8x8 2016 Annual Report Download - page 41

Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill represents the excess fair value of consideration transferred over the fair
value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible assets are not amortized, but are annually
tested for impairment and more often if there is an indicator of impairment.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine
whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this
assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required
to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial
performance, and other relevant events and factors affecting the reporting unit.
Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we
operate. This process requires us to estimate our actual current tax expense and to assess temporary differences resulting from book-tax accounting differences for
items such as accrued vacation. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would reduce income tax expense in the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets, which include net operating loss
and tax credit carry forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable. During the fourth quarter of fiscal 2016 and 2015, we evaluated the need for a valuation allowance against our net
deferred tax asset and concluded that we needed less of an allowance. Therefore, we decreased our valuation allowance by approximately $1.1 million and $1.5
million, as certain California net operating losses will not be utilized as they have expired in fiscal 2016 and 2015. During the fourth quarters of fiscal 2014, we
evaluated the need for a valuation allowance against our net deferred tax asset and concluded that an additional allowance was needed. Therefore, we increased our
valuation allowance related to our state and federal net operating loss and tax credit carryovers which resulted in reversals of previous income statement credits of
approximately $1.3 million. We determined that an increase in our valuation allowance was appropriate as a result of the change in the net income apportionment
methodology in California and the acquisition of Voicenet in the third quarter of fiscal 2014. In making this determination, we considered all available positive and
negative evidence, including our recent earnings trend and expected continued future taxable income. As of March 31, 2016, the net deferred tax asset on the
consolidated balance sheet represented the projected tax benefit we expect to realize. We continue to maintain a valuation allowance against the portion of our
deferred tax assets that we believe is more likely than not to be used to reduce our income tax liability.
We have received inquiries, demands or audit requests from several state, municipal and 9-1-1 taxing agencies seeking payment of taxes that are applied to or
collected from the customers of providers of traditional public switched telephone network services. We recorded $0.4 million, $0.1 million and $0.1 million of
expense for the years ended March 31, 2016, 2015 and 2014, respectively, for estimated tax exposure for such assessments.
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