FairPoint Communications 2010 Annual Report Download - page 88

Table of Contents
Concurrent with the filing of the Chapter 11 Cases, on October 26, 2009 the Company wrote off all remaining debt issue and offering costs related to its
pre-petition debt in accordance with the Reorganizations Topic of the ASC.
The Company entered into the Debtor-in-Possession Credit Agreement (as amended, the “DIP Credit Agreement”) on October 27, 2009. The Company
incurred $0.9 million of debt issue costs associated with the DIP Credit Agreement and began to amortize these costs over the nine-month life of the DIP Credit
Agreement using the effective interest method. Concurrent with the final order of the Bankruptcy Court, dated March 11, 2010 (the “Final DIP Order”), the
Company incurred an additional $1.1 million of debt issue costs associated with the DIP Credit Agreement and began to amortize these costs over the
remaining life of the DIP Credit Agreement using the effective interest method. On October 22, 2010, the Company incurred an additional $0.4 million of debt
issue costs to extend the DIP Credit Agreement through January 2011. The Company has amortized these costs over the extended life of the DIP Credit
Agreement.
As of December 31, 2010 and 2009, the Company had capitalized debt issue costs of $0.1 million and $0.7 million, respectively, net of amortization.
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Advertising costs are expensed as they are incurred.
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Goodwill consists of the difference between the purchase price incurred in the acquisition of Legacy FairPoint using the purchase method of accounting and
the fair value of net assets acquired. In accordance with the Intangibles-Goodwill and Other Topic of the ASC , goodwill is no longer amortized, but instead is
assessed for impairment at least annually. During this assessment, management relies on a number of factors, including operating results, business plans,
and anticipated future cash flows.
Goodwill impairment is determined using a two-step process. Step one compares the estimated fair value of the Company’s single wireline reporting unit
(calculated using both the market approach and the income approach) to its carrying amount, including goodwill. The market approach compares the fair
value of the Company, as measured by its market capitalization, to the carrying amount of the Company, which represents its shareholders’ equity balance.
As of December 31, 2010, shareholders’ deficit totaled $587.4 million. The income approach compares the fair value of the Company, as measured by
discounted expected future cash flows, to the carrying amount of the Company. If the Company’s carrying amount exceeds its estimated fair value, there is a
potential impairment and step two of the analysis must be performed.
Step two compares the implied fair value of the Company’s goodwill (i.e. the fair value of the Company less the fair value of the Company’s assets and
liabilities, including identifiable intangible assets) to its goodwill carrying amount. If the carrying amount of the Company’s goodwill exceeds the implied fair
value of the goodwill, the excess is required to be recorded as an impairment.
The Company performed step one of its annual goodwill impairment assessment as of October 1, 2010 and concluded that there was no impairment at that
time.
As of December 31, 2010, the Company had goodwill of $595.1 million.
The Company’s only non-amortizable intangible asset is the trade name of Legacy FairPoint acquired in the Merger. Consistent with the valuation
methodology used to value the trade name at the Merger, the Company assesses the fair value of the trade name based on the relief from royalty method. If the
carrying amount of the trade name exceeds its estimated fair value, the asset is considered impaired. The Company performed its annual non-amortizable
intangible asset impairment assessment as of October 1, 2010 and concluded that there was no indication of impairment at that time. As of December 31,
2010, as a result of changes to the Company’s financial projections related to the Chapter 11 Cases, the Company determined that a possible impairment of its
non-amortizable intangible assets was indicated. The Company performed an interim non-amortizable intangible asset impairment assessment as of December
31, 2010 and determined that the trade name was not impaired.
For its non-amortizable intangible asset impairment assessments at December 31, and October 1, 2010, the Company made certain assumptions including
an estimated royalty rate, a long-term growth rate, an effective tax rate and a discount rate, and applied these assumptions to projected future cash flows of the
consolidated FairPoint Communications business, exclusive of cash flows associated with wholesale
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