Earthlink 2011 Annual Report Download - page 89

Table of Contents
EARTHLINK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill and Other Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for
under the purchase method of accounting. Purchased intangible assets consist primarily of subscriber bases and customer relationships, acquired
software and technology, trade names and other assets acquired in conjunction with the purchases of businesses and subscriber bases from other
companies. When management determines material intangible assets are acquired in conjunction with the purchase of a company, the Company
determines the fair values of the identifiable intangible assets by taking into account management's own analysis and an independent third party
valuation specialist's appraisal. Intangible assets determined to have definite lives are amortized over their estimated useful lives. Subscriber
bases acquired directly are valued at cost plus assumed service liabilities, which approximates fair value at the time of purchase.
The Company does not amortize goodwill and intangible assets deemed to have indefinite lives. The Company tests its goodwill and
indefinite-
lived intangible assets annually during the fourth quarter of its fiscal year or when events and circumstances indicate that those assets
might have an other than temporary impairment. Impairment testing of goodwill is required at the reporting unit level (operating segment or one
level below operating segment) and involves a two-
step process. The first step of the impairment test involves comparing the estimated fair
values of the Company's reporting units with the reporting units' carrying amounts, including goodwill. The Company estimates the fair value of
the reporting unit using discounted expected future cash flows. If the carrying amount of the reporting unit exceeds its fair value, a second step is
performed to compare the carrying amount of goodwill to the implied fair value of that goodwill. If the carrying amount of goodwill exceeds the
implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. Impairment testing of intangible
assets deemed to have indefinite lives is performed by comparing the carrying value of the asset to the fair value. If the carrying amount of an
indefinite-lived intangible asset exceeds the fair value, an impairment loss is recognized equal to the excess.
Long
-Lived Assets
The Company evaluates the recoverability of long-lived assets, including property and equipment and purchased definite-
lived intangible
assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions
that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in
the extent or manner in which an asset is used or a significant adverse change that would indicate the carrying amount of an asset or group of
assets is not recoverable. For long-
lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not
recoverable through its undiscounted cash flows and measures the impairment loss, if any, based on the difference between the carrying amount
and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell.
Leases
The Company categorizes leases at their inception as either operating or capital leases depending on certain criteria. Certain of the
Company's operating lease agreements include scheduled rent escalations or rent holiday over the term of the lease. The Company recognizes
rent expense on a straight-
line basis over the term of the lease. The difference between rent expense and rent paid is recorded as deferred rent
and included in other liabilities in the Consolidated Balance Sheets. Incentives granted under certain leases are treated as a reduction of the
Company's rent expense on a straight-line basis over the term of the
82