United Airlines 2007 Annual Report Download - page 60

impairment test for its goodwill and other indefinite-lived intangible assets as of October 1, 2007 and 2006. These tests did not indicate any material impairment
of these assets.
Upon the implementation of fresh-start reporting (see Note 1, "Voluntary Reorganization Under Chapter 11—Fresh-Start Reporting," in the Combined
Notes to Consolidated Financial Statements) the Company's assets, liabilities and equity were valued at their respective fair values. The excess of reorganization
value over the fair value of net tangible and identifiable intangible assets and liabilities was recorded as goodwill in the accompanying Statements of
Consolidated Financial Position on the Effective Date. As discussed in Note 10, "Segment Information," in the Combined Notes to Consolidated Financial
Statements, the entire goodwill amount of $2.3 billion and $2.7 billion at December 31, 2007 and 2006, respectively, has been allocated to the mainline reporting
segment. In addition, the adoption of fresh-start reporting resulted in the recognition of $2.2 billion of indefinite-lived intangible assets.
SFAS 142 requires that a two-step impairment test be performed on goodwill. In the first step, the Company compares the fair value of the reporting unit to
its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets of the reporting unit, goodwill is not impaired and the
Company is not required to perform further testing. If the carrying value of the net assets of the reporting unit exceeds the fair value of the reporting unit, then the
Company must perform the second step to determine the implied fair value of the goodwill and compare it to the carrying value of the goodwill. If the carrying
value of goodwill exceeds its implied fair value, then the Company must record an impairment charge equal to such difference.
The Company assessed the fair value of its reporting units considering both the market and income approaches. Fair value is estimated under each approach
and a weighted-average fair value is determined by applying an equal weighting to both approaches. The market approach utilizes quoted market prices, adjusted
for control premium and other factors, and recent transaction values of peer companies to estimate fair value. Under the income approach, the fair value of the
reporting unit is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors including estimates of
future capacity, passenger yield, traffic, operating costs, appropriate discount rates and other relevant factors. To estimate the fair value of indefinite-lived
intangible assets the Company used the market and income approaches, discussed above, and the cost method, which uses the concept of replacement cost as an
indicator of fair value.
At December 31, 2007 and 2006, United recorded an indefinite-lived intangible asset of $255 million for its London Heathrow slots, based upon its
estimation of the fair value for those slots as of the adoption of fresh-start reporting on February 1, 2006. United, however, determined at fresh-start that its rights
relating to its actual route authorities to Heathrow had a fair value of zero. The EU/U.S. open skies agreement is expected to directly impact the future value and
expected lives of route authorities to Heathrow; however, there is no direct impact from the open skies agreement on airport slot rights, including those at
Heathrow. The open skies agreement is also expected to provide United an opportunity to secure antitrust immunity for certain of its Star Alliance carrier
relationships, and to provide United and other carriers with access to new markets in EU countries. In September 2007, the DOT granted United and bmi antitrust
immunity. The immunity goes into effect at the same time as the open skies agreement between the U.S. and the EU in March of 2008. Because of the diverse
nature of these potential impacts on United's business, the overall future impact of the EU agreement on United's business in the EU region cannot be predicted
with certainty. United has concluded that, in certain circumstances, the open skies agreement could indirectly and adversely affect the fair value of its slot rights
at Heathrow, and therefore has further concluded that the signing of the open skies agreement on April 30, 2007 constituted an indicator of impairment with
respect to United's Heathrow slots intangible asset.
59
Source: UNITED AIR LINES INC, 10-K, February 29, 2008