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Table of Contents
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, we have identified three reporting units for evaluating goodwill, which are Consumer
Services (which consists of our consumer product offerings including narrowband and broadband access, VoIP and value-
added services),
EarthLink Business and Web Hosting. The Consumer Services reportable segment is one reporting unit, while the Business Services reportable
segment consists of two reporting units, EarthLink Business 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
ITC^DeltaCom acquisition was allocated to the EarthLink Business reporting unit. There is no remaining goodwill from our New Edge
acquisition. Goodwill resulting from all other acquisitions related to consumer products and was 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 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. 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
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