GameStop 2012 Annual Report Download - page 49

undiscounted cash flows underlying its impairment test, many other factors impact the fair value calculation.
Since we are required to determine fair value from a hypothetical market participant’s perspective, discount
rates used in the analyses may change based on market conditions, regardless of whether the Company’s
cost of capital has changed, which could negatively impact the fair value calculation. As we periodically
reassess our fair value calculations using currently available market information and internal forecasts,
changes in our judgments and other assumptions could result in recording material impairment charges of
goodwill or other intangible assets in any of the Company’s reporting units in the future.
Other Intangible Assets. Other intangible assets consist primarily of trade names, leasehold rights,
advertising relationships and amounts attributed to favorable leasehold interests recorded primarily as a
result of the acquisition of SFMI Micromania SAS (“Micromania”) in 2008 and the merger with Electronics
Boutique Holdings Corp. in 2005 (the “EB merger”). We record intangible assets apart from goodwill if
they arise from a contractual right and are capable of being separated from the entity and sold, transferred,
licensed, rented or exchanged individually. The useful life and amortization methodology of intangible
assets are determined based on the period in which they are expected to contribute directly to cash flows.
Trade names which were recorded as a result of acquisitions, primarily Micromania, are considered
indefinite-lived intangible assets as they are expected to contribute to cash flows indefinitely and are not
subject to amortization, but they are subject to annual impairment testing. Leasehold rights which were
recorded as a result of the Micromania acquisition represent the value of rights of tenancy under commercial
property leases for properties located in France. Rights pertaining to individual leases can be sold by us to a
new tenant or recovered by us from the landlord if the exercise of the automatic right of renewal is refused.
Leasehold rights are amortized on a straight-line basis over the expected lease term not to exceed 20 years
with no residual value. Advertising relationships, which were recorded as a result of digital acquisitions, are
relationships with existing advertisers who pay to place ads on the Company’s digital Web sites and are
amortized on a straight-line basis over 10 years. Favorable leasehold interests represent the value of the
contractual monthly rental payments that are less than the current market rent at stores acquired as part of
the Micromania acquisition or the EB merger. Favorable leasehold interests are amortized on a straight-line
basis over their remaining lease term with no expected residual value. For additional information related to
the Company’s intangible assets, see Note 9 of “Notes to Consolidated Financial Statements.”
Indefinite-lived intangible assets are assessed for impairment at least annually and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. This test is completed as
of the beginning of the fourth quarter each fiscal year or when circumstances indicate the carrying value of
the intangible assets might be impaired. Similar to the test for goodwill impairment discussed above, the
impairment test for indefinite-lived intangible assets consists of a comparison of the fair value of the
intangible asset with its carrying amount. An impairment loss is recognized for the amount by which the
carrying value exceeds the fair value of the asset. The fair value of our Micromania trade name is calculated
using a relief-from-royalty approach, which assumes the value of the trade name is the discounted cash
flows of the amount that would be paid by a hypothetical market participant had they not owned the trade
name and instead licensed the trade name from another company. The basis for future cash flow projections
are internal revenue forecasts, which the Company believes represent reasonable market participant
assumptions, to which the selected royalty rate is applied. These future cash flows are discounted using the
applicable discount rate, as well as any potential risk premium to reflect the inherent risk of holding a
standalone intangible asset. The discount rate used in the analysis reflects a hypothetical market
participant’s weighted average cost of capital, current market rates and the risks associated with the
projected cash flows. The primary uncertainties in this calculation are the selection of an appropriate royalty
rate and assumptions used in developing internal revenue growth forecasts, as well as the perceived risk
associated with those forecasts in developing the discount rate.
During the third quarter of fiscal 2012, the Company determined that sufficient indicators of potential
impairment existed to require an interim impairment test of its Micromania trade name. As a result of the
interim impairment test of its Micromania trade name, the Company recorded a $44.9 million impairment
charge during the third quarter of fiscal 2012. The Company completed its annual impairment tests of
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