Time Magazine 2009 Annual Report Download - page 86

necessary. If the carrying amount 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 goodwill carrying amount to measure the amount of impairment
loss, 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 amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss
is recognized in an amount equal to that excess.
The performance of the Company’s 2009 annual impairment analyses did not result in any impairments of the
Company’s goodwill. The discount rates utilized in the 2009 analysis ranged from 10.5% to 12% while the terminal
growth rates used in the DCF analysis ranged from 2.5%-3.0%. To illustrate the magnitude of a potential
impairment relative to future changes in estimated fair values, had the fair values of each of the Company’s
reporting units been hypothetically lower by 10% as of December 31, 2009, no reporting unit’s book value would
have exceeded its fair value. Had the fair values of each of the Company’s reporting units been hypothetically lower
by 20% as of December 31, 2009, the Time Inc. reporting unit book value would have exceeded fair value by
approximately $525 million, the Warner Bros. reporting unit book value would have exceeded fair value by
approximately $85 million and the HBO reporting unit book value would have exceeded fair value by
approximately $528 million. If this were to occur, the second step of the goodwill impairment test would be
required to be performed to determine the ultimate amount of impairment loss to record.
The impairment test for other intangible assets not subject to amortization involves a comparison of the
estimated fair value of the intangible asset with 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 intangible assets not subject to amortization are determined using a DCF valuation analysis. Common among
such approaches is the “relief from royalty” methodology, which is used in estimating the fair value of the
Company’s brands and trademarks. Discount rate assumptions are based on an assessment of the risk inherent in the
projected future cash flows generated by the respective intangible assets. Also subject to judgment are assumptions
about royalty rates, which are based on the estimated rates at which similar brands and trademarks are being
licensed in the marketplace. The discount rates utilized in the 2009 analysis of other intangible assets ranged from
11% to 12.5% while the terminal growth rates used in the DCF analysis ranged from 2.5%-3.0%. To illustrate the
magnitude of potential impairment relative to future changes in estimated fair values, had the fair values of certain
tradenames at Time Inc. with an aggregate carrying value of $639 million, been hypothetically lower by 10%, the
book values of those tradenames would have exceeded fair values by $46 million. Had the fair values of those
tradenames been hypothetically lower by 20% as of December 31, 2009, book values would have exceeded fair
values by $111 million.
Long-Lived Assets
Long-lived assets, including finite-lived intangible assets (e.g., tradenames, customer lists, film libraries and
property, plant and equipment), do not require that an annual impairment test be performed; instead, long-lived
assets are tested for impairment upon the occurrence of a triggering event. Triggering events include the more likely
than not disposal of a portion of such assets or the occurrence of an adverse change in the market involving the
business employing the related assets. Once a triggering event has occurred, the impairment test is based on whether
the intent is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the asset for
continued use, the impairment test first requires a comparison of estimated undiscounted future cash flows
generated by the asset group against the carrying value of the asset group. If the carrying value of the asset group
exceeds the estimated undiscounted future cash flows, the asset would be deemed to be impaired. Impairment would
then be measured as the difference between the estimated fair value of the asset and its carrying value. Fair value is
generally determined by discounting the future cash flows associated with that asset. If the intent is to hold the asset
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)