Enom 2012 Annual Report Download - page 58

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projections, anticipated future cash flows and marketplace data. The Company also determined that the impact of
macroeconomic factors on the discount rates and growth rates used for the most recent impairment tests would not significantly
affect the fair value of the reporting units. Based on this qualitative assessment and considering the aggregation of these factors,
the Company concluded that for each of its three reporting units, it is more likely than not that the fair value of each reporting
unit exceeds its carrying amount and that it was therefore unnecessary to perform the two-step impairment test.
Capitalization and Useful Lives Associated with our Intangible Assets, including Content and Internal Software and
Website Development Costs
We publish long-lived media content generated by our content studio which we commission and acquire from third-party
freelance creative professionals. Direct costs incurred for each individual content unit that we determine embodies a probable
future economic benefit are capitalized. The vast majority of direct content costs represent amounts paid to freelance creative
professionals to acquire content units and, to a lesser extent, specifically identifiable internal direct labor costs incurred to
enhance the value of acquired content units prior to their publication. Internal costs not directly attributable to the enhancement
of content units acquired prior to publication are expensed as incurred. All costs incurred to deploy and publish content are
expensed as incurred, including the costs incurred for the ongoing maintenance of websites on which our content resides. We
generally acquire content when our internal systems and processes, including an analysis of millions of historical Internet
search queries, advertising marketing terms, or keywords, and other data provide reasonable assurance that, given predicted
consumer and advertiser demand relative to our predetermined cost to acquire the content, the content unit will generate
revenues over its useful life that exceed the cost of acquisition. In determining whether content embodies probable future
economic benefit required for asset capitalization, we make judgments and estimates including the forecasted number of
page views and the advertising rates that the content will generate. These estimates and judgments take into consideration
various inherent uncertainties including, but not limited to, total expected page views over the articles useful life, our expected
ability to renew at favorable terms or replace certain material agreements with Google that currently provide a significant
portion of our revenues; the expected ability of our direct advertising sales force to sell branded advertisements; the fact that
our content creation and distribution model is new and evolving and may be impacted by competition and technological
advancements; our ability to expand existing and enter into new distribution channels and applications for our content; and
whether we will be able to continue to create content of the same quality or generate similar economic returns from content in
the future. Management has reviewed, and intends to regularly review the operating performance of content in determining
probable future economic benefits of our content.
We also capitalize initial registration and acquisition costs of our undeveloped websites and our internally developed
software and website development costs during their development phase.
In addition we have also capitalized certain identifiable intangible assets acquired in connection with business
combinations and we use valuation techniques to value these intangibles assets, with the primary technique being a discounted
cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions and estimates
including projected revenues, operating costs, growth rates, useful lives and discount rates.
Our finite lived intangible assets are amortized over their estimated useful lives using the straight-line method, which
approximates the estimated pattern in which the underlying economic benefits are consumed. Capitalized website registration
costs for undeveloped websites are amortized on a straight-line basis over their estimated useful lives of one to seven years.
Internally developed software and website development costs are depreciated on a straight-line basis over their estimated three
year useful life. We amortize our intangible assets acquired through business combinations on a straight-line basis over the
period in which the underlying economic benefits are expected to be consumed.
Capitalized content is amortized on a straight-line basis over five years, representing our estimate of the pattern that the
underlying economic benefits are expected to be realized and based on our estimates of the projected cash flows from
advertising revenues expected to be generated by the deployment of our content. These estimates are based on our current plans
and projections for our content, our comparison of the economic returns generated by content of comparable quality and an
analysis of historical cash flows generated by that content to date which, particularly for more recent content cohorts, is
somewhat limited. To date, certain content that we acquired in business combinations has generated cash flows from
advertisements beyond a five year useful life. The acquisition of content, at scale, however, is a new and rapidly evolving
model, and therefore we closely monitor its performance and, periodically, assess its estimated useful life.
Advertising revenue generated from the deployment of our media content makes up a significant element of our business
such that amounts we record in our financial statements related to our content are material. Significant judgment is required in
estimating the useful life of our content. Changes from the five year useful life we currently use to amortize our capitalized
content would have a significant impact on our financial statements. For example, if underlying assumptions were to change
such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2012,
our net income would increase by approximately $5 million for the year ended December 31, 2012, and our net income would