FairPoint Communications 2011 Annual Report Download - page 62

Table of Contents
As of December 31, 2010, as a result of changes to our financial projections related to the Chapter 11 Cases, we determined that a possible impairment
of our long-lived assets – the property, plant and equipment and customer relationships of the Predecessor Company – was indicated. In accordance with the
guidance related to impairment of long-lived assets, we performed recoverability tests, based on undiscounted projected future cash flows associated with our
long-lived assets, and determined that long-lived assets were not impaired at December 31, 2010.
At September 30, 2011, given the significant sustained decline in our stock price since the Effective Date and the September 30, 2011 impairment of
goodwill and the FairPoint trade name, as further described below, we determined that a possible impairment of our long-lived assets – the property, plant and
equipment, customer relationships and favorable leasehold agreements – was present. However, we concluded that long-lived assets were recoverable based on
the Company’s estimated gross cash flows being greater than the carrying value.
As of December 31, 2011, we performed our routine review of impairment triggering events specified by the guidance related to impairment of long-lived
assets and concluded that we do not believe a triggering event has occurred.
Goodwill impairment is determined using a two-step process. Step one compares the estimated fair value of our single wireline reporting unit (calculated
using both the market approach and the income approach) to its carrying amount, including goodwill. The market approach compares our fair value, as
measured by our market capitalization, to our carrying amount, which represents our stockholders’ equity balance. The income approach is based upon
projected future cash flows discounted to present value using factors that consider the timing and risk associated with the future cash flows. The fair value of
the Company’s single wireline reporting unit was estimated using a probability weighted scenario of future cash flow projections based on management’s long
range estimates of market conditions over a multiple year horizon. An estimated growth rate was used to arrive at an estimated terminal value. A discount rate
was based upon a cost of capital calculated using various inputs, such as the risk-free rate, equity risk premium, size premium, company specific premium,
etc., as of the date of the goodwill impairment test.
Step two compares the implied fair value of our goodwill (i.e., our fair value less the fair value of our assets and liabilities, including identifiable
intangible assets) to our goodwill carrying amount. If the carrying amount of our goodwill exceeds the implied fair value of our goodwill, the excess is required
to be recorded as an impairment.
At October 1, 2010, we performed step one of our annual goodwill impairment assessment and concluded that there was no indication of impairment at
that time.
At September 30, 2011, given the significant sustained decline in our stock price since the Effective Date which had caused our market capitalization to
be below our book value, we determined that a possible impairment of goodwill was indicated and concluded that an interim goodwill impairment test was
necessary. In step one, we calculated the discounted cash flows to arrive at a fair value, which was then compared to the carrying value, including goodwill. A
combination of expected cash flows and higher discount rates resulted in the fair value, using the discounted cash flow method, being less than the carrying
value, at which point we proceeded to step two, as outlined above. Results of the impairment test required us to record an impairment charge reducing the
carrying value of the goodwill to zero at September 30, 2011. This non-cash impairment charge had no impact on our compliance with the covenants contained
in the Credit Agreement.
Our only non-amortizable intangible asset other than goodwill is the FairPoint trade name. Consistent with the valuation methodology used to value the
trade name at the Effective Date, we assessed the fair value of the trade name based on the relief from royalty method. If the carrying amount of our trade name
exceeds its estimated fair value, the asset is considered impaired. For our non-amortizable intangible asset impairment assessments of the FairPoint trade name,
we 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, exclusive of cash flows associated with wholesale revenues as these revenues are not generated through brand
recognition. Changes in one or more of these assumptions may result in the recognition of an impairment loss different from what was actually recorded.
We performed our 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 our financial projections related to the Chapter 11 Cases, we determined that a
possible impairment of our non-amortizable intangible assets was indicated. We performed an interim non-amortizable intangible asset impairment assessment
as of December 31, 2010 and determined that our trade name was not impaired.
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