Exelon 2014 Annual Report Download - page 63

Purchase Accounting
In accordance with the authoritative accounting guidance, the assets acquired and liabilities assumed in an acquired business are
recorded at their estimated fair values on the date of acquisition. The difference between the purchase price amount and the net fair
value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if it exceeds the estimated fair value
and as a bargain purchase gain on the income statement if it is below the estimated fair value. Determining the fair value of assets
acquired and liabilities assumed requires management’s judgment, the utilization of independent valuation experts and involves the
use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount
rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value
assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each
liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization
expense. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for
additional information.
Unamortized Energy Assets and Liabilities
Unamortized energy contract assets and liabilities represent the remaining unamortized balances of non-derivative energy contracts
that Generation has acquired. The initial amount recorded represents the fair value of the contract at the time of acquisition, and the
balance is amortized over the life of the contract in relation to the present value of the underlying cash flows. Amortization expense
and income are recorded through purchased power and fuel expense or operating revenues. Refer to Note 4—Mergers,
Acquisitions, and Dispositions and Note 10—Intangible Assets of the Combined Notes to Consolidated Financial Statements for
further discussion.
Impairment of Long-lived Assets
Exelon, Generation, ComEd, PECO and BGE regularly monitor and evaluate their long-lived assets and asset groups, excluding
goodwill, for impairment when circumstances indicate the carrying value of those assets may not be recoverable. Indicators for
impairment may include a deteriorating business climate, including current energy prices and market conditions, condition of the
asset, specific regulatory disallowance, or plans to dispose of a long-lived asset significantly before the end of its useful life, among
others.
The review of long-lived assets and asset groups for impairment requires significant assumptions about operating strategies and
estimates of future cash flows, which require assessments of current and projected market conditions. For the generation business,
forecasting future cash flows requires assumptions regarding forecasted commodity prices for the sale of power, costs of fuel and
the expected operations of assets. A variation in the assumptions used could lead to a different conclusion regarding the
recoverability of an asset or asset group and, thus, could have a significant effect on the consolidated financial statements. An
impairment evaluation is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived
assets or asset groups are largely independent of other groups of assets and liabilities. For the generation business, the lowest level
of independent cash flows is determined by evaluation of several factors, including the geographic dispatch of the generation units
and the hedging strategies related to those units as well as the associated intangible contract assets recorded on the balance sheet.
The cash flows from the generating units are generally evaluated at a regional portfolio level with cash flows generated from the
customer supply and risk management activities, including cash flows from contracts that are accounted for as intangible contract
assets and liabilities recorded on the balance sheet. In certain cases generating assets may be evaluated on an individual basis
where those assets are contracted on a long-term basis with a third party and operations are independent of other generating assets
(typically contracted renewables).
On a quarterly basis, Generation assesses its asset groups for indicators of impairment. If indicators are present, a recoverability test
is performed. Impairment may occur if the carrying value of the asset or asset group exceeds the future undiscounted cash flows.
When the undiscounted cash flow analysis indicates a long-lived asset or asset group is not recoverable, the amount of the
impairment loss is determined by measuring the excess of the carrying amount of the long-lived asset or asset group over its fair
value. The fair value of the long-lived asset or asset group is dependent upon a market participant’s view of the exit price of the
assets. This includes significant assumptions of the estimated future cash flows generated by the assets and market discount rates.
Events and circumstances often do not occur as expected and there will usually be differences between prospective financial
information and actual results, and those differences may be material. Accordingly, to the extent that any of the information used in
the fair value analysis requires judgment, the resulting fair market value would be different. As such, the determination of fair value is
driven by both internal assumptions that include significant unobservable inputs (Level 3) such as revenue and generation forecasts,
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