ComEd 2013 Annual Report Download - page 56

Goodwill
AsofDecember 31,2013,Exelon’s andComEd’s carryingamount ofgoodwill wasapproximately$2.6 billion,relatingto the
acquisition ofComEd in 2000 aspart ofthePECO/UnicomMerger.Under the provisionsofthe authoritativeguidancefor goodwill,
ComEd is requiredto performan assessment for possible impairment ofitsgoodwill at least annuallyor more frequentlyifan event
occursor circumstanceschangethat wouldmore likelythan not reducethefairvalue oftheComEd reportingunitbelowitscarrying
amount.Under the authoritativeguidance,a reportingunitis an operatingsegment or operatingcomponent andisthelevel at which
goodwill is testedfor impairment.Entitiesassessinggoodwill for impairment havethe option offirst performingaqualitative
assessment to determine whether a quantitativeassessment is necessary. In performingaqualitativeassessment,entitiesshould
assess, amongother things, macroeconomic conditions, industryandmarket considerations, overall financial performance,cost
factors, andentity-specific events. If an entitydetermines, on thebasis ofqualitativefactors, that thefairvalue ofthe reportingunitis
more likelythan not greater than thecarryingamount,no further testingisrequired. If an entitybypassesthequalitativeassessment
or performs thequalitativeassessment,but determinesthat itis more likelythan not that itsfairvalue is less than itscarrying
amount,aquantitativetwo-step,fairvalue-basedtestis performed. Thefirststep comparesthefairvalue ofthe reportingunittoits
carryingamount,includinggoodwill.Ifthecarryingamount ofthe reportingunitexceeds itsfairvalue,thesecondstep is performed.
Thesecondstep requiresan allocation offairvalue to theindividual assetsandliabilitiesusingpurchaseprice allocation accounting
guidanceinorder to determine theimpliedfairvalue ofgoodwill.Iftheimpliedfairvalue ofgoodwill is less than thecarryingamount,
an impairment loss is recordedasareduction to goodwill andacharge to operatingexpense.Application ofthegoodwill impairment
testrequiresmanagement judgment,includingtheidentification ofreportingunitsanddeterminingthefairvalue ofthe reportingunit,
which management estimatesusingaweightedcombination ofadiscountedcash flowanalysis andamarket multiplesanalysis.
Significant assumptionsusedinthesefairvalue analysesincludediscount andgrowthrates, utilitysector market performanceand
transactions, projectedoperatingandcapital cash flows for ComEd’s business andthefairvalue ofdebt.In applyingthesecondstep
(if needed), management mustestimate thefairvalue ofspecific assetsandliabilitiesofthe reportingunit.
Management concludedtheremeasurement ofthelike-kindexchangeposition andthechargetoComEd’s earnings inthefirst
quarter of2013 triggeredan interim goodwill impairment assessment and, asaresult,ComEd testeditsgoodwill for impairment asof
January31,2013.Thefirststep oftheinterim impairment assessment comparingtheestimatedfairvalue ofComEd to itscarrying
value,includinggoodwill,indicatedno impairment ofgoodwill;therefore,thesecondstep wasnot required.
ComEd performedaquantitativeassessment asofNovember 1,2013,for its2013 annual goodwill impairment assessment.Thefirst
step oftheinterim impairment assessment comparingtheestimatedfairvalue ofComEd to itscarryingvalue,includinggoodwill,
indicatedno impairment ofgoodwill;therefore,thesecondstep wasnot required.
While neither theinterim nor the annual assessmentsindicatedan impairment ofComEd’s goodwill,certainassumptionsusedto
estimate thefairvalue ofComEd are highlysensitivetochanges. Adverseregulatoryactions, such asearlytermination of EIMA,or
changesinsignificant assumptions, including discount andgrowthrates, utilitysector market performanceandtransactions,
projectedoperatingandcapital cash flows fromComEd’s business, andthefairvalue ofdebt,couldpotentiallyresult inafuture
impairment ofComEd’s goodwill, which couldbematerial.Basedon theresultsofthe annual goodwill test performedasof
November 1,2013,theestimatedfairvalue ofComEd wouldhave neededto decreaseby more than 10%for ComEd to failthefirst
step oftheimpairment test.See Note 1—Significant AccountingPolicies, Note 10—Intangible AssetsandNote 14—IncomeTaxesof
theCombinedNotesto ConsolidatedFinancial Statementsfor additional information.
Purchase Accounting
Inaccordancewiththe authoritativeaccountingguidance,the purchasepriceofan acquiredbusiness is generallyallocatedto the
assetsacquiredandliabilitiesassumedat theirestimatedfairvalueson thedate ofacquisition.Anyunallocatedpurchaseprice
amount is recognizedasgoodwill on thebalancesheet if itexceeds theestimatedfairvalue andasabargain purchasegainonthe
incomestatement if itis belowtheestimatedfairvalue.Determiningthefairvalue ofassetsacquiredandliabilitiesassumedrequires
management’s judgment,theutilization ofindependent valuation expertsandinvolvestheuseof significant estimatesand
assumptionswithrespecttothetimingandamountsoffuture cash inflows andoutflows, discount rates, market pricesandasset
lives, amongother items. Thejudgmentsmadeinthedetermination oftheestimatedfairvalue assignedto theassetsacquiredand
liabilitiesassumed, aswell astheestimateduseful lifeofeach asset andtheduration ofeach liability, can materiallyimpactthe
financial statementsin periods after acquisition,such asthrough depreciation andamortization expense.See Note 4—Merger and
AcquisitionsoftheCombinedNotesto ConsolidatedFinancial Statementsfor additional information.
Unamortized Energy Assets and Liabilities
Unamortizedenergy contractassetsandliabilitiesrepresent theremainingunamortizedbalancesofnon-derivative energy contracts
that Generation hasacquired. Theinitial amount recordedrepresentsthefairvalue ofthecontractatthetimeofacquisition,andthe
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