US Cellular 2008 Annual Report Download - page 144

implied fair value of reporting unit goodwill with the carrying amount of that goodwill. To calculate the
implied fair value of goodwill in this second step, an enterprise allocates the fair value of the reporting
unit to all of the assets and liabilities of that reporting unit (including any unrecognized intangible assets)
as if the reporting unit had been acquired in a business combination and the fair value was the price
paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amount
assigned to the assets and liabilities of the reporting unit represents the implied fair value of goodwill. If
the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is
recognized for that difference.
Quoted market prices in active markets are the best evidence of fair value of an asset or reporting unit
and are used when available. If quoted market prices are not available, the estimate of fair value is
based on the best information available, including prices for similar assets and the use of other valuation
techniques. Other valuation techniques include present value analysis, multiples of earnings or revenues,
or similar performance measures. The use of these techniques involves assumptions by management
about factors that are highly uncertain including future cash flows, the appropriate discount rate and
other inputs. Different assumptions for these inputs or different valuation methodologies could create
materially different results.
U.S. Cellular tests goodwill for impairment at the level of reporting referred to as a reporting unit. For
purposes of impairment testing of goodwill in 2008, U.S. Cellular identified five reporting units pursuant
to paragraph 30 of SFAS 142. The five reporting units represent five geographic groupings of FCC
licenses, representing five geographic service areas. U.S. Cellular tests licenses for impairment at the
level of reporting referred to as a unit of accounting. For purposes of its annual impairment testing of
licenses in the second quarter of 2008, U.S. Cellular combined its FCC licenses into nineteen units of
accounting pursuant to FASB Emerging Issues Task Force (‘‘EITF’’) Issue 02-7, Units of Accounting for
Testing Impairment of Indefinite-Lived Intangible Assets (‘‘EITF 02-7’’) and SFAS 142. Of these, fourteen of
such nineteen units of accounting represented geographic groupings of licenses which, because they
were not being utilized and, therefore were not expected to generate cash flows from operating activities
in the foreseeable future, were considered separate units of accounting for purposes of impairment
testing. Subsequent to the second quarter 2008 licenses impairment testing, previously unutilized
licenses in one unit of accounting were deployed in one of the five units of accounting that represent
developed operating markets. As a result, U.S. Cellular’s impairment testing of licenses conducted in the
fourth quarter of 2008 was applied to eighteen units of accounting, thirteen of which represent licenses
that are not being utilized.
For purposes of impairment testing of goodwill, U.S. Cellular prepares valuations of each of the five
reporting units. A discounted cash flow approach is used to value each of the reporting units, using
value drivers and risks specific to the current industry and economic markets. The cash flow estimates
incorporate assumptions that market participants would use in their estimates of fair value. Key
assumptions made in this process are the discount rate, estimated future cash flows, projected capital
expenditures and terminal value multiples.
For purposes of impairment testing of licenses, U.S. Cellular prepares valuations of each of the units of
accounting that represent developed operating markets using an excess earnings methodology. This
excess earnings methodology estimates the fair value of the units of accounting by measuring the future
cash flows of the license groups, reduced by charges for contributory assets such as working capital,
trademarks, existing subscribers, fixed assets, assembled workforce and goodwill. For units of
accounting which consist of licenses that are not being utilized, U.S. Cellular prepares estimates of fair
value by reference to fair market values indicated by recent auctions and market transactions where
available.
As stated above, U.S. Cellular performs the required annual impairment assessment of its licenses and
goodwill in the second quarter of the year. As a result of the further deterioration in the credit and
financial markets and the accelerated decline in the overall economy in the fourth quarter of 2008,
U.S. Cellular performed another impairment assessment of licenses and goodwill as of December 31,
2008.
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