Earthlink 2008 Annual Report Download - page 55

Table of Contents
values derived using the discounted cash flow methodology. The discounted cash flows for each reporting unit are based on discrete financial
forecasts developed by management for planning purposes. Cash flows beyond the discrete forecasts are estimated using a terminal value
calculation, which incorporates historical and forecasted financial trends for each identified reporting unit.
If we determine that the carrying value of a reporting unit exceeds its estimated fair value, we perform a second step. The implied fair value
of goodwill is determined in the same manner as utilized to recognize goodwill in a business combination. The implied fair value of goodwill is
measured as the excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities. Any impairment loss is
measured by the amount the carrying value of goodwill exceeded the implied fair value of the goodwill.
The impairment test for our indefinite-
lived intangible assets, which consist of trade names, involves a comparison of the estimated fair
value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is
recognized in an amount equal to that excess. We determine the fair value of our trade names using the royalty savings method, in which the fair
value of the asset is calculated based on the present value of the royalty stream that we are saving by owning the asset. Significant judgments
required to estimate the fair value include assumptions about royalty rates and the selection of appropriate discount rates. Changes in these
estimates and assumptions could materially affect the determination of fair value for our indefinite-
lived intangible assets which could impact the
amount of an impairment.
Long
-lived assets
For noncurrent assets such as property and equipment, definite-
lived intangible assets and investments in other companies, we perform tests
of impairment when certain events or changes in circumstances indicate that the carrying amount may not be recoverable. During the fourth
quarter of 2008, we recorded a non-
cash impairment charge of $11.6 million related to New Edge customer relationships. Our tests involve
critical estimates reflecting management's best assumptions and estimates related to, among other factors, subscriber additions, churn, prices,
marketing spending, operating costs and capital spending. Significant judgment is involved in estimating these factors, and they include inherent
uncertainties. Management periodically evaluates and updates the estimates based on the conditions that influence these factors. The variability
of these factors depends on a number of conditions, including uncertainty about future events, and thus our accounting estimates may change
from period to period. If other assumptions and estimates had been used in the current period, the balances for noncurrent assets could have been
materially impacted. Furthermore, if management uses different assumptions or if different conditions occur in future periods, future operating
results could be materially impacted.
Fair value measurements
We adopted the provisions of SFAS No. 157 effective January 1, 2008. We determined that we utilize unobservable (Level 3) inputs in
determining the fair value of certain assets, which included auction rate securities with a carrying value and fair value of $47.8 million as of
December 31, 2008.
Our auction rate securities are variable-
rate debt instruments whose underlying agreements have contractual maturities of up to 40 years,
but have interest rate reset periods at pre-
determined intervals, usually every 28 days. These securities are predominantly secured by student
loans guaranteed by state related higher education agencies and reinsured by the U.S. Department of Education. Beginning in February 2008,
auctions for these securities failed to attract sufficient buyers, resulting in us continuing to hold such securities. In prior periods, due to the
auction process, quoted market prices were readily available, which would have qualified as Level 1 under SFAS No. 157. However, due to
events in credit markets beginning in February 2008, these securities did not have readily determinable market values and were not liquid. The
fair values of our auction rate securities as of December 31, 2008 were estimated utilizing a discounted cash flow analysis. This analysis
considered, among other items, the collateralization underlying the security investments, the creditworthiness of the counterparty, and the timing
and value of
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