Incredimail 2013 Annual Report Download - page 42

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 a 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; (iii) expected costs to develop the in-
process research and development into commecrially viable
products and estimating cash flows from the projects when completed; and (iv) 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 3 to our
consolidated financial statements for additional information on accounting for our acquisitions in 2011 and 2012.
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.
We operate in one operating segment, and this segment comprises our only reporting unit. In calculating the fair value of the reporting
unit, we used our market equity capitalization.
If the carrying value of a reporting unit exceeds its fair value, we then calculate the goodwill’
s implied fair value by performing a
hypothetical allocation of the reporting unit’
s fair value to the underlying assets and liabilities, with the residual being the implied fair value of
goodwill. This allocation process involves using significant estimates, including estimates of future cash flows, future short-term and long-
term
growth rates, weighted average cost of capital and assumptions about the future deployment of the long-
lived assets of the reporting unit. Other
factors we consider are the brand awareness and the market position of the reporting unit and assumptions about the period of time we will
continue to use the brand in our product portfolio. If these estimates or their related assumptions change in the future, we may be required to
record impairment charges for our goodwill.
Our most recent annual goodwill impairment analysis, which was performed in 2013, did not result in impairment. As of December 31,
2013, our market capitalization was significantly higher than our equity book value.
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