US Cellular 2014 Annual Report Download - page 30

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United States Cellular Corporation
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management believes the application of the following critical accounting policies and the estimates
required by such application reflect its most significant judgments and estimates used in the preparation
of U.S. Cellular’s consolidated financial statements. Management has discussed the development and
selection of each of the following accounting policies and related estimates and disclosures with the
Audit Committee of U.S. Cellular’s Board of Directors.
Intangible Asset Impairment
Goodwill and licenses represent a significant component of U.S. Cellular consolidated assets. These
assets are considered to be indefinite lived assets and are therefore not amortized but tested annually for
impairment. U.S. Cellular performs annual impairment testing of Goodwill and Licenses, as required by
GAAP, as of November 1 of each year. Significant negative events, such as changes in any of the
assumptions described below as well as decreases in forecasted cash flows, could result in an
impairment in future periods.
See Note 7—Intangible Assets in the Notes to Consolidated Financial Statements for information related
to Goodwill and Licenses activity in 2014 and 2013.
Goodwill
Based on the results of the U.S. Cellular annual Goodwill impairment assessment performed as of
November 1, 2014, the fair value of each of the reporting units exceeded their respective carrying values.
Therefore, no impairment of Goodwill existed.
For purposes of impairment testing of Goodwill in 2014 and 2013, U.S. Cellular identified four reporting
units based on geographic service areas.
A discounted cash flow approach was used to value each reporting unit, using value drivers and risks
specific to the industry and current economic factors. The cash flow estimates incorporated assumptions
that market participants would use in their estimates of fair value and may not be indicative of U.S.
Cellular specific assumptions. However, the discount rate used in the analysis accounts for any additional
risk a market participant might place on integrating U.S. Cellular into its operations at the level of cash
flows assumed under this approach. The most significant assumptions made in this process were the
revenue growth rate (shown as a compound annual growth rate in the table below), the terminal revenue
growth rate, the discount rate and capital expenditures as a percentage of revenue (shown as a simple
average in the table below). There are uncertainties associated with these key assumptions and potential
events and/or circumstances that could have a negative effect on these key assumptions, which are
described below. These assumptions were as follows:
November 1,
Key Assumptions 2014
Revenue growth rate(1) ..................................... 1.6%
Terminal revenue growth rate(1) ............................... 2.0%
Discount rate(2) ........................................... 10.5%
Capital expenditures as a percentage of revenue(3) ................. 16.5%
(1) There are risks that could negatively impact the projected revenue growth rates, including,
but not limited to: the success of new and existing products/services, competition,
operational difficulties and churn.
(2) The discount rate of each reporting unit was computed by calculating the weighted average
cost of capital of market participants with businesses reasonably comparable to U.S.
Cellular. The discount rate is dependent upon the cost of capital of other industry market
participants and the company specific risk. To the extent that the weighted average cost of
capital of industry participants increases or U.S. Cellular’s risk in relation to its peers
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