Cricket Wireless 2011 Annual Report Download - page 119

LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On January 3, 2011, the Company acquired a customer assistance call center from various entities doing
business as Pocket Communications (“Pocket”) for $850,000. The Company accounted for this transaction as a
business purchase combination in accordance with the authoritative guidance for business combinations. A
portion of the purchase price was assigned to property and equipment and the remaining amount was allocated to
goodwill.
The following table summarizes the changes in the carrying amount of the Company’s goodwill during the
years ended December 31, 2011 and December 31, 2010 (in thousands):
Year Ended December 31,
2011 2010
Beginning balance, January 1 ...................................... $31,094 $ 430,101
Goodwill impairment charge ..................................... — (430,101)
Goodwill acquired ............................................. 560 31,094
Goodwill resulting from final Pocket purchase price adjustments ........ 232 —
Ending balance, December 31 ...................................... $31,886 $ 31,094
During the third quarter of each year, the Company assesses its goodwill for impairment at the reporting unit
level by applying a fair value test. This fair value test involves a two-step process. The first step is to compare the
carrying value of the Company’s net assets to its fair value. If the fair value is determined to be less than carrying
value, a second step is performed to measure the amount of the impairment, if any.
Significant judgments are required in connection with the Company’s annual impairment test in order to
estimate its fair value. The Company has generally based its determination of fair value primarily upon its
average market capitalization for the month of August plus a control premium. Average market capitalization is
calculated based upon the average number of shares of Leap common stock outstanding during such month and
the average closing price of Leap common stock during such month. The Company considered the month of
August to be an appropriate period over which to measure average market capitalization in 2011 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 2011, 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 2011 testing based upon its relevant transactional experiences 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 the Company applied.
The carrying value of the Company’s goodwill was $31.7 million as of August 31, 2011. Based upon its
annual impairment test conducted during the third quarter of 2011, the Company determined that no impairment
condition existed because the book value of the Company’s net assets as of August 31, 2011 was $676.1 million
and the fair value of the Company, based upon its average market capitalization during the month of August and
an assumed control premium of 30%, was $848.4 million. Therefore, the Company was not required to perform
the second step of the goodwill impairment test.
109