Avid 2009 Annual Report Download - page 30

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Goodwill and Intangible Assets
We assess the impairment of goodwill and identifiable intangible assets on at least an annual basis and whenever events
or changes in circumstances indicate that the carrying value of the asset may not be fully recoverable. Factors we
consider important that could trigger an impairment review include significant underperformance relative to the
historical or projected future operating results, significant negative industry or economic trends, unanticipated
competition, loss of key personnel, a more-likely-than-not expectation that a reporting unit or component thereof will be
sold or otherwise disposed of, significant changes in the manner of use of the acquired assets or the strategy for our
overall business, a significant decline in our stock price for a sustained period, a reduction of our market capitalization
relative to our net book value and other similar circumstances.
In accordance with ASC subtopic 350-20, Intangibles – Goodwill and Others – Goodwill (formerly SFAS No. 142,
Goodwill and Other Intangible Assets), we do not amortize goodwill. The goodwill impairment test prescribed by ASC
350-20 requires us to identify reporting units and to determine estimates of the fair values of our reporting units at the
date we test for impairment. Our organizational structure in 2009 was based on two strategic business units, Video and
Audio, which equated to our reporting units. Both reporting units include goodwill.
In our annual goodwill impairment analysis, the fair value of each reporting unit is compared to its carrying value,
including goodwill. We generally use a discounted cash flow valuation model to determine the fair values of our
reporting units. This model focuses on estimates of future revenues and profits for each reporting unit and also assumes
a terminal value for the unit based on a constant growth valuation formula. We estimate these amounts by evaluating
historical trends, current budgets, operating plans and industry data. The model also includes assumptions for, among
others, working capital cash flow, growth rates, income tax rates, expected tax benefits and long term discount rates, all
of which require significant judgments by management. We estimate the long-term discount rates based on our review
of the weighted-average cost of capital and appropriate equity risk premium for each reporting unit. We also consider
the reconciliation of our market capitalization to the total fair value of our reporting units. If a reporting unit’s carrying
value exceeds its fair value, we record an impairment loss equal to the difference between the carrying value of the
goodwill and its implied fair value.
We perform our annual goodwill impairment tests as of the end of the fourth quarter of each year. Our annual goodwill
impairment testing in the fourth quarter of 2009 determined that no goodwill impairment existed. At December 31,
2009, the fair values of our Video and Audio reporting units exceeded their carrying values by 28% and 21%,
respectively.
When events or circumstances exist that indicate the carrying value of a reporting unit’s goodwill may not be
recoverable, we perform an interim goodwill impairment analysis. The interim analysis includes calculating the fair
value of the reporting unit being tested using a model similar to that used for the annual goodwill impairment testing.
The reporting unit’s calculated fair value is then allocated among its tangible and intangible assets and liabilities to
determine the implied fair value of the reporting unit’s goodwill. The fair values of the intangible assets are estimated
using various valuation models based on different approaches, such as the multi-period excess cash flows approach,
royalty savings approach and avoided-cost approach. These approaches include assumptions for, among others,
customer retention rates, trademark royalty rates, costs to complete in-process technology and long-term discount rates,
all of which require significant judgments by management. If the carrying value of the reporting unit’s goodwill exceeds
the implied fair value, we record an impairment loss equal to the difference between the carrying value of the goodwill
and its implied fair value.
Identifiable intangible assets are also tested for impairment in accordance with ASC section 360-10-35, Property, Plant
and Equipment – Overall – Subsequent Measurement, (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), if events or circumstances exist that indicate the carrying value of an asset may not be
recoverable. The fair value of each asset is compared to its carrying value, and if the asset’s carrying value is not
recoverable and exceeds its fair value, we record an impairment loss equal to the difference between the carrying value
of the asset and its fair value. The carrying value of an asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use and eventual disposition of the asset. Changes in business conditions or our
assumptions could require that we record impairment charges related to our identifiable intangible assets.