Rosetta Stone 2013 Annual Report Download - page 42

Table of Contents
In estimating the fair value of our reporting units in Step 1, we use a variety of techniques including the income approach (i.e., the discounted cash flow
method) and the market approach (i.e., the guideline public company method). Our adjusted EBITDA projections are estimates that can significantly affect the
outcome of the analysis, both in terms of our ability to accurately project future results and in the allocation of fair value between reporting units. The fair
value of each of our reporting units substantially exceeded its carrying value at June 30, 2013.
The factors that we consider important, and which could trigger an interim impairment review, include, but are not limited to: a significant decline in the
market value of our common stock for a sustained period; a material adverse change in economic, financial market, industry or sector trends; a material
failure to achieve operating results relative to historical levels or projected future levels; and significant changes in operations or business strategy. Although no
such indicators occurred during 2013, we will continue to review for impairment indicators.
In January 2014 we announced plans to substantially reduce our Asian operations. As part of our interim review for triggers noted above, we considered
whether any circumstances or events in 2013 predicating our 2014 decision represented events that would trigger an interim impairment assessment for ROW
Consumer and if so, whether it was more likely than not that the fair value of that reporting unit is less than its carrying value. Based on our analysis, which
included a review of financial projections, we determined that there were no such triggers requiring further impairment testing as of December 31, 2013.
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Intangible assets consist of acquired technology, including developed and core technology, customer related assets, trade name and trademark and other
intangible assets. Those intangible assets with finite lives are recorded at cost and amortized on a straight line basis over their expected lives in accordance with
ASC 350. This guidance provides the option to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible
asset is impaired as a basis for determining whether it is necessary to perform the quantitative test. If necessary, the quantitative test is performed by
comparing the fair value of indefinite lived intangible assets to the carrying value in accordance with ASC 350. In the event the carrying value exceeds the fair
value of the assets, the assets are written down to their fair value. There has been no impairment of intangible assets during any of the periods presented.
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In accordance with Accounting Standards Codification topic 360,  ("ASC 360"), we
evaluate the recoverability of our long-lived assets. ASC 360 requires recognition of impairment of long-lived assets in the event that the net book value of such
assets exceeds the future undiscounted net cash flows attributable to such assets. Impairment, if any, is recognized in the period of identification to the extent
the carrying amount of an asset exceeds the fair value of such asset. Based on our analysis, we believe that no impairment of our long-lived assets was
indicated as of December 31, 2013 and 2012.
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We believe that the accounting estimate for the realization of deferred tax assets is a critical accounting estimate because judgment is required in assessing
the likely future tax consequences of events that have been recognized in our financial statements or tax returns. Although it is possible there will be changes
that are not anticipated in our current estimates, we believe it is unlikely such changes would have a material period-to-period impact on our financial position
or results of operations.
We account for income taxes in accordance with Accounting Standards Codification topic 740,  ("ASC 740"), which provides for an asset
and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the
financial statement carrying amounts of assets and liabilities versus the tax bases of assets and liabilities. Under this method, deferred tax assets are
recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary
differences.
ASC 740 requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance if, based on available evidence, it is more likely
than not ("MLTN") that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed quarterly
based on the ASC 740 MLTN realization threshold criterion. In the assessment, appropriate consideration is given to all positive and negative evidence related
to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and
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