FairPoint Communications 2011 Annual Report Download - page 96

Table of Contents
Goodwill impairment is determined using a two-step process. Step one compares the estimated fair value of the Company’s single 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 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 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 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.
During this assessment, management relies on a number of factors, including operating results, business plans and anticipated future cash flows. 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. At
December 31, 2010, the Company had goodwill of $595.1 million.
In connection with the Company’s adoption of fresh start accounting on the Effective Date, goodwill of the Predecessor Company was eliminated. On the
Effective Date, the Company recorded $256.0 million of goodwill in connection with the Company’s adoption of fresh start accounting. During the second
quarter of 2011, the Company made a $12.8 million reclassification adjustment to Property, Plant and Equipment based on fresh start accounting guidance
which reduced the goodwill to $243.2 million.
At September 30, 2011, as a result of the significant sustained decline in the Company’s stock price since the Effective Date, which had caused the
Company’s market capitalization to be below its book value, the Company determined that a possible impairment of goodwill was indicated and concluded
that an interim goodwill impairment test was necessary. In step one, the Company 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 the company proceeded to step two, as outlined above. Results of the
impairment test required the Company to record an impairment charge reducing the carrying value of the goodwill to zero at September 30, 2011. This non-
cash impairment charge has no impact on the Company’s compliance with the covenants contained in the Credit Agreement.
The goodwill impairment falls within Level 3 of the fair value hierarchy (see note 18), due to the use of significant unobservable inputs to determine fair
value. The fair value measurement was calculated using unobservable inputs, primarily using the income approach and specifically the discounted cash flow
method.
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In accordance with the Intangibles – Goodwill and Other Topic of the ASC non-amortizable intangible assets are assessed for impairment at least
annually. The Company performs its annual impairment test as of the first day of the fourth fiscal quarter of each year and 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.
For its non-amortizable intangible asset impairment assessments of the FairPoint trade name, the Company makes certain assumptions including an
estimated royalty rate, a long-term growth rate, an effective tax rate and a discount rate, and applies 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.
The Company performed its 2010 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. At December 31, 2010, the
Company’s trade name was recorded at $42.8 million.
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