Earthlink 2008 Annual Report Download - page 54

Table of Contents
operating loss carryforwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely
than not that all or a portion of the deferred tax assets will not be realized. We consider the probability of future taxable income and our
historical profitability, among other factors, in assessing the amount of the valuation allowance. During the year ended December 31, 2008, we
released $65.6 million of our valuation allowance related to our deferred tax assets. These deferred tax assets relate primarily to net operating
loss carryforwards which we determined, in accordance with SFAS No. 109, "Accounting for Income Taxes," we will more likely than not be
able to utilize due to the generation of sufficient taxable income in the future. Of the total valuation allowance release, $56.1 million was
recorded as an income tax benefit in the Consolidated Statement of Operations and $9.5 million related to acquired net operating losses and
reduced goodwill on the Consolidated Balance Sheet. We maintain a partial valuation allowance for our deferred tax assets, primarily net
operating loss carryforwards, due to uncertainty regarding their realization. Adjustments could be required in the future if we estimate that the
amount of deferred tax assets to be realized is more or less than the net amount we have recorded. Any decrease in the valuation allowance could
have the effect of increasing stockholders' equity and/or decreasing the income tax provision in the statement of operations.
Recoverability of noncurrent assets
Goodwill and indefinite-lived intangible assets
We account for intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill
and indefinite lived-intangible assets be tested for impairment at least annually. We perform an impairment test of our goodwill and indefinite-
lived intangible assets annually during the fourth quarter of our fiscal year or when events and circumstances indicate the indefinite-
lived
intangible assets might be permanently impaired. During the fourth quarter of 2008, our annual impairment test 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 and $3.1 million for the indefinite-lived trade name.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assigning assets and liabilities
to reporting units, assigning goodwill to reporting units, and determining the fair value of each reporting unit. Significant judgments required to
estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates, growth rates and other
assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for each reporting unit which
could trigger impairment or impact the amount of the impairment.
Although we operate two reportable segments in accordance with SFAS No. 131, we have identified three reporting units for evaluating
goodwill in accordance with SFAS No. 142, which are Consumer Services (which consists of our consumer product offerings including
narrowband and broadband access, VoIP and value-
added 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. Goodwill resulting from our New Edge acquisition in 2006 is allocated to the New Edge reporting unit. Goodwill resulting
from all other acquisitions related to consumer products and is allocated to the Consumer Services reporting unit. No goodwill is allocated to our
Web Hosting reporting unit.
Impairment testing of goodwill is required at the reporting unit level and involves a two-
step process. 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 estimate the
fair values of our reporting units primarily using the income approach valuation methodology that includes the discounted cash flow method,
taking into consideration the market approach and certain market multiples as a validation of the
50