Cricket Wireless 2012 Annual Report Download - page 117

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LEAP WIRELESS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the changes in the carrying amount of the Company’s goodwill during the
years ended December 31, 2012 and December 31, 2011 (in thousands):
Year Ended December 31,
2012 2011
Beginning balance, January 1 ...................................... $31,886 $31,094
Goodwill acquired ............................................. — 560
Goodwill resulting from final Pocket purchase price adjustments ........ — 232
Ending balance, December 31 ...................................... $31,886 $31,886
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 2012 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 2012, 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 2012 testing based upon relevant transactional experience 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 $31.9 million as of August 31, 2012. Based upon its
annual impairment test conducted during the third quarter of 2012, the book value of the Company’s net assets as
of August 31, 2012 was $527.5 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 $573.5 million. As
such, the Company determined that no impairment condition existed and was not required to perform the second
step of the goodwill impairment test.
In the fourth quarter of 2012, the Company evaluated whether any triggering events or changes in
circumstances had occurred subsequent to the annual impairment test conducted in the third quarter of 2012. As
part of this evaluation, the Company considered whether there were any events or circumstances that would
indicate it was more likely than not that the carrying value of the Company exceeded its fair value. Based on this
evaluation, the Company determined that the $106.4 million gain resulting from the spectrum swap with T-
Mobile, which closed on October 1, 2012, constituted a triggering event due to the significant increase in the
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