Earthlink 2015 Annual Report Download - page 69

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Table of Contents
EARTHLINK HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment testing of goodwill is required at the reporting unit level (operating segment or one level below operating segment) and involves a two-step process.
Prior to performing the two-step impairment test, the Company may make a qualitative assessment of the likelihood of goodwill impairment in order to determine
whether a detailed quantitative analysis is required. The first step of the impairment test involves comparing the estimated fair values of the Company's reporting
units with the reporting units' carrying amounts, including goodwill. The Company estimates the fair value of its reporting units using discounted expected future
cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to compare the carrying amount of goodwill to the implied
fair value of that goodwill. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal
to the excess.
Other intangible assets consist of customer relationships, developed technology and software, trade names and other assets acquired in conjunction with the
purchases of businesses or purchases of assets from other companies. When management determines material intangible assets are acquired in conjunction with the
purchase of a business, the Company determines the fair values of the identifiable intangible assets by taking into account management's own analysis and an
independent third party valuation specialist's appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives.
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets, including property and equipment and definite-lived intangible assets, for impairment when events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that would necessitate an impairment assessment
include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used or a significant
adverse change that would indicate the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company
recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss, if any, based
on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. During
the year ended December 31, 2014, the Company recorded $14.3 million for impairment of long-lived assets, which consisted of impairment of work in progress
for information technology projects not expected to be used, impairment of software licenses not expected to be used and impairment of certain assets held for sale.
The impairment loss is classified within impairment of goodwill and long-lived assets in the Consolidated Statement of Comprehensive Loss.
Leases
The Company categorizes leases at their inception as either operating or capital leases depending on certain criteria. Certain of the Company's operating lease
agreements include scheduled rent escalations or rent holidays over the term of the lease. The Company recognizes rent expense on a straight-line basis over the
term of the lease. The difference between rent expense and rent paid is recorded as deferred rent and included in other accrued liabilities in the Consolidated
Balance Sheets. Incentives granted under certain leases are treated as a reduction of the Company's rent expense on a straight-line basis over the term of the related
lease agreement. Leasehold improvements funded by the lessor under operating leases are recorded as leasehold improvements and deferred rent.
Asset Retirement Obligations
The Company has asset retirement obligations associated with certain assets within leased facilities that the Company is contractually obligated to restore to their
previous condition upon exit from the lease. The fair value of the obligation is also capitalized as property and equipment and amortized over the estimated useful
life of the associated asset over the shorter of estimated useful life or lease term. The Company's asset retirement obligations were $3.1 million and $3.3 million as
of December 31, 2014 and 2015 , respectively, and are included in other long-term liabilities in the Consolidated Balance Sheets.
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