United Airlines 2008 Annual Report Download - page 70

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circumstances indicate that an impairment loss may have been incurred, on an interim basis. An
impairment charge could have a material adverse effect on the Company’s financial position and results
of operations in the period of recognition. The Company tested its goodwill and other indefinite-lived
intangible assets for impairment during its annual impairment test as of October 1, 2007 and as part of
its interim test as of May 31, 2008. The interim testing resulted in the total impairment of the Company’s
goodwill and partial impairment of other indefinite-lived intangible assets. The Company also performed
its annual interim test of indefinite-lived intangible assets as of October 1, 2008.
Goodwill—2008 Interim Impairment Test
For purposes of testing goodwill, the Company performed Step One of the SFAS 142 test by
estimating the fair value of the mainline reporting unit (to which all goodwill is allocated) utilizing
several fair value measurement techniques, including two market estimates and one income estimate,
and using relevant data available through and as of May 31, 2008. The market approach is a valuation
technique in which fair value is estimated based on observed prices in actual transactions and on asking
prices for similar assets. The valuation process is essentially that of comparison and correlation between
the subject asset and other similar assets. The income approach is a technique in which fair value is
estimated based on the cash flows that an asset could be expected to generate over its useful life,
including residual value cash flows. These cash flows are discounted to their present value equivalents
using a rate of return that accounts for the relative risk of not realizing the estimated annual cash flows
and for the time value of money. Certain variations of the income approach were used to determine
certain of the intangible asset fair values.
Under the market approaches, the fair value of the mainline reporting unit was estimated based
upon the fair value of invested capital for UAL, as well as a separate comparison to revenue and
EBITDAR multiples for similar publicly traded companies in the airline industry. The fair value
estimates using both market approaches included a control premium similar to those observed for
historical airline and transportation company market transactions.
Under the income approach, the fair value of the mainline reporting unit was estimated based upon
the present value of estimated future cash flows for UAL. The income approach is dependent on a
number of critical management assumptions including estimates of future capacity, passenger yield,
traffic, operating costs (including fuel prices), appropriate discount rates and other relevant assumptions.
The Company estimated its future fuel-related cash flows for the income approach based on the five-year
forward curve for crude oil as of May 31, 2008. The impacts of the Company’s aircraft and other tangible
and intangible asset impairments, discussed below, were considered in the fair value estimation of the
mainline reporting unit.
Taking into consideration an equal weighting of the two market estimates and the income estimate,
which has been the Company’s practice when performing annual goodwill impairment tests, the indicated
fair value of the mainline reporting unit was less than its carrying value, and therefore, the Company was
required to perform Step Two of the SFAS 142 goodwill impairment test.
In Step Two of the impairment test, the Company determined the implied fair value of goodwill of
the mainline reporting unit by allocating the fair value of the reporting unit determined in Step One to
all the assets and liabilities of the mainline reporting unit, including any recognized and unrecognized
intangible assets, as if the mainline reporting unit had been acquired in a business combination and the
fair value of the mainline reporting unit was the acquisition price. As a result of the Step Two testing,
the Company determined that goodwill was completely impaired and therefore recorded an impairment
charge to write-off the full value of goodwill.
Indefinite-lived Intangible Assets
The Company utilized appropriate valuation techniques to separately estimate the fair values of all
of its indefinite-lived intangible assets as of May 31, 2008 and compared those estimates to related
carrying values. Tested assets included tradenames, international route authorities, London Heathrow
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