ServiceMagic 2012 Annual Report Download - page 40

Table of Contents
the fair value of an indefinite-lived intangible asset is less than the carrying value then the fair value of asset must be determined and compared
to its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. The estimates of fair value of indefinite-lived intangible assets are determined using an avoided royalty DCF valuation analysis.
Significant judgments inherent in this analysis include the selection of appropriate royalty and discount rates and estimating the amount and
timing of expected future cash flows. The discount rates used in the DCF analyses are intended to reflect the risks inherent in the expected future
cash flows generated by the respective intangible assets. The royalty rates used in the DCF analyses are based upon an estimate of the royalty
rates that a market participant would pay to license the Company's trade names and trademarks. Assumptions used in the avoided royalty DCF
analyses, including the discount rate and royalty rate, are assessed annually based on the actual and projected cash flows related to the asset, as
well as macroeconomic and industry specific factors. The discount rates used in the Company's annual indefinite-lived impairment assessment
ranged from 10% to 18% in 2012 and 13% to 20% in 2011, and the royalty rates used ranged from 1% to 9% in both 2012 and 2011.
Recoverability of Long-Lived Assets
We review the carrying value of all long-lived assets, comprising property and equipment and definite-lived intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value
of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. If the carrying value is deemed not to be recoverable, an impairment loss is recorded equal to the amount by which the
carrying value of the long-lived asset exceeds its fair value. During 2011 the Company wrote-off certain capitalized software costs. These
charges are more fully described above in "Results of Operations for the Years Ended December 31, 2012, 2011 and 2010." The carrying value
of property and equipment and definite-lived intangible assets is $374.5 million at December 31, 2012.
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 4 to the
consolidated financial statements, and reflect management's assessment of actual future taxes to be paid on items reflected in the consolidated
financial statements, giving consideration to both timing and the probability of realization. As of December 31, 2012, the balance of deferred tax
liabilities, net, is $303.0 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax
apportionment or the outcome of any review of our tax returns by the various tax authorities, as well as actual operating results of the Company
that vary significantly from anticipated results.
We recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is
then measured for purposes of financial statement recognition as the largest amount of benefit which is more than 50% likely of being realized
upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the
probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which
may require periodic adjustments and which may not accurately anticipate actual outcomes. At December 31, 2012, the Company has
unrecognized tax benefits of $496.8 million, including interest. Changes to reserves from period to period and differences between amounts paid,
if any, upon resolution of issues raised in audits and amounts previously provided may be material. Differences between the reserves for income
tax contingencies and the amounts owed by the Company are recorded in the period they become known.
Stock-Based Compensation
As disclosed in the notes to the consolidated financial statements, the Company estimated the fair value of stock options issued in 2012,
2011 and 2010 using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 0.6%,
2.3% and 2.4%, respectively, a dividend yield of 1.2%, zero and zero, respectively, volatility factors of 31%, 30% and 30%, respectively, based
on the historical stock price volatilities of IAC and a weighted average expected term of the stock options of 4.4 years, 6.1 years and 5.6 years,
respectively. For stock options, including unvested stock options assumed in acquisitions, the value of the stock option is measured at the grant
date (or acquisition date, if applicable) at fair value and expensed over the remaining vesting term. The impact on non-cash compensation
expense for the year ended December 31, 2012, assuming a 1% increase in the risk-
free interest rate, a 10% increase in the volatility factor, and a
one year increase in the weighted average expected term of the outstanding options would be an increase of $2.2 million, $10.4 million, and
$5.0 million, respectively. The Company also issues RSUs and performance-based RSUs. For RSUs issued, the value of the instrument is
measured at the grant date as the fair value of IAC common stock and expensed as non-cash compensation expense over the vesting term. For
performance-based RSUs issued, the value of the instrument is measured at
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