Exelon 2015 Annual Report Download - page 112

Table of Contents
qualitative assessment or performs the qualitative assessment, but determines that it is more likely than not that its fair value is less than its
carrying amount, a quantitative two-step, fair value-based test is performed. The first step compares the fair value of the reporting unit to its
carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second
step requires an allocation of fair value to the individual assets and liabilities using purchase price allocation accounting guidance in order to
determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount, an impairment loss is recorded as
a reduction to goodwill and a charge to operating expense. Application of the goodwill impairment test requires management judgment, including
the identification of reporting units and determining the fair value of the reporting unit, which management estimates using a weighted combination
of a discounted cash flow analysis and a market multiples analysis. Significant assumptions used in these fair value analyses include discount
and growth rates, utility sector market performance and transactions, projected operating and capital cash flows for ComEd’s business and the fair
value of debt. In applying the second step (if needed), management must estimate the fair value of specific assets and liabilities of the reporting
unit. See Note 1—Significant Accounting Policies, Note 11—Intangible Assets and Note 15—Income Taxes of the Combined Notes to
Consolidated Financial Statements for additional information.
Purchase Accounting (Exelon and Generation)
In accordance with the authoritative accounting guidance, the assets acquired and liabilities assumed in an acquired business are recorded
at their estimated fair values on the date of acquisition. The difference between the purchase price amount and the net fair value of assets
acquired and liabilities assumed is recognized as goodwill on the balance sheet if it exceeds the estimated fair value and as a bargain purchase
gain on the income statement if it is below the estimated fair value. Determining the fair value of assets acquired and liabilities assumed requires
management’s judgment, often utilizes independent valuation experts and involves the use of significant estimates and assumptions with respect
to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments
made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life
of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through
depreciation and amortization expense. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial
Statements for additional information.
Unamortized Energy Assets and Liabilities (Exelon and Generation)
Unamortized energy contract assets and liabilities represent the remaining unamortized balances of non-derivative energy contracts that
Generation has acquired. The initial amount recorded represents the fair value of the contract at the time of acquisition, and the balance is
amortized over the life of the contract in relation to the expected realization of the underlying cash flows. Amortization expense and income are
recorded through purchased power and fuel expense or operating revenues. Refer to Note 4—Mergers, Acquisitions, and Dispositions and Note 11
—Intangible Assets of the Combined Notes to Consolidated Financial Statements for further discussion.
Impairment of Long-lived Assets (Exelon, Generation, ComEd, PECO and BGE)
Exelon, Generation, ComEd, PECO and BGE regularly monitor and evaluate their long-lived assets and asset groups, excluding goodwill, for
impairment when circumstances indicate the carrying value of those assets may not be recoverable. Indicators of potential impairment may
include a deteriorating business climate, including decline in energy prices, condition of the asset, specific regulatory disallowance, or plans to
dispose of a long-lived asset significantly before the end of its useful life, among others.
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Source: BALTIMORE GAS & ELECTRIC CO, 10-K, February 10, 2016 Powered by Morningstar® Document Research℠
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