Blackberry 2014 Annual Report Download - page 158

BlackBerry Limited
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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compared to $952 million for fiscal 2012. This increase primarily reflected the impact of renewed or amended licensing
agreements and certain property, plant and equipment asset additions made over the prior four quarters.
Impairment of Goodwill
Goodwill represents the excess of an acquisition price over the fair value of identifiable net assets acquired. Goodwill is tested
for impairment annually, through a two step process, in the fourth quarter of each fiscal year, or more frequently if events or
changes in circumstances indicate that goodwill is more likely than not impaired.
The Company performed a goodwill impairment analysis during the fourth quarter of fiscal 2012 and concluded that
impairment existed. Based on the results of that test, the Company recorded the 2012 Goodwill Impairment Charge of $355
million.
Due to business conditions and a continued significant decline in the Company’s market capitalization, the Company concluded
that goodwill impairment indicators existed and an interim goodwill impairment assessment was required for the first quarter of
fiscal 2013. The Company used a two-step impairment test to identify potential goodwill impairment and measured the amount
of the goodwill impairment loss to be recognized. In the first step, the fair value of the Company was determined using the
Company’s average market capitalization for the preceding five days from the impairment test date, plus a reasonable control
premium, which was established based on recent market transactions. The results from the first step of the goodwill impairment
test demonstrated that the carrying value of the Company exceeded its estimated fair value as at the balance sheet date and
therefore the second step of the goodwill impairment test was performed.
In the second step of the impairment test, the Company calculated the impairment loss by estimating the implied fair value of
goodwill and comparing it with its carrying value. Using the fair value determined in the first step as the acquisition price, the
implied fair value of goodwill was calculated as the residual amount of the acquisition price after allocations made to the fair
value of net assets, including recognized and unrecognized intangible assets. Based on the results of the second step of the
goodwill impairment test, it was concluded that the carrying value of goodwill was impaired. Consequently, the Company
recorded the 2013 Goodwill Impairment Charge of $335 million, which eliminated the remaining carrying value of its
goodwill, and reported this amount as a separate line item in the consolidated statements of operations.
The Company’s share price and control premium are significant factors in assessing the Company’s fair value for purposes of
the goodwill impairment assessment. The Company’s share price can be affected by, among other things, changes in industry or
market conditions, including the effect of competition, changes in the Company’s results of operations, and changes in the
Company’s forecasts or market expectations relating to future results. See “Risk Factors – The market price of the Company’s
common shares is volatile” in the Company’s Annual Information Form.
Investment Income
Investment income decreased by $6 million to $15 million in fiscal 2013, from $21 million in fiscal 2012. The decrease in
investment income was the result of decreases in the company’s average yield on its investments, the recording of the
Company’s portion of investment losses in its equity-based investments, and the accrual of interest expenses for other tax
matters, offset by a gain on the sale of the Company’s claim on Lehman Brothers International (Europe) (“LBIE”) trust assets
which had previously been impaired in fiscal 2011.
Income Taxes
For fiscal 2013, the Company’s income tax recovery from continuing operations was $592 million, resulting in an effective
income tax recovery rate of approximately 48.5%, compared to income tax expense of $347 million and an effective income
tax rate of approximately 22.9% for the prior fiscal year. The Company’s effective income tax recovery rate reflected the
geographic mix of earnings in jurisdictions with different income tax rates. The higher effective income tax recovery rate in
fiscal 2013 primarily reflected the favourable impacts of the $152 million effective settlement of uncertain income tax positions
in the third quarter of fiscal 2013 that resulted from prior restructuring of the Company’s international operations, carrying
operating losses back to prior periods with higher effective income tax rates and the effect of income tax incentives on earnings
offset by the unfavourable impact of the 2013 Goodwill Impairment Charge.
Net Income (Loss)
The Company’s net loss from continuing operations for fiscal 2013 was $628 million, a decrease of $1.8 billion compared to
net income of $1.2 billion in fiscal 2012. The decrease took into account the impact of an income tax benefit of $166 million
related to the settlement of uncertain tax positions, including related interest and foreign exchange gains, restructuring charges
of $220 million related to the CORE program and the 2013 Goodwill Impairment Charge of $335 million incurred in fiscal
2013, as well as the impacts of the PlayBook Inventory Provision, the 2012 Goodwill Impairment Charge, the 2012 BlackBerry