Incredimail 2011 Annual Report Download - page 38

Business combinations
We account for business combinations following ASC 805 “Business Combinations”,
which requires that we allocate the purchase price of acquired
companies to the tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. In addition, we expense acquisition-
related
expenses as they are incurred. We engage third-
party appraisal firm to assist management in determining the fair values of certain assets acquired and liabilities
assumed. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets.
Management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and
information obtained from the management of the acquired companies and relevant market and industry data and are, inherently, uncertain. Critical estimates made in
valuing certain of the intangible assets include, but are not limited to, the following: (i) future expected cash flows from license sales, maintenance agreements,
customer contracts and acquired developed technologies and patents; (ii) the acquired company’
s brand and market position as well as assumptions about the period of
time the acquired brand will continue to be used in the combined company’
s product portfolio; and (iii) discount rates. Unanticipated events and circumstances may
occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to circumstances that existed at
the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as
operating expenses, if otherwise.
In connection with purchase price allocations, we estimate the fair value of the support obligations assumed in connection with acquisitions. The estimated
fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-
up approach determines fair value by estimating the costs related
to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to
pay a third party to assume the support obligation. See Note 2 to our consolidated financial statements for additional information on accounting for our recent
acquisition.
Goodwill
Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less
liabilities assumed. We review goodwill for impairment annually in October each year, and whenever events or changes in circumstances indicate its carrying value
may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and other”.
Goodwill impairment is deemed to exist if the carrying value of a reporting
unit exceeds its fair value. If the carrying value of a reporting unit’
s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the
difference.
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