Earthlink 2008 Annual Report Download - page 43

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2008 was primarily due to certain identifiable definite-lived intangible assets becoming fully amortized over the past year.
Impairment of goodwill and intangible assets
During the years ended December 31, 2007 and 2008, we recorded non-
cash impairment charges for goodwill and intangible assets of
$4.3 million and $78.7 million, respectively. We did not recognize any impairment losses during the year ended December 31, 2006. In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill and indefinite-
lived intangible assets must be tested for
impairment annually or when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
After conducting our annual impairment test during the fourth quarter of 2008, we concluded that goodwill and certain intangible assets
recorded as a result of our April 2006 acquisition of New Edge were impaired and we recorded non-
cash impairment charges related to the New
Edge reporting unit of $64.0 million for goodwill, $3.1 million for the indefinite-
lived trade name and $11.6 million for customer relationships.
The impairment charge was recorded in accordance with SFAS No. 142 with respect to goodwill and trade name, and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-
Lived Assets," with respect to the customer relationships. The primary factor contributing
to the impairment charge was the recent significant economic downturn. New Edge serves a large percentage of small and medium-
sized
business customers, especially retail businesses, which have been particularly affected by the recent economic downturn. Economic conditions
affecting retail businesses worsened substantially during the "holiday season" in the fourth quarter of 2008. As a result, management updated its
long-
range financial outlook which reflected decreased expectations of future growth rates and cash flows for New Edge. We used this updated
financial outlook in conjunction with our annual impairment test.
Goodwill. Impairment testing of goodwill is required at the reporting unit level and involves a two-
step process. Although we operate two
reportable segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," Consumer
Services and Business Services, we have identified three reporting units for evaluating goodwill in accordance with SFAS No. 142, which are
Consumer Services, New Edge and Web Hosting. The Consumer Services reportable segment is one reporting unit, while the Business Services
reportable segment consists of two reporting units, New Edge and Web Hosting. Each of these reporting units constitutes a business for which
discrete financial information is available and segment management regularly reviews the operating results.
The first step of the impairment test involves comparing the estimated fair value of our reporting units with the reporting unit's carrying
amount, including goodwill. We estimated the fair values of our reporting units primarily using the income approach valuation methodology that
included the discounted cash flow method, taking into consideration the market approach and certain market multiples as a validation of the
values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit were based on discrete financial
forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts were estimated by using a terminal value
calculation, which incorporated historical and forecasted financial trends for each identified reporting unit.
Upon completion of the first step of the impairment test, we determined that the carrying value of our New Edge reporting unit exceeded its
estimated fair value. Because indicators of impairment existed for this reporting unit, we performed the second step of the test required under
SFAS No. 142. In accordance with SFAS No. 142, we determined the implied fair value of goodwill in the same manner used to recognize
goodwill in a business combination. To determine the implied value of goodwill, we allocated fair values to the assets and liabilities of the New
Edge reporting unit as of October 1, 2008. We calculated the implied fair value of goodwill as the excess of the fair value of the New Edge
reporting unit over the amounts assigned to its assets and liabilities. We determined the $64.0 million impairment loss as the amount by which
the carrying value of goodwill exceeded the implied fair value of the goodwill.
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