Time Magazine 2011 Annual Report Download - page 81

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
rates used in the DCF analysis ranged from 2.75% to 3.25%. While none of the book values of the Company’s
reporting units were within 10% of their respective fair values as of December 31, 2011, had the fair values of
each of the Company’s reporting units been hypothetically lower by 20% as of December 31, 2011, the Time Inc.
reporting unit book value would have exceeded fair value by approximately $400 million and the Warner Bros.
reporting unit book value would have exceeded fair value by approximately $500 million. If this were to occur,
the second step of the goodwill impairment test would need to be performed to determine the ultimate amount of
impairment loss to record.
The annual 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 tradenames. 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 tradenames are being
licensed in the marketplace.
The performance of the Company’s 2011 annual impairment test for other intangible assets not subject to
amortization resulted in a noncash impairment of $16 million related to two tradenames. The discount rates
utilized in the 2011 analysis of other intangible assets ranged from 10.5% to 12% and the terminal growth rates
used in the DCF analysis ranged from 2.75% to 3.25%. 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. and
Turner with an aggregate carrying value of $631 million been hypothetically lower by 10% as of December 31,
2011, the book values of certain of those tradenames would have exceeded fair values by $9 million. Had the fair
values of those tradenames been hypothetically lower by 20% as of December 31, 2011, the book values of
certain of those tradenames would have exceeded fair values by $52 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. The impairment test for
assets held for continued use requires a comparison of cash flows expected to be generated over the useful life of
an asset or group of assets (“asset group”) against the carrying value of the asset group. An asset group is
established by identifying the lowest level of cash flows generated by the asset or group of assets that are largely
independent of the cash flows of other assets. If the intent is to hold the asset group for continued use, the
impairment test first requires a comparison of estimated undiscounted future cash flows generated by the asset
group against its carrying value. If the carrying value exceeds the estimated undiscounted future cash flows, an
impairment would be measured as the difference between the estimated fair value of the asset group and its
carrying value. Fair value is generally determined by discounting the future cash flows associated with that asset
group. If the intent is to hold the asset group for sale and certain other criteria are met (e.g., the asset can be
disposed of currently, appropriate levels of authority have approved the sale, and there is an active program to
locate a buyer), the impairment test involves comparing the asset group’s carrying value to its estimated fair
value. To the extent the carrying value is greater than the estimated fair value, an impairment loss is recognized
for the difference. Significant judgments in this area involve determining the appropriate asset group level at
which to test, determining whether a triggering event has occurred, determining the future cash flows for the
assets involved and selecting the appropriate discount rate to be applied in determining estimated fair value. For
more information, see Note 2.
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