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period into operating expense, and the recorded liabilities are accreted to the future value of the estimated
restoration costs.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business
combination as of the acquisition date. We assess goodwill and indefinite-lived intangible assets, neither of
which is amortized, for impairment annually as of October 1, or more frequently, if events and circumstances
indicate impairment may have occurred. See Note 5 —Goodwill and Intangible Assets, Net for discussion of
impairment of goodwill and indefinite-lived assets in 2008 and 2006.
In the evaluation of goodwill for impairment, we first compare the fair value of the reporting unit to the
carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting
unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis,
we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill
over its implied fair value should such a circumstance arise.
We generally base our measurement of fair value of reporting units on a blended analysis of the present
value of future discounted cash flows and market valuation approach. The discounted cash flows model
indicates the fair value of the reporting units based on the present value of the cash flows that we expect the
reporting units to generate in the future. Our significant estimates in the discounted cash flows model include:
our weighted average cost of capital; long-term rate of growth and profitability of our business; and working
capital effects. The market valuation approach indicates the fair value of the business based on a comparison
of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in
the market approach model include identifying similar companies with comparable business factors such as
size, growth, profitability, risk and return on investment and assessing comparable revenue and operating
income multiples in estimating the fair value of the reporting units.
We believe the weighted use of discounted cash flows and market approach is the best method for
determining the fair value of our reporting units because these are the most common valuation methodologies
used within the travel and internet industries; and the blended use of both models compensates for the inherent
risks associated with either model if used on a stand-alone basis.
In addition to measuring the fair value of our reporting units as described above, we consider the
combined carrying and fair values of our reporting units in relation to the Company’s total fair value of equity
plus debt as of the assessment date. Our equity value assumes our fully diluted market capitalization, using
either the stock price on the valuation date or the average stock price over a range of dates around the
valuation date, plus an estimated acquisition premium which is based on observable transactions of comparable
companies. The debt value is based on the highest value expected to be paid to repurchase the debt, which can
be fair value, principal or principal plus a premium depending on the terms of each debt instrument.
In the evaluation of indefinite-lived intangible assets, an impairment charge is recorded for the excess of
the carrying value of indefinite-lived intangible assets over their fair value. We base our measurement of fair
value of indefinite-lived intangible assets, which primarily consist of trade name and trademarks, using the
relief-from-royalty method. This method assumes that the trade name and trademarks have value to the extent
that their owner is relieved of the obligation to pay royalties for the benefits received from them.
Recoverability of Intangible Assets with Definite Lives and Other Long-Lived Assets
Intangible assets with definite lives and other long-lived assets are carried at cost and are amortized on a
straight-line basis over their estimated useful lives of two to twelve years. We review the carrying value of
long-lived assets or asset groups, including property and equipment, to be used in operations whenever events
or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors
F-11
Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)