AT&T Wireless 2015 Annual Report Download - page 29

AT&T INC. | 27
(the Greenfield Approach). We also corroborated the
value of wireless licenses with a market approach as
the AWS-3 auction provided market price information
for national wireless licenses. The Greenfield Approach
assumes a company initially owns only the wireless
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.
For impairment testing purposes, we assumed wireless
revenue growth to trend up from our 2015 decline of
0.4% to a long-term growth rate that reflects expected
long-term inflation trends. We assumed our churn rates
will increase in 2016 from our rate of 1.39% in 2015, in
line with expected trends in the U.S. industry but at a rate
comparable with industry-leading churn. EBITDA margins
were assumed to trend toward 40% annually, and EBITDA
service margins were assumed to continue to trend to at
least 40% annually.
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 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 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
8.25%, 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.
If either the projected rate of long-term growth of cash
flows or revenues declined by 0.5%, or if the discount
rate increased by 0.5%, the fair values of the wireless
licenses, while less than currently projected, would still
be higher than the book value of the licenses. The fair
value of the licenses exceeded the book value by more
than 10%.
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7, all of our goodwill resides in
the Business Solutions, Entertainment Group, Consumer
Mobility and International segments. For each of the
reporting units in 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 EBITDA. We determined the
multiples of the publicly traded companies whose services
are comparable to those offered by the reporting unit
and then calculated a weighted-average of those multiples.
Using those weighted averages, we then calculated fair
values for each of those reporting units. In 2015, 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.
Wireless licenses (spectrum) in the U.S. are tested
for impairment on an aggregate basis, consistent with
use of the licenses to support the Business Solutions
and Consumer Mobility segments on a national scope.
As in prior years, we performed our test of the fair
values of licenses using a discounted cash flow model