Frontier Communications 2006 Annual Report Download - page 30

CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
Intangibles
Our indefinite lived intangibles consist of goodwill and trade name, which resulted from the purchase of
ILEC properties. We test for impairment of these assets annually, or more frequently, as circumstances warrant.
All of our ILEC properties share similar economic characteristics and as a result, we aggregate our reporting
units into one ILEC segment. In determining fair value of goodwill during 2006 we compared the net book value
of the reporting units to current trading multiples of ILEC properties as well as trading values of our publicly
traded common stock. Additionally, we utilized a range of prices to gauge sensitivity. Our test determined that
fair value exceeded book value of goodwill. An independent third party appraiser analyzed trade name.
Pension and Other Postretirement Benefits
Our estimates of pension expense, other post retirement benefits including retiree medical benefits and
related liabilities are “critical accounting estimates.” We sponsor a noncontributory defined benefit pension plan
covering a significant number of current and former employees and other post retirement benefit plans that
provide medical, dental, life insurance benefits and other benefits for covered retired employees and their
beneficiaries and covered dependents. The pension plan for the majority of our current employees is frozen. The
accounting results for pension and post retirement benefit costs and obligations are dependent upon various
actuarial assumptions applied in the determination of such amounts. These actuarial assumptions include the
following: discount rates, expected long-term rate of return on plan assets, future compensation increases,
employee turnover, healthcare cost trend rates, expected retirement age, optional form of benefit and mortality.
We review these assumptions for changes annually with our independent actuaries. We consider our discount rate
and expected long-term rate of return on plan assets to be our most critical assumptions.
The discount rate is used to value, on a present basis, our pension and post retirement benefit obligation as
of the balance sheet date. The same rate is also used in the interest cost component of the pension and post
retirement benefit cost determination for the following year. The measurement date used in the selection of our
discount rate is the balance sheet date. Our discount rate assumption is determined annually with assistance from
our actuaries based on the pattern of expected future benefit payments and the prevailing rates available on long-
term, high quality corporate bonds that approximate the benefit obligation. In making this determination we
consider, among other things, the yields on the Citigroup Pension Discount Curve and Bloomberg Finance and
the changes in those rates from one period to the next. This rate can change from year-to-year based on market
conditions that impact corporate bond yields. Our discount rate increased from 5.625% at year-end 2005 to
6.00% at year-end 2006.
The expected long-term rate of return on plan assets is applied in the determination of periodic pension and
post retirement benefit cost as a reduction in the computation of the expense. In developing the expected long-
term rate of return assumption, we considered published surveys of expected market returns, 10 and 20 year
actual returns of various major indices, and our own historical 5-year and 10-year investment returns. The
expected long-term rate of return on plan assets is based on an asset allocation assumption of 35% to 55% in
fixed income securities, 35% to 55% in equity securities and 5% to 15% in alternative investments. We review
our asset allocation at least annually and make changes when considered appropriate. In 2006, we did not change
our expected long-term rate of return from the 8.25% used in 2005. Our pension plan assets are valued at actual
market value as of the measurement date.
Accounting standards in effect prior to December 31, 2006 required that we record an additional minimum
pension liability when the plan’s “accumulated benefit obligation” exceeded the fair market value of plan assets
at the pension plan measurement (balance sheet) date. In the fourth quarter of 2004, mainly due to a decrease in
the year-end discount rate, we recorded an additional minimum pension liability in the amount of $17.4 million
with a corresponding charge to shareholders’ equity of $10.7 million, net of taxes of $6.7 million. In the fourth
quarter of 2005, primarily due to another decrease in the year-end discount rate, we recorded an additional
minimum pension liability in the amount of $36.4 million with a corresponding charge to shareholders’ equity of
$22.5 million, net of taxes of $13.9 million. These adjustments did not impact our net income or cash flows.
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