ServiceMagic 2012 Annual Report Download - page 39

Table of Contents
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the descriptions of IAC's accounting policies contained in Note 2 to the consolidated
financial statements in regard to significant areas of judgment. Management of the Company is required to make certain estimates, judgments
and assumptions during the preparation of its consolidated financial statements in accordance with U.S. generally accepted accounting
principles. These estimates, judgments and assumptions impact the reported amount of assets, liabilities, revenue and expenses and the related
disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from those
estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a
more significant impact on our consolidated financial statements than others. What follows is a discussion of some of our more significant
accounting policies and estimates.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets, which consist of the Company's acquired trade names and trademarks, are assessed
annually for impairment as of October 1 or more frequently if an event occurs or circumstances change that would more likely than not reduce
the fair value of a reporting unit or the fair value of an indefinite-lived intangible asset below its carrying value. The annual assessments
identified impairment charges in 2010 related to the Shoebuy and Search & Applications reporting units. These impairment charges are more
fully described above in "Results of Operations for the Years Ended December 31, 2012, 2011 and 2010." The value of goodwill and indefinite-
lived intangible assets that is subject to annual assessment for impairment is $ 1.6 billion and $379.0 million, respectively, at December 31,
2012.
In 2012, the Company adopted Accounting Standards Update ("ASU") 2011-08, "Testing Goodwill for Impairment," which gives
companies the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.
If it is not more likely than not that the fair value of the reporting unit is less than its carrying value, no further assessment of that reporting unit's
goodwill is necessary. If it is more likely than not that the fair value of the reporting unit is less than the carrying value then goodwill must be
tested for impairment using a two-step process. The first step involves a comparison of the estimated fair value of each of the Company's
reporting units to its carrying value, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit
using a discounted cash flow ("DCF") analysis. Determining fair value requires the exercise of significant judgment, including judgment about
the amount and timing of expected future cash flows and appropriate discount rates. The expected cash flows used in the DCF analyses are based
on the Company's most recent budget and, for years beyond the budget, the Company's estimates, which are based, in part, on forecasted growth
rates. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows of the respective
reporting units. Assumptions used in the DCF analyses, including the discount rate, are assessed annually based on the reporting units' current
results and forecast, as well as macroeconomic and industry specific factors. The discount rates used in the Company's annual goodwill
impairment assessment ranged from 13% to 25% in 2012 and 13% to 20% in 2011. If the estimated fair value of a reporting unit exceeds its
carrying value, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. If the carrying value of
a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the
goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying value to measure the amount of
impairment, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any
unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was
the purchase price paid. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment is
recognized in an amount equal to that excess.
The fair value of each of the Company's seven reporting units, excluding Tutor which was acquired in December 2012, exceed their
carrying values by more than 20% at October 1, 2012, the date of our most recent annual impairment assessment. Any impairment charge that
might result in the future would be determined based upon the excess of the carrying value of goodwill over its implied fair value using the
second step of the impairment analysis that is described above but, in any event, would not be expected to be lower than the excess of the
carrying value of the reporting unit over its fair value. The primary driver in the DCF valuation analyses and the determination of the fair values
of the Company's reporting units is the estimate of future revenue and profitability. Generally, the Company would expect to record an
impairment if forecasted revenue and profitability are no longer expected to be achieved and as a result, the carrying value of a reporting unit(s)
exceeds its fair value. This assessment would be based, in part, upon the performance of its businesses relative to budget, the Company's
assessment of macroeconomic factors, industry and competitive dynamics and the strategies of its businesses in response to these factors.
In 2012, the Company adopted ASU 2012-02, "Testing Indefinite-Lived Intangible Assets for Impairment," which gives companies the
option to qualitatively assess whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying
value. If it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value, the fair value of the
asset does not need to be determined. If it is more likely than not that
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