AT&T Wireless 2011 Annual Report Download - page 47

AT&T Inc. 45
indefinite-lived trade name used by the Advertising
Solutions segment. For the Wireless and Wireline
segments, in the event of a 10% drop in the fair values
of the reporting units, the fair values would have still
exceeded the book values of the reporting units and
additional testing would still have not been necessary.
Wireless FCC licenses are tested for impairment on an
aggregate basis, consistent with the management of the
business on a national scope. As in prior years, we
performed our test of the fair values of FCC licenses using
a discounted cash flow model (the Greenfield Approach).
The Greenfield Approach assumes a company initially
owns only the wireless FCC licenses, and then makes
investments required to build an operation comparable to
the one that currently utilizes the licenses. We utilized a
17-year discrete period to isolate cash flows attributable
to the licenses, including modeling the hypothetical
build-out. The projected cash flows are based on certain
financial factors, including revenue growth rates, EBITDA
margins and churn rates. We expect wireless revenue
growth to trend down from our 2011 growth rate of 8.1%
to a long-term growth rate that reflects expected long-
term inflation trends. We expect our churn rates to decline
in 2012 from our rate of 1.37% in 2011, in line with
expected trends in the industry but at a rate comparable
with industry-leading churn. EBITDA margins should
continue to trend at about 40%.
This model then incorporates cash flow assumptions
regarding investment in the network, development of
distribution channels and the subscriber base, and other
inputs for making the business operational. We based the
assumptions, which underlie the development of the
network, subscriber base and other critical inputs of the
discounted cash flow model, on a combination of average
marketplace participant data and our historical results,
trends and business plans. We also used operating metrics
such as capital investment per subscriber, acquisition costs
per subscriber, minutes of use per subscriber, etc., to
develop the projected cash flows. Since we included the
cash flows associated with these other inputs in the
annual cash flow projections, the present value of the
unlevered free cash flows of the segment, after investment
in the network, subscribers, etc., is attributable to the
wireless FCC licenses. The terminal value of the segment,
which incorporates an assumed sustainable growth rate, is
also discounted and is likewise attributed to the licenses.
We used a discount rate of 9.0%, based on the optimal
long-term capital structure of a market participant and
its associated cost of debt and equity, to calculate the
present value of the projected cash flows. This discount
rate is also consistent with rates we use to calculate the
present value of the projected cash flows of licenses
acquired from third parties.
Goodwill, wireless FCC licenses, and other trade names
are not amortized but tested annually for impairment.
We conduct our impairment tests as of October 1.
We test goodwill on a reporting unit basis, and our
reporting units coincide with our segments, except for
certain operations in our Other segment. If, due to
changes in how we manage the business, we move a
portion of a reporting unit to another reporting unit, we
determine the amount of goodwill to reallocate to the
new reporting unit based on the relative fair value of
the portion of the business moved and the portion of
the business remaining in the reporting unit. The goodwill
impairment test is a two-step process. The first step
involves determining the fair value of the reporting unit
and comparing that measurement to the book value. If the
fair value exceeds the book value, then no further testing
is required. If the fair value is less than the book value
(i.e., an indication of impairment exists), then we perform
the second step.
In the second step, we determine the fair values of all of
the assets and liabilities of the reporting unit, including
those that may not be currently recorded. The difference
between the sum of all of those fair values and the
overall reporting unit’s fair value is a new implied goodwill
amount, which we compare to the recorded goodwill.
If implied goodwill is less than the recorded goodwill,
then we record an impairment of the recorded goodwill.
The amount of this impairment may be more or less than
the difference between the overall fair value and book
value of the reporting unit. It may even be zero if the fair
values of other assets are less than their book values.
As shown in Note 6, more than 99% of our goodwill
resides in the Wireless, Wireline, and Advertising Solutions
segments. For each of those segments, we assess their fair
value using a market multiple approach and a discounted
cash flow approach. Our primary valuation technique is to
determine enterprise value as a multiple of a company’s
Earnings Before Interest, Taxes, and Depreciation and
Amortization expenses (EBITDA). We determined the
multiples of the publicly traded companies whose services
are comparable to those offered by the segment and
then calculate a weighted average of those multiples.
Using those weighted averages, we then calculated fair
values for each of those segments. We also perform a
discounted cash flow analysis as a secondary test of fair
value to corroborate our primary market multiple test.
Except for the Advertising Solutions segment, the
calculated fair value of the reporting unit exceeded book
value in all circumstances and no additional testing was
necessary. As a result of our 2011 impairment test, we
recorded a goodwill impairment charge in the Advertising
Solutions segment due to declines in the value of our
directory business and that industry (see Note 6).
We also recorded a corresponding impairment to an