ServiceMagic 2014 Annual Report Download - page 54

Table of Contents
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.
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. A 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 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.
At October 1, 2014, the date of our most recent annual impairment assessment, the fair value of the Company's reporting units exceed their
carrying values. The fair value of the Search & Applications reporting unit currently exceeds its carrying value by approximately 15%. If operating
results vary significantly from anticipated results, future, potentially material, impairments of goodwill and/or indefinite-lived intangible assets
could occur. To illustrate the magnitude of a potential impairment charge relative to future changes in estimated fair value, had the estimated fair
value of Search & Applications been hypothetically lower by 20% as of October 1, 2014, the carrying value of Search & Applications would have
exceeded its fair value by approximately $100 million.
The Company also has 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 the Company elects to perform a qualitative assessment and concludes 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; otherwise
the fair value of the indefinite-lived intangible 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 20% in 2014 and 10% to 18% in 2013, and the
royalty rates used ranged from 1% to 9% in both 2014 and 2013.
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 2013 the Company wrote off certain capitalized software costs. This charge is more fully described above
in "Results of Operations for the Years Ended December 31, 2014, 2013 and 2012 - Depreciation." The carrying value of property and equipment
and definite-lived intangible assets is $389.2 million at December 31, 2014.
Income Taxes
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. The second step is to measure the tax benefit as the largest amount 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, 2014, the
Company has unrecognized tax benefits of $33.2 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.
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