Cricket Wireless 2010 Annual Report Download - page 113

considered the month of August to be an appropriate period over which to measure average market capitalization in
2010 because trading prices during that period reflected market reaction to the Company’s most recently announced
financial and operating results, announced early in the month of August.
In conducting the annual impairment test during the third quarter of 2010, the Company applied a control
premium of 30% to its average market capitalization. The Company believes that consideration of a control
premium is customary in determining fair value and is contemplated by the applicable accounting guidance. The
Company believes that its consideration of a control premium was appropriate because it believes that its market
capitalization does not fully capture the fair value of its business as a whole or the additional amount an assumed
purchaser would pay to obtain a controlling interest in the Company. The Company determined the amount of the
control premium as part of its third quarter 2010 impairment testing based upon its relevant transactional
experience, a review of recent comparable telecommunications transactions and an assessment of market,
economic and other factors. Depending on the circumstances, the actual amount of any control premium
realized in any transaction involving the Company could be higher or lower than the control premium that the
Company applied.
The carrying value of the Company’s goodwill was $430.1 million as of August 31, 2010. As of August 31,
2010, the carrying value of the Company’s net assets exceeded the Company’s fair value, determined based upon its
average market capitalization during the month of August 2010 and applying a control premium of 30%. As a result,
the Company performed the second step of the assessment to measure the amount of any impairment. Under step
two of the assessment, the Company performed a hypothetical purchase price allocation as if the Company were
being acquired in a business combination and estimated the fair value of the Company’s identifiable assets and
liabilities. This determination required the Company to make significant estimates and assumptions regarding the
fair value of both its recorded and unrecorded assets and liabilities, such as its customer relationships, wireless
licenses and property and equipment. This step of the assessment indicated that the implied fair value of the
Company’s goodwill was zero, as the fair value of the Company’s identifiable assets (net of liabilities) as of
August 31, 2010 exceeded the fair value of the Company. As a result, the Company recorded a non-cash impairment
charge of $430.1 million in the third quarter of 2010, reducing the carrying amount of its goodwill to zero.
As discussed in Note 7, on October 1, 2010, the Company and Pocket contributed substantially all of their
respective wireless spectrum and operating assets in the South Texas region to a new joint venture, STX Wireless,
which is controlled and managed by Cricket. The excess purchase price over the fair value of the net assets acquired
was $31.1 million and was allocated to goodwill in the Company’s consolidated balance sheet at December 31,
2010.
As of December 31, 2010, the Company evaluated whether any triggering events or changes in circumstances
had occurred subsequent to its annual impairment test conducted in the third quarter of 2010. As part of this
evaluation, the Company considered additional qualitative factors, including whether there had been any significant
adverse changes in legal factors or in its business climate, adverse action or assessment by a regulator, unanticipated
competition, loss of key personnel or likely sale or disposal of all or a significant portion of its reporting unit. Based
on this evaluation, the Company concluded that there had not been any triggering events or changes in
circumstances that indicated an impairment condition existed as of December 31, 2010. Had the Company
concluded that a triggering event had occurred as of such date, the first step of the goodwill impairment test would
have resulted in a determination that the fair value of the Company (based upon its market capitalization, plus a
control premium) exceeded the carrying value of its net assets, and thus would not have required any further
impairment evaluation.
If competition in markets in which the Company operates continues to intensify, or if the competition or other
factors cause significant changes in its actual or projected financial or operating performance, such factors could
constitute a triggering event which would require the Company to perform an interim goodwill impairment test
prior to its next annual impairment test, possibly as soon as the first quarter of 2011. If the first step of the interim
impairment test were to indicate that a potential impairment existed, the Company would be required to perform the
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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)