Classmates.com 2010 Annual Report Download - page 50

Table of Contents
Advertising revenues for our online loyalty marketing service consist primarily of fees generated when emails are transmitted to members,
when members respond to emails and when members complete online transactions. Each of these activities is a discrete, independent activity,
which generally is specified in the sales agreement for each advertising customer. As the earning activities take place, activity measurement data
(examples include the number of emails delivered and the number of responses received) is accumulated and the related revenue is recorded.
Probability of collection is assessed based on a number of factors, including past transaction history with the customer and the
creditworthiness of the customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes
reasonably assured, which is generally upon receipt of cash. This deferred revenue also represents invoiced services that have not yet been
performed.
Business Combinations
All of our acquisitions occurred prior to the effective date of ASC 805, Business Combinations , and accordingly, have been accounted for
as purchase business combinations in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141,
Business Combinations
. Under the purchase method of accounting, the costs, including transaction costs, are allocated to the underlying net
assets acquired, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill.
The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities
acquired can significantly impact net income. Consequently, to the extent an indefinite-lived, definite-lived or a longer-lived asset is ascribed
greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period. Definite-lived
identifiable intangible assets are amortized on either a straight-line basis or an accelerated basis. We determine the appropriate amortization
method by performing an analysis of expected cash flows over the estimated useful lives of the assets and match the amortization expense to the
expected cash flows from those assets.
Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates
and assumptions. Two areas, in particular, that require significant judgment are estimating the fair value and related useful lives of identifiable
intangible assets. To assist in this process, we may obtain appraisals from valuation specialists for certain intangible assets. While there are a
number of different methods used in estimating the fair value of acquired intangible assets, there are two approaches primarily used: the
discounted cash flow and market comparison approaches. Some of the more significant estimates and assumptions inherent in the two
approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; terminal
growth rate; subscriber churn; terminal value; determination of appropriate market comparables; and the determination of whether a premium or
a discount should be applied to market comparables. Most of the above assumptions are made based on available historical and market
information.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price of an acquired entity over the fair value of the net tangible and intangible assets
acquired. Indefinite-lived intangible assets acquired in a business combination are initially recorded at management's estimate of their fair
values. We account for goodwill and indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other , which
among other things, addresses financial accounting and reporting requirements for acquired goodwill and indefinite-lived intangible assets.
ASC 350 prohibits the amortization of goodwill
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