iHeartMedia 2009 Annual Report Download - page 37

The discount rate used in the December 31, 2008 impairment model increased 150 basis points compared to the discount
rate used in the preliminary purchase price allocation as of July 30, 2008 which resulted in a decline in the fair value of our licenses.
As a result, we recognized a non-cash impairment charge in approximately one-quarter of our markets, which totaled $936.2 million.
The fair value of our FCC licenses was $3.0 billion at December 31, 2008.
The BIA forecast for 2009 declined 8.7% and declined between 13.8% and 15.7% through 2013 compared to the BIA
forecasts used in the 2008 impairment test. Additionally, the industry profit margin declined 100 basis points from the 2008
impairment test. These market driven changes were primarily responsible for the decline in fair value of the FCC licenses below their
carrying value. As a result, we recognized a non-cash impairment charge in approximately one-quarter of our markets, which totaled
$590.3 million. The fair value of our FCC licenses was $2.4 billion at June 30, 2009.
In calculating the fair value of our FCC licenses, we primarily relied on the discounted cash flow models. However, we
relied on the stick method for those markets where the discounted cash flow model resulted in a value less than the stick method
indicated.
To estimate the stick values for our markets, we obtained historical radio station transaction data from BIA which involved
sales of individual radio stations whereby the station format was immediately abandoned after acquisition. These transactions are
highly indicative of stick transactions in which the buyer does not assign value to any of the other acquired assets (i.e. tangible or
intangible assets) and is only purchasing the FCC license.
In addition, we analyzed publicly available FCC license auction data involving radio broadcast licenses. Periodically, the
FCC will hold an auction for certain FCC licenses in various markets and these auction prices reflect the purchase of only the FCC
radio license.
Based on this analysis, the stick values were estimated to be the minimum value of a radio license within each market. This
value was considered to be the fair value of the license for those markets where the present value of the cash flows and terminal value
did not exceed the estimated stick value. Approximately 17% and 23% of the fair value of our FCC licenses at December 31, 2008
and June 30, 2009, respectively, was determined using the stick method.
The following table shows the increase to the FCC license impairment that would have occurred using hypothetical
percentage reductions in fair value, had the hypothetical reductions in fair value existed at the time of our impairment testing:
Annual Impairment Test to FCC Licenses
We perform our annual impairment test on October 1 of each year. We engaged Mesirow Financial, a third-party valuation
firm, to assist us in the development of the assumptions and our determination of the fair value of our FCC licenses. The aggregate
fair value of our FCC licenses on October 1, 2009 increased approximately 11% from the fair value at June 30, 2009. The increase in
fair value resulted primarily from an increase of $120.4 million related to improved revenue forecasts and an increase of $195.9
million related to a decline in the discount rate of 50 basis points. We calculated the discount rate as of the valuation date and also
one-year, two-year, and three-year historical quarterly averages. The discount rate was calculated by weighting the required returns on
interest-bearing debt and common equity capital in proportion to their estimated percentages in an expected capital structure. The
capital structure was estimated based on the quarterly average of data for publicly traded companies in the radio broadcasting
industry. These market driven changes were responsible for the decline in the calculated discount rate.
As a result of the increase in the fair value of our FCC licenses, no impairment was recorded at October 1, 2009. The fair
value of our FCC licenses at October 1, 2009 was approximately $2.7 billion.
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(In thousands)
June 30, 2009 December 31, 2008
Percent change in fair value Change to impairmen
t
Change to impairmen
t
5% $ 118,877 $ 151,008
10%
$ 239,536 $ 302,016
15% $ 360,279 $ 453,025