Earthlink 2009 Annual Report Download - page 60

Table of Contents
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. 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 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 $42.9 million as of December 31, 2009 and our put right with a carrying value and fair value of $5.2 million as
of December 31, 2009.
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. Prior to February 2008, due to
the auction process, quoted market prices were readily available, which would have qualified as Level 1. 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 and 2009 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 expected future cash flows. These securities were also compared, when possible, to other observable market data with similar characteristics
to the securities held by us. Due to the failed auctions, we classify these instruments within Level 3. We elected the fair value option for the put
right to offset the fair value changes of the auction rate securities. The fair value of the put right is estimated using a discounted cash flow
analysis and is classified within Level 3.
Determining the fair values of our auction rate securities and put right requires judgment. If other assumptions and estimates had been used
in the current period, the fair value of our auction rate securities and put right could have been materially impacted. Furthermore, if management
uses different assumptions in future periods, future operating results could be materially impacted.
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