AT&T Wireless 2013 Annual Report Download - page 28

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Dollars in millions except per share amounts
26 | AT&T Inc.
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 7, all of our goodwill resides in the
Wireless and Wireline segments. For each of those
segments, we assess their fair values 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 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 2013, 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 7). 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
using a discounted cash flow model (the Greenfield
Approach). The Greenfield Approach assumes a
Depreciation Our depreciation of assets, including
use of composite group depreciation and estimates of
useful lives, is described in Notes 1 and 6. 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, 2013. 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 $2,539
in our 2013 depreciation expense and that a one-year
decrease would result in an increase of approximately
$3,763 in our 2013 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 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. 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