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Expedia, Inc.
Notes to Consolidated Financial Statements — (Continued)
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 that
would necessitate an impairment assessment include a significant adverse change in the extent or manner in
which an asset is used, a significant adverse change in legal factors or the business climate that could affect the
value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts
indicate a potential impairment, we would assess the recoverability of an asset group by determining if the
carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result
from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the
asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we
will estimate the fair value of the asset group using appropriate valuation methodologies which would typically
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