Redbox 2011 Annual Report Download - page 49

Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Preparation of these
statements requires management to make judgments and estimates. We base our estimates on historical
experience and on other assumptions that we believe to be reasonable under the present circumstances.
Significant estimates underlying our consolidated financial statements include the:
• useful lives and salvage values of our content library;
• determination of goodwill impairment;
• lives and recoverability of equipment and other long-lived assets;
• recognition and measurement of current and long-term deferred income taxes (including the
measurement of uncertain tax positions); and
• loss contingencies.
It is reasonably possible that the estimates we make may change in the future and could have a material affect on
our financial statements.
Content Library
Our content library, which we called our DVD library in prior years, consists of movies and video games
available for rent or purchase. We obtain our movie and video game content through revenue sharing agreements
and license agreements with studios and game publishers, as well as through distributors and other suppliers. The
content purchases are capitalized and amortized to their estimated salvage value as a component of direct
operating expenses over the usage period. The cost of content mainly includes the cost of the movies and video
games, labor, overhead, freight, and studio revenue sharing expenses. Content salvage values are estimated based
on the amounts that we have historically recovered on disposal. For purchased content that we expect to be sold
at the end of its useful life, an estimated salvage value is provided. For licensed content that we do not expect to
sell, no salvage value is provided. The useful lives and salvage value of our content library are periodically
reviewed and evaluated. The amortization charges are recorded on an accelerated basis, reflecting higher rentals
of movies and video games in the first few weeks after release, and substantially all of the amortization expense
is recognized within one year of purchase.
Goodwill
Goodwill represents the excess purchase price of an acquired enterprise or assets over the estimated fair value of
identifiable net assets acquired. We test goodwill for impairment at the reporting unit level on an annual basis as
of November 30 or whenever an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. As a result of the early adoption of Accounting
Standard Update (“ASU”) No. 2011-08 “Testing goodwill for impairment,” we first assess a range of qualitative
factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive
environment, changes in the market for our products and services, regulatory and political developments, entity
specific factors such as strategies and financial performance, when evaluating potential impairment for goodwill.
If, after completing such assessment, it is determined more likely than not that the fair value of a reporting unit is
less than its carrying value, we proceed to a two-step impairment test, whereby the first step is comparing the fair
value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds
its carrying amount, goodwill of the reporting unit is considered to not be impaired and the second step of the test
is not performed. The second step of the impairment test is performed when the carrying amount of the reporting
unit exceeds the fair value, then the implied fair value of the reporting unit goodwill is compared with the
carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss shall be recognized in an amount equal to the excess.
41