Twenty-First Century Fox 2011 Annual Report Download - page 33

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
The Company accounts for its business acquisitions under the purchase method of accounting. The total cost of acquisitions is allocated to the
underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the tangible
net assets acquired is recorded as intangibles. Amounts recorded as goodwill are assigned to one or more reporting units. Determining the fair
value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and
assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other
items. Identifying reporting units and assigning goodwill to them requires judgment involving the aggregation of business units with similar
economic characteristics and the identification of existing business units that benefit from the acquired goodwill. The Company allocates goodwill
to disposed businesses using the relative fair value method.
Carrying values of goodwill and intangible assets with indefinite lives are reviewed at least annually for possible impairment in accordance
with ASC 350. The Company’s impairment review is based on, among other methods, a discounted cash flow approach that requires significant
management judgments. The Company uses its judgment in assessing whether assets may have become impaired between annual valuations.
Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities, loss of key personnel and
acts by governments and courts, may signal that an asset has become impaired.
The Company uses the direct valuation method to value identifiable intangibles for purchase accounting and impairment testing. The direct
valuation method used for FCC licenses requires, among other inputs, the use of published industry data that are based on subjective judgments
about future advertising revenues in the markets where the Company owns television stations. This method also involves the use of management’s
judgment in estimating an appropriate discount rate reflecting the risk of a market participant in the U.S. broadcast industry. The resulting fair
values for FCC licenses are sensitive to these long-term assumptions and any variations to such assumptions could result in an impairment to
existing carrying values in future periods and such impairment could be material.
The Company’s goodwill impairment reviews are determined using a two-step process. The first step of the process is to compare the fair value
of a reporting unit with its carrying amount, including goodwill. In performing the first step, the Company determines the fair value of a reporting
unit by primarily using a discounted cash flow analysis and market-based valuation approach methodologies. Determining fair value requires the
exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates, relevant comparable company
earnings multiples and the amount and timing of expected future cash flows. The cash flows employed in the analyses are based on the Company’s
estimated outlook and various growth rates have been assumed for years beyond the long-term 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. In assessing the reasonableness of its
determined fair values, the Company evaluates its results against other value indicators, such as comparable public company trading values. If the
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
review is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment review is
required to be performed to estimate the implied fair value of the reporting unit’s goodwill. The implied fair value of goodwill is determined in the
same manner as the amount of goodwill recognized in a business combination. That is, 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 estimated fair value of the reporting unit was the purchase price paid. The implied fair value of the reporting unit’s goodwill
is compared with the carrying amount of that goodwill. 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.
During fiscal 2011, the Company recorded an impairment charge for its Digital Media Group which is considered a reporting unit under ASC
350. The Company continues to monitor this reporting unit due to the impairment charges recorded in fiscal 2011. Goodwill at risk for future
impairment related to this reporting unit totaled $243 million as of June 30, 2011. The Company will continue to monitor its goodwill and
intangible assets for possible future impairment.
Income Taxes
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions in which it operates. The Company computes its
annual tax rate based on the statutory tax rates and tax planning opportunities available to it in the various jurisdictions in which it earns income.
Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment
is required in determining the Company’s tax expense and in evaluating its tax positions including evaluating uncertainties under ASC 740
“Income Taxes”.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making
this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a
change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company would adjust
related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.
Employee Costs
The measurement and recognition of costs of the Company’s various pension and other postretirement benefit plans require the use of
significant management judgments, including discount rates, expected return on plan assets, future compensation and other actuarial assumptions.
The Company maintains defined benefit pension plans covering a significant number of its employees and retirees. The primary plans are
closed to new participants. For financial reporting purposes, net periodic pension expense (income) is calculated based upon a number of actuarial
assumptions, including a discount rate for plan obligations and an expected rate of return on plan assets. The Company considers current market
conditions, including changes in investment returns and interest rates, in making these assumptions. In developing the expected long-term rate of
return, the Company considered the pension portfolio’s past average rate of returns, and future return expectations of the various asset classes.
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