Netgear 2008 Annual Report Download - page 59

Table of Contents
value is greater than the carrying value of the Company’s net assets, then no impairment results. If the fair value is less than its carrying value,
then the Company would perform the second step and determine the fair value of the goodwill. In this second step, the amount of impairment is
determined by comparing the implied fair value to the carrying value of the goodwill in the same manner as if the Company was being acquired
in a business combination. Specifically, the Company would allocate the fair value to all of the Company’s assets and liabilities, including any
unrecognized intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of
goodwill is less than the recorded goodwill, an impairment charge would be recorded to earnings in the Consolidated Statements of Operations.
In addition, the Company would evaluate goodwill for impairment if events or circumstances change between annual tests indicating a
possible impairment. Examples of such events or circumstances include the following: a significant decline in the Company’s expected future
cash flows; a sustained, significant decline in the Company’s stock price and market capitalization; a significant adverse change in the business
climate; the testing for recoverability of a significant asset group; and slower growth rates.
In the fourth quarter of fiscal 2008, the Company completed the annual impairment test of goodwill. The Company’s fair value was
determined using a combination of the income approach and the market approach. Under the market approach, the Company utilized information
regarding the Company as well as publicly available industry information to determine earnings multiples and revenue multiples that were used
to value the Company. Under the income approach, the Company determined the fair value based on estimated future cash flows, discounted by
an estimated weighted-average cost of capital, which reflects the Company’s overall level of inherent risk and the rate of return an outside
investor would expect to earn. Determining the Company’s fair value is judgmental in nature and requires the use of significant estimates and
assumptions, including revenue growth rates and operating margins, discount rates and future market conditions, among others.
Solely for the purpose of establishing inputs for the fair value calculation, the Company made the following assumptions. For the income
approach, a 3% growth factor was used to calculate the Company’s terminal value and the discount rate was estimated at 20%. For the market
approach, the Company applied a control premium of 30% which seeks to give effect to the increased consideration a potential acquirer would
be required to pay in order to gain sufficient ownership to set policies, direct operations and make decisions related to the Company. In
conducting its impairment test in the fourth quarter of 2008, the Company determined its fair value exceeded the carrying value of its net assets
by approximately 12%. No goodwill impairment loss was recognized in the years ended December 31, 2006, 2007, or 2008.
Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance
that the Company’s estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery,
made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate
predictions of the future. If the Company’s assumptions regarding forecasted revenue or earnings are not achieved, the Company may be
required to record goodwill impairment charges in future periods, whether in connection with the Company’s next annual impairment testing in
the fourth quarter of 2009 or prior to that, if any such change constitutes a triggering event outside of the quarter from when the annual goodwill
impairment test is performed. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether
such charge would be material.
Long-lived assets
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets,
which range from two to five years. Purchased intangible assets determined to have indefinite useful lives are not amortized. Long-lived assets,
including property and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” Such conditions may include an economic downturn or a change
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