AT&T Wireless 2012 Annual Report Download - page 47

AT&T Inc. | 45
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, all of our goodwill resides in the
Wireless and Wireline segments. For each of those
segments, we assess their fair value using an income
approach (also known as a discounted cash flow) and a
market multiple approach. The income approach utilizes
a 10-year cash flow projection with a perpetuity value
discounted using an appropriate Weighted Average Cost
of Capital (WACC) rate for each reporting unit. The market
multiple approach uses 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 calculated a weighted-average of those
multiples. Using those weighted averages, we then
calculated fair values for each of those segments. In
2012, the calculated fair value of the reporting unit
exceeded book value in all circumstances and no
additional testing was necessary. 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. 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 indefinite-lived trade name used by the former
Advertising Solutions segment.
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
be recorded during the fourth quarter, unless an earlier
remeasurement is required. Should actual experience
differ from actuarial assumptions, the projected pension
benefit obligation and net pension cost and accumulated
postretirement benefit obligation and postretirement
benefit cost would be affected in future years. Note 11
also discusses the effects of certain changes in
assumptions related to medical trend rates on retiree
healthcare costs.
Depreciation Our depreciation of assets, including use
of composite group depreciation and estimates of useful
lives, is described in Notes 1 and 5. We assign useful
lives based on periodic studies of actual asset lives.
Changes in those lives with significant impact on the
financial statements must be disclosed, but no such
changes have occurred in the three years ended
December 31, 2012. However, if all other factors were
to remain unchanged, we expect that a one-year
increase in the useful lives of our plant in service
would result in a decrease of approximately $2,479
in our 2012 depreciation expense and that a one-year
decrease would result in an increase of approximately
$3,648 in our 2012 depreciation expense.
Asset Valuations and Impairments We account for
acquisitions completed after 2008 using the acquisition
method. We allocate the purchase price to the assets
acquired and liabilities assumed based on their estimated
fair values. The estimated fair values of intangible assets
acquired are based on the expected discounted cash
flows of the identified customer relationships, patents,
trade names and FCC licenses. In determining the future
cash flows, we consider demand, competition and other
economic factors.
Customer relationships, which are finite-lived intangible
assets, are primarily amortized using the sum-of-the-
months-digits method of amortization over the period in
which those relationships are expected to contribute to
our future cash flows. The sum-of-the-months-digits
method is a process of allocation and reflects our belief
that we expect greater revenue generation from these
customer relationships during the earlier periods after
acquisition. Amortization of other intangibles, including
patents and certain trade names, is determined using the
straight-line method of amortization over the expected
remaining useful lives.
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