Expedia 2012 Annual Report Download - page 95

We establish assets and liabilities for the present value of estimated future costs to return certain of our
leased facilities to their original condition under the authoritative accounting guidance for asset retirement
obligations. Such assets are depreciated over the lease 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. In September 2011, we adopted the Financial Accounting Standard
Board’s (“FASB”) new guidance on impairment testing of goodwill. In the evaluation of goodwill for
impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair
value of the reporting unit is less than the carrying amount. If so, we perform a quantitative assessment and
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 September 2012, we adopted the FASB’s new guidance on impairment testing of indefinite-lived
intangible assets. In our evaluation of our indefinite-lived intangible assets, we first perform a qualitative
assessment to determine whether the fair value of the indefinite-lived intangible asset is more likely than not
impaired. If so, we perform a quantitative assessment and 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.
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