Time Magazine 2013 Annual Report Download - page 82

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
method of accounting and (iii) investments accounted for using the equity method of accounting. The Company
regularly reviews its investments for impairment, including when the carrying value of an investment exceeds its
related market value. If the Company determines 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 (i) the market value of the security in relation to its cost basis, (ii) the 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., if 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 the reporting unit level. A reporting unit is either the “operating segment
level,” such as Warner Bros. Entertainment Inc. (“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., Warner Bros. Theatrical, Warner Bros. Television). 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 or whether the operations are similar such that they should be aggregated for purposes of the
impairment test. For purposes of the goodwill impairment test, management has concluded that the operations
below the operating segment are not self-sustaining businesses or the operations are similar and therefore has
determined that its reporting units are the same as its operating segments.
In assessing Goodwill for impairment, the Company has the option to first perform a qualitative assessment
to determine whether the existence of events or circumstances leads to a determination that it is more likely than
not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is not
more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company is not
required to perform any additional tests in assessing Goodwill for impairment. However, if the Company
concludes otherwise or elects not to perform the qualitative assessment, then it is required to perform the first
step of a two-step impairment review process. The first step of the two-step process involves a comparison of the
estimated fair value of a reporting unit to its carrying amount. 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 public company earnings multiples. The
cash flows employed in the DCF analyses are based on the Company’s most recent budgets and long range plans
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