for credit risk related to receivables has not been material to the Company&#8217;s financial position or results of operations.<br />Viacom is compensated for its services in the collection and administration of the securitized receivables. No servicing asset or liability has been recorded because the fees received for servicing the receivables approximates the related costs. Losses on the sale of receivables represent the financial cost of funding under the securitization programs and are included in Other items, net in the Consolidated Statements of Earnings.<br />Investments<br />The Company&#8217;s investments primarily consist of investments in affiliates and other investments. Investments in affiliates, over which the Company has a significant influence, but not a controlling interest, are accounted for using the equity method. Other investments are carried at fair value, to the extent publicly traded, with unrealized gains and losses recorded in other comprehensive income, or at cost. The Company monitors its investments for impairment at least annually and makes appropriate reductions in carrying values if the Company determines that an impairment charge is required based on qualitative and quantitative information. The Company&#8217;s investments are included in Other ass ets - noncurrent in the Consolidated Balance Sheets.<br />Guarantees<br />At the inception of a guarantee, the Company recognizes a liability for the fair value of an obligation assumed by issuing the guarantee. For guarantees which qualify as financial instruments, the liability is subsequently remeasured at fair value on a recurring basis and the change in fair value is reported as a component of Other items, net in the Consolidated Statements of Earnings. For guarantees which do not qualify as financial instruments, the liability is subsequently reduced as utilized or extinguished and increased if there is a probable loss associated with the guarantee which exceeds the value of the recorded liability.<br />Restructuring Costs<br />Restructuring costs associated with exit or disposal activities are recorded at fair value and recognized when the costs are incurred.<br />Derivative Financial Instruments<br />Derivative financial instruments are recorded on the Consolidat ed Balance Sheets as assets or liabilities and measured at fair value. For derivatives designated as hedges of the fair value of assets or liabilities, the changes in fair value of both the derivatives and the hedged items are recorded in current earnings as part of Other items, net in the Consolidated Statements of Earnings. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives is recorded in Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets and subsequently recognized in earnings when the hedged items impact income. Changes in the fair value of derivatives not designated as hedges and the ineffective portion of cash flow hedges are recorded in earnings. The Company does not hold or enter into financial instruments for speculative trading purposes.<br />&#160;<br />Foreign Currency Translation<br />Assets and liabilities of subsidiaries with a functional currency other than U.S. dollar are translated into U.S. dollars using period-end exchange rates, while results of operations are translated at average exchange rates during the period. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive income (loss) in the Consolidated Balance Sheets. Foreign subsidiaries using the United States (&#8220;U.S.&#8221;) Dollar as the functional currency include remeasurement adjustments in earnings.<br /><br />Prior to January&#160;1, 2009 the foreign operations of the Filmed Entertainment segment were consolidated using the United States (&#8220;U.S.&#8221;)&#160;Dollar as the functional currency as the majority of the cash inflows and outflows of these subsidiaries were denominated in U.S. Dollars. Due to changes in the terms and conditions of significant operating arrangements at the Filmed Entertainment segment, effective January&#160;1, 2009 the majority of the cash inflows and outflows of these foreign opera tions are now denominated in local currency. Accordingly, substantially all of the Company&#8217;s foreign operations are consolidated using the local currency as the functional currency.<br /><br />Fair Value Measurements<br />Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This clarified definition of fair value was adopted prospectively for all recurring measurements of fair value beginning on January 1, 2008, and for all nonrecurring measurements of fair value beginning on January 1, 2009. The framework for measuring fair value provides a hierarchy that prioritizes the inputs to valuation techniques used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The three levels of the fair value hierarchy are as follows:<br /><br />Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.<br /><br />Level 2 - Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; inputs that are derived principally from or corroborated by observable market data by correlation or other means.<br /><br />Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.<br /><br />The Company&#8217;s recurring fair value measures relate to marketable securities and derivative instruments, including a financial guarantee. The Company&#8217;s non-financial assets and non-financial liabilities subject to non-recurring measures incl ude goodwill and intangibles.<br />Treasury Stock<br />Treasury stock is accounted for using the cost method.<br />Cash and Cash Equivalents<br />All highly liquid investments with maturities of three months or less at the date of purchase are considered to be cash equivalents.<br /><br />Use of Estimates<br />Preparing financial statements in conformity with generally accepted accounting principles (&#8220;GAAP&#8221;) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the reporting periods presented. Significant estimates inherent in the preparation of the accompanying Consolidated Financial Statements include estimates of film ultimate revenues, product returns, amount of receivables expected to be collected, potential outcome of uncertain tax positions, determination of fair value of acquired assets an d liabilities, determination of fair value of stock based compensation and determination of pension benefit assumptions. Estimates are based on past experience and other considerations reasonable under the circumstances. Actual results may differ from these estimates.<br /></p></div> <div style="font-size:12pt"><p>NOTE 3. ACQUISITIONS &amp; INVESTMENTS<br /><br />In 2009, 2008 and 2007, the Company invested $133 million, $296 million and $70 million, respectively, in acquisitions and investments. In October 2009, the Company acquired the global rights to the Teenage Mutant Ninja Turtles for $64 million. Included in the 2008 amount is $150 million for an earn-out payment, subject to adjustment, related to the Company&#8217;s acquisition of Harmonix Music Systems Inc. (&#8220;Harmonix&#8221;). The acquisition agreement provided that to the extent financial results exceeded specific contractual targets against a defined gross profit metric through 2008, former Harmonix shareholders are eligible for incremental earn-out payments with respect to the years ended December&#160;31, 2007 and December&#160;31, 2008. See Note 16 for additional information.< br />The pro forma impact of business combinations completed during each of the years ended December&#160;31, 2009, 2008 and 2007, either individually or in the aggregate, were not material to the Company.<br />At December&#160;31, 2009 and 2008, the Company had equity method investments totaling $186 million and $238 million, respectively. The Company holds an equity interest in EPIX, a joint venture formed with Lionsgate and Metro-Goldwyn Mayer in April 2008 to exhibit certain motion pictures on behalf of the equity partners' movie studios through a new premium pay television channel, video-on-demand service and Internet site, of approximately 50%. In November 2007, the Company established a joint venture (&#8220;Viacom 18&#8221;) with Network18 Fincap Limited (&#8220;Network18&#8221;), a leading entertainment and media company in India, through the Company&#8217;s contribution of its existing MTV Networks&#8217; India operations, with cash and other consideration contributed to the venture by Network18. In August 2007, the Company contributed a $230 million non-interest bearing note payable and certain assets related to MTV&#8217;s URGE digital music service for a 49% stake in Rhapsody America LLC (&#8220;Rhapsody&#8221;), a newly formed venture with RealNetworks, Inc.<br />During 2007, the Company sold its non-controlling investment in MTV Russia, an international equity affiliate, for $191 million and recognized a pre-tax gain on the sale of $151 million.<br />&#160;<br />Variable Interest Entities<br />In the normal course of business, the Company enters into joint ventures or makes investments with business partners that support its underlying business strategy and provide it the ability to enter new markets to expand the reach of its brands, develop new programming and/or distribute its existing content. In certain instances, an entity in which the Company makes an investment may qualify as a variable interest entity. I n determining whether the Company is the primary beneficiary of those VIEs, it considers quantitative and qualitative factors as further described below.<br />Unconsolidated Variable Interest Entities<br />The Company has a number of unconsolidated investments in which it holds a non-controlling ownership interest, including but not limited to Rhapsody, EPIX and Viacom 18. These arrangements are typically entered into with strategic partners and generally contain the following governance provisions: (i)&#160;the funding of the venture is provided by the equity holders pro rata based on their ownership interest; (ii)&#160;the investments are initially funded to meet short-term working capital requirements with funding commitments provided by the partners to fund future operating needs; (iii)&#160;commercial arrangements between the Company, the venture and other related parties are negotiated between the parties and are believed to be at market rates; and (iv)&#160;voting rights a re consistent with the equity holders&#8217; rights and obligations to share in the profits and losses of the variable interest entity. In connection with these investment arrangements the Company does not hold a majority of the equity interest, nor does it absorb a majority of the expected losses or residual returns, and therefore does not qualify as the primary beneficiary. Accordingly, these investments are accounted for under the equity method of accounting and are included in Other assets-noncurrent in the Consolidated Balance Sheets. In these arrangements, the Company&#8217;s risk of loss is typically limited to its carrying value and future funding commitments.<br />The Company acquired 100% of DreamWorks on January&#160;31, 2006, which included a live-action film library that was legally owned by DW Funding, a wholly owned subsidiary of DreamWorks. In May 2006, the Company sold a 51% controlling interest in DW Funding to Soros Strategic Partners LP (&#8220;Soros&#8221;) a nd Dune Entertainment II LLC (&#8220;Dune&#8221;) and retained a 49% interest. The Company acquired DreamWorks with the intention of selling the live-action film library close to or concurrently with the closing of the acquisition, but ultimately, the buyers sought terms which called for the Company to retain an interest in the film library. No gain or loss was recognized on the sale. The Company has certain rights and obligations to reacquire the library in 2011. Specifically, the Company is subject to a put option where it can be required to repurchase the 51% interest in DW Funding it does not own at fair market value. The Company also has a corresponding fair market value call option. In connection with the sale, DW Funding entered into senior borrowings with a third party and mezzanine financings with Soros and Dune, the proceeds of which were utilized to fund the cash paid to the Company for the sale of its controlling interest in DW Funding. The Company has guaranteed $204 million of ce rtain unsecured mezzanine financing of DW Funding provided by Soros and Dune. At December 31, 2009 and 2008, the Company had $54 million and $53 million recorded for its guarantee related to DW Funding. See Note 7 for additional information. Additionally, in connection with the sale Paramount and its international affiliates retained the exclusive distribution rights to the live-action film library for a five-year period, renewable under certain circumstances, for which Paramount receives distribution fees.<br />Based upon the level of equity investment at risk, the Company determined that DW Funding was a VIE. In order to assess whether the Company would absorb the majority of expected losses, the Company quantitatively computed the expected losses to be absorbed by each of the variable interest holders and determined that the variable interest which it held, including the debt guaranteed, would not result in the Company absorbing the majority of expected losses of DW Funding. Based on the quantita tive analysis and after considering qualitative factors including the nature and purpose of the transaction, the Company determined it was not the primary beneficiary of DW Funding. As a result, the Company accounts for its investment under the equity method of accounting.<br />At December&#160;31, 2009 and 2008, the Company&#8217;s aggregate investment carrying value in VIEs was $144 million and $180 million, respectively, it has future contractual funding commitments of $177 million at December 31, 2009. The impact of the Company&#8217;s unconsolidated VIEs on its Consolidated Financial Statements, including related party transactions, is further described in Note 15.<br /><br />Consolidated Variable Interest Entities<br />In April 2008, MTV Networks&#8217; Hispanic-oriented cable network MTV Tr3s acquired an interest in a television broadcaster to expand its reach to Hispanic audiences in the Los Angeles and other southwest markets where the target company held bro adcast licenses. The Company acquired a non-voting equity interest in the broadcaster of approximately 32% and has certain rights and funding obligations related to its investment, including the guarantee of third-party bank debt. The Company has determined that it is the primary beneficiary as it will absorb the majority of losses through its equity interest and via its guarantee of third-party bank debt. Accordingly, the Company consolidates the entity. As of December 31, 2009 and 2008, there are $43 million and $103 million of assets and $85 million and $78 million of liabilities, respectively, in respect of this entity included within the Company&#8217;s Consolidated Balance Sheets. The operating results of this consolidated VIE in 2009 included a $60 million non-cash impairment charge related to certain broadcast licenses held by the entity. The impact to Net earnings attributable to Viacom was a reduction of $19 million, with the remaining $41 million allocated to the noncontrolling interest. E xcept for the 2009 impairment charge, the revenues, expenses and operating income for 2009 and 2008 were not significant to the Company.<br /></p></div> <div style="font-size:12pt"><p>NOTE 4. 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STOCK REPURCHASE PROGRAM<br /><br />Since December 31, 2008, the Company has not purchased any shares under its stock repurchase program but may resume purchases in the future based on a variety of factors. At December 31, 2009, there is $1.275 billion available to make purchases under the program. From June 23, 2007 to December 31, 2008, the Company repurchased shares of its Class B common stock under a $4.0 billion stock repurchase program. Prior to June 23, 2007 the Company repurchased shares of its Class B common stock under a $3.0 billon stock repurchase program.<br /><br />For the year ended December 31, 2008, 35.1 million shares were repurchased in the open market under the $4.0 billion program for an aggregate purchase price of $1.099 billion and an additional 3.6 million shares were purchased under the NAIRI Agreement with NAI for an agg regate purchase price of $124 million. The NAIRI Agreement was terminated October 10, 2008.<br /></p></div> <div style="font-size:12pt"><p>NOTE 11. STOCK BASED COMPENSATION <br />The Company&#8217;s 2006 Long-Term Management Incentive Plan (the &#8220;LTMIP&#8221;) provides for various types of equity awards, including stock options, stock appreciation rights, restricted shares, restricted share units (&#8220;RSUs&#8221;), unrestricted shares of Class B common stock, phantom shares, dividend equivalents, performance awards (including performance share units (&#8220;PSUs&#8221;)) and other awards, or a combination of any of the above. In addition, the Company&#8217;s director equity plans provide for automatic grants of stock options and RSUs to outside directors each year.<br />The Company has primarily granted stock options and RSUs to employees. Certain senior executives have also received PSUs. Stock options g enerally vest ratably over a four-year period from the date of grant and expire eight to ten years after the date of grant. RSUs typically vest ratably over a four-year period from the date of the grant. The Company grants PSUs with the target number of PSUs granted to each executive representing the right to receive one share of Class B common stock, subject to adjustment depending on the total shareholder return (&#8220;TSR&#8221;) of the Company&#8217;s Class B common stock measured against the TSR of the common stock of the companies comprising the S&amp;P 500 Index at the start of the measurement period. The measurement period is at least three years. The number of shares of Class B common stock an executive is entitled to receive at the end of the applicable measurement period ranges from 0% to 200/300% of the target PSU award. 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The discount rate reflects the estimated rate at which the pension benefit obligations could effectively be settled. The Company used investment grade corporate bond yields to support its discount rate assumption. The expected long-term returns on plan assets were based upon the target asset allocation and return estimates for equity and debt securities. The expected rate of return for equities was based upon the risk-free rate plus a premium for equity securities. The expected return on debt securities was based upon an analysis of current and historical yields on portfolios of similar quality and duration. A decrease in the discount rate or a decrease in the expected rate of return on plan assets would increase pension expense. The estimated impact of a 25 basis point change in the discount rate would be a change of approximately $3&#160;million on 2009 pension expense and would change the projected benefit obligation by approximately $22 million. 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A one percentage point change in assumed health care cost trend rates would not have any significant impact on the Company&#8217;s total service and interest cost and accumulated postretirement benefit obligation. <br />Investment Policies and Strategies<br />The Viacom Investments Committee is responsible for managing the investment of assets under the funded pension plan in a prudent manner with regard to preserving principal while providing reasonable returns. The Investments Committee has established investment p olicies through careful study of the returns and risks associated with alternative investment strategies in relation to the current and projected liabilities of the plan, after consulting with an outside investment manager as it deems appropriate. The investment manager&#8217;s role is to provide guidance to the Investments Committee on matters pertaining to the investment of plan assets including investment policy, investment selection, monitoring the plan&#8217;s performance and compliance with the plan&#8217;s investment policies.<br /><br />The investment policy establishes target asset allocations based upon an analysis of the timing and amount of projected benefit payments, the expected returns and risk of the asset classes and the correlation of those returns. The Company&#8217;s practice is to review asset allocations regularly with its investment managers and rebalance as necessary. The range of target asset allocations under the Company&#8217;s investment policy ar e 55-75% equity securities, 25-40% debt securities and 0-10% in cash and other instruments.<br /><br />The investment manager implements the investment policy through investments in mutual funds and other pooled asset portfolios. 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During 2009, approximately $12 million related to these charges was paid out in cash, leaving a remaining liability of $21 million as of December 31, 2009.<br />In the fourth quarter of 2009, the Company recorded a $60 million non-cash impairment charge in the Media Networks segment related to certain broadcast licenses held by a 32%-owned consolidated entity. This charge is included within Depreciation and amortization in the Consolidated Statement of Earnings. The impact to Net earnings attributable to Viacom was a reduction of $19 million. The impairment results from a planned change in strategy of distribution in the affected markets as well as a sustained deterioration in the advertising markets that supported the broadcast licenses. The fair value of the broadcast licenses was determined under an income approach utilizing the projected net cash flows of the licenses, a Level 3 input within the hierarchy set forth in the accounting guidance for fair value measurements.<br />In the fourth quarter of 2008, to better align the Company&#8217;s organization and cost structure with changing economic conditions, the Company undertook a strategic review of its businesses which resulted in an aggregate of $454 million of restructuring and other charges. In addition to broad adverse economic conditions, the strategic review considered the emergence of sustained softness in the advertising market and ratings issues at certain channels in the Media Networks segment, and the Filmed Entertainment segment&#8217;s decision to reduce its future film slate. 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The total amount of unrecognized tax benefits at December 31, 2009, that if recognized would favorably affect the effective tax rate is approximately $284 million. <br />As discussed in Note 2, the Company recognizes interest and penalties accrued related to unrecognized tax benefits as a component of the Provision for income taxes in the Consolidated Statements of Earnings. The Company recognized $33 million, $17 million and $7 million of interest and penalties as a component of the Provision for income taxes in the Consolidated Statements of Earnings for the years ended December 31, 2009, 2008 and 2007, respectively. The Company had accruals of $78 million and $111 million related to interest and penalties recorded as a component of Other liabilities-current and noncurrent in the Consolidated Balance Sheets for the years ended December 31, 2009 and 2008, respectively.<br />&#160;<br />The Company and its subsidiaries file income tax returns with the Internal Revenue Service (&#8220;IRS&#8221;) and various state and international jurisdictions. For jurisdictions in which tax filings are prepared, with few exceptions, the Company is no longer subject to income tax examinations by state, local or international tax authorities for years through 2000, and by the IRS for years through 2005. For years ending on or prior to December&#160;31, 2005, the Company filed consolidated and combined tax returns with CBS Corporation. The IRS and New York State concluded their examinations of the Viacom and CBS Corporation U.S. consolidated and state combined income tax returns through 2005 in the third and fourth quarters of 2009. In connection with the separation and pursuant to the terms of the Tax Matters Agreement, Viacom and CBS Corporation agreed to each be financially responsible for 50% of any potential income tax liabiliti es that arose in 2005 or earlier, to the extent such potential income tax liabilities were not directly attributable to their respective business operations. Currently, there are no material potential income tax liabilities still in dispute. The IRS began its examination of the Company&#8217;s 2006 and 2007 U.S. consolidated federal income tax returns in the first quarter of 2009. Tax authorities are also conducting examinations of Viacom subsidiaries in various international jurisdictions, such as the United Kingdom and various states, including New York. Due to potential resolution of unrecognized tax positions involving multiple tax periods and jurisdictions, it is reasonably possible that a reduction of up to $70&#160;million of unrecognized income tax benefits may occur within 12&#160;months, some of which, depending on the nature of the settlement may affect the Company&#8217;s income tax provision and therefore benefit the resulting effective tax rate. The majority of these uncerta in tax positions, when recognized in the financial statements, would be recorded in the Consolidated Statements of Earnings as part of the Provision for income taxes. The actual amount could vary significantly depending on the ultimate timing and nature of any settlements.<br /></p></div> <div style="font-size:12pt"><p>NOTE 15. RELATED PARTY TRANSACTIONS <br />NAI, through NAIRI, Inc., is the controlling stockholder of both Viacom and CBS Corporation. NAI also held a controlling interest in Midway until November 28, 2008. Sumner&#160;M.&#160;Redstone, the Chairman, Chief Executive Officer and controlling shareholder of NAI, is the Executive Chairman of the Board and Founder of both Viacom and CBS Corporation. In addition, Shari Redstone, who is Sumner Redstone&#8217;s daughter, is the President of NAI, and the Vice Chair of the Board of both Viacom and CBS Corporation. George Abrams, one of the Company&#8217;s directors, serves on the boards of both NAI and Viacom, and Frederic Salerno, another of the Company&#8217;s directors, serves on the boards of both Viacom and CBS Corporation. Philippe Dauman, the Company&#8217;s President and Chi ef Executive Officer, also serves on the boards of both NAI and Viacom.<br />Since the fall of 2008, Mr. Dauman has recused himself from activity as an NAI board member with respect to all matters relating to the restructuring of NAI&#8217;s indebtedness. In addition, NAI&#8217;s board of directors has created a special committee that does not include Mr. Redstone or Mr. Dauman in order to consider issues that may be perceived to create a conflict between their responsibility to Viacom and to NAI. Similarly, the Company&#8217;s independent directors act on behalf of the Board of Directors when appropriate to address such issues. Transactions between Viacom and related parties are typically overseen by the Company&#8217;s Governance and Nominating Committee.<br />NAI licenses films in the ordinary course of business for its motion picture theaters from all major studios, including Paramount. During the years ended December 31, 2009, 2008 and 2007, Paramount earned revenues from NAI in connection with these licenses in the aggregate amounts of approximately $34 million, $36 million and $36 million, respectively.<br />In connection with the Company&#8217;s stock repurchase programs, the Company entered into an agreement with NAIRI Inc. (&#8220;NAIRI&#8221;), a wholly-owned subsidiary of NAI, and NAI under which the Company agreed to buy from them, and they agreed to sell to the Company, a number of shares of Viacom Class B common stock each month such that their ownership percentage of Viacom Class A common stock and Class B common stock (considered as a single class) would not increase as a result of the Company&#8217;s repurchase of shares under its stock repurchase program. In 2008 and 2007, the Company repurchased 3.6 million and 6.0 million shares, respectively, of Class B common stock from NAIRI for an aggregate purchase price of $124 million and $246 million, respectively. The NAIRI Agreement was terminated in October 2008.<br />Viacom and CBS Cor poration Related Party Transactions<br />In the normal course of business, the Company is involved in transactions with CBS Corporation and its various businesses (&#8220;CBS&#8221;) that result in the recognition of revenues and expenses by Viacom. 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COMMITMENTS AND CONTINGENCIES<br />Commitments<br />The Company&#8217;s commitments primarily consist of programming and talent commitments, operating lease arrangements, purchase obligations for goods and services and future funding commitments related to equity investees, including a put option with respect to DW Funding. See Note 3 for additional information relating to the Company&#8217;s future funding commitments. These arrangements result from the Company&#8217;s normal course of business and represent obligations that may be payable over several years. Additionally, the Company is subject to a redeemable put option, payable in a foreign currency, with respect to an international subsidiary which expires in 2011 and is classified as Redeemable noncontrolling interest in the Consolidated Balance Sheet s. 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align="left" width="50">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="50">&#160;</td><td height="6" style="border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="50">&#160;</td><td height="6" style="border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="6" style="border-top: 3px double #000000;border-bottom: 2px solid #000000;" align="left" width="50">&#160;</td></tr></table></div> <div style="font-size:12pt"><p><br />NOTE 18. REPORTING SEGMENTS<br />&#160;<br />The following tables set forth the Company&#8217;s financial performance by reporting segment. The Company&#8217;s reporting segments have been determined in accordance with the Company&#8217;s internal management structure. The Company manages its operations through two reporting segments: (i)&#160;Media Networks and (ii)&#160;Filmed Entertainment. Typical intersegment transactions include the purchase of advertising by the Filmed Entertainment segment on Media Networks&#8217; properties and the purchase of Filmed Entertainment&#8217;s feature films exhibition rights by Media Networks. The elimination of such intercompany transactions in the consolidated financial statements is included within eliminations in the table below. 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style="border-top: 1px solid #000000;" align="left" width="10">&#160;</td><td height="4" style="border-top: 1px solid #000000;" align="center" width="60"><b>&#160;</b></td><td height="4" style="border-top: 1px solid #000000;" align="center" width="10"><b>&#160;</b></td><td height="4" style="border-top: 1px solid #000000;" align="center" width="10"><b>&#160;</b></td><td height ="4" style="border-top: 1px solid #000000;" align="center" width="60"><b>&#160;</b></td><td height="4" style="border-top: 1px solid #000000;" align="left" width="10">&#160;</td><td height="4" style="border-top: 1px solid #000000;" align="center" width="60"><b>&#160;</b></td></tr><tr><td height="13" width="511" align="left">Land</td><td height="13" width="10" align="center"><b>$</b></td><td height="13" width="60" align="right"><b> 246&#160;</b></td><td height="13" width="10" align="left"><b>&#160;</b></td><td height="13" width="10" align="center">$</td><td height="13" width="60" align="right"> 245&#160;</td><td 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width="60">&#160;</td><td height="13" style="border-bottom: 2px solid #000000;" align="left" width="10">&#160;</td><td height="13" style="border-bottom: 2px solid #000000;" align="left" width="60">&#160;</td></tr></table><p>Depreciation expense, including capitalized lease amortization, was $226 million, $264 million and $250 million in 2009, 2008 and 2007, respectively. 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