Time Magazine 2010 Annual Report Download - page 75

investments for impairment, including when the carrying value of an investment exceeds its related market value. If
it has been determined that an investment has sustained an other-than-temporary decline in its value, the investment
is written down to its fair value by a charge to earnings. Factors that are considered by the Company in determining
whether an other-than-temporary decline in value has occurred include the (i) market value of the security in
relation to its cost basis, (ii) financial condition of the investee and (iii) the Company’s intent and ability to retain the
investment for a sufficient period of time to allow for recovery in the market value of the investment.
In evaluating the factors described above for available-for-sale securities, the Company presumes a decline in
value to be other-than-temporary if the quoted market price of the security is 20% or more below the investment’s
cost basis for a period of six months or more (the “20% criterion”) or the quoted market price of the security is 50%
or more below the security’s cost basis at any quarter end (the “50% criterion”). However, the presumption of an
other-than-temporary decline in these instances may be overcome if there is persuasive evidence indicating that the
decline is temporary in nature (e.g., the investee’s operating performance is strong, the market price of the investee’s
security is historically volatile, etc.). Additionally, there may be instances in which impairment losses are
recognized even if the 20% and 50% criteria are not satisfied (e.g., there is a plan to sell the security in the
near term and the fair value is below the Company’s cost basis).
For investments accounted for using the cost or equity method of accounting, the Company evaluates
information (e.g., budgets, business plans, financial statements, etc.) in addition to quoted market prices, if
any, in determining whether an other-than-temporary decline in value exists. Factors indicative of an
other-than-temporary decline include recurring operating losses, credit defaults and subsequent rounds of
financing at an amount below the cost basis of the Company’s investment. For more information, see Note 4.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets, primarily tradenames, are tested annually for impairment
during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances.
Goodwill is tested for impairment at a level referred to as a reporting unit. A reporting unit is either the “operating
segment level,” such as Warner Bros. Entertainment Group (“Warner Bros.”), Home Box Office, Inc. (“Home Box
Office”), Turner Broadcasting System, Inc. (“Turner”) and Time Inc., or one level below, which is referred to as a
“component” (e.g., Sports Illustrated,People). The level at which the impairment test is performed requires
judgment as to whether the operations below the operating segment constitute a self-sustaining business. If the
operations below the operating segment level are determined to be a self-sustaining business, testing is generally
required to be performed at this level; however, if multiple self-sustaining business units exist within an operating
segment, an evaluation would be performed to determine if the multiple business units share resources that support
the overall goodwill balance. For purposes of the goodwill impairment test, Time Warner has identified Warner
Bros., Home Box Office, Turner and Time Inc. as its reporting units.
Goodwill impairment is determined using a two-step process. The first step involves a comparison of the
estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, the
Company determines the fair value of a reporting unit using a discounted cash flow (“DCF”) analysis and, in certain
cases, a combination of a DCF analysis and a market-based approach. Determining fair value requires the exercise
of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, the amount
and timing of expected future cash flows, as well as relevant comparable company earnings multiples for the
market-based approach. The cash flows employed in the DCF analyses are based on the Company’s most recent
budgets and business plans and, when applicable, various growth rates have been assumed for years beyond the
current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future
cash flows of the respective reporting units. If the estimated fair value of a reporting unit exceeds its carrying
amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not 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 carrying amount to measure the amount of impairment loss, if any.
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TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)