Netgear 2013 Annual Report Download - page 67

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The carrying value of the asset is
reviewed on a regular basis for the existence of facts, both internal and external, that may suggest impairment. Charges related to the impairment of
property and equipment were not material in the years ended December 31, 2013 , 2012 and 2011 .
Goodwill
Goodwill represents the purchase price over estimated fair value of net assets of businesses acquired in a business combination. Goodwill acquired
in a business combination is not amortized, but instead tested for impairment at least annually during the fourth quarter. Should certain events or
indicators of impairment occur between annual impairment tests, the Company will perform the impairment test as those events or indicators occur.
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; and slower growth rates.
Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than
not (that is, a likelihood of more than 50%) that the fair value of the reporting unit is less than its carrying value. The qualitative assessment considers
the following factors: macroeconomic conditions, industry and market considerations, cost factors, overall company financial performance, events
affecting the reporting units, and changes in the Company's share price. If the reporting unit does not pass the qualitative assessment, then the Company
estimates its fair value and compare the fair value with the carrying value of its net assets. If the fair value is greater than the carrying value of its net
assets, then no impairment results. If the fair value is less than its carrying value, then it would determine the fair value of the goodwill by comparing the
implied fair value to the carrying value of the goodwill in the same manner as if the Company were being acquired in a business combination.
Specifically, the Company would allocate the fair value to all of our 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 the fourth fiscal quarter of 2013, we completed the annual impairment test of goodwill. Due to the increase in goodwill in fiscal year 2013 as a
result of our acquisitions, we elected to bypass the qualitative assessment and proceed directly to estimating the fair value of net assets for each reporting
unit. The fair value of the business units was determined placing an equal weighting of 50 percent on the income approach and market approach
indications of value. Under the income approach, the fair value of an asset is based on the value of the estimated cash flows that the asset can be
expected to generate in the future. These estimated future cash flows were discounted to arrive at their respective fair values. Under the market
approach, the fair value of the unit is based on an analysis of financial data for publicly traded companies engaged in the same or similar lines of
business. We compared the fair value of the reporting units to the reporting unit’
s carrying value and determined that goodwill was not impaired since
the estimated fair values of each of the reporting units exceeded the carrying values. The excess of fair value over carrying amount for each of our
reporting units ranged from approximately 15% to approximately 219%
of carrying amounts. The service provider business unit has the lowest excess of
fair value over carrying amount at 15%
. In order to evaluate the sensitivity of the estimated fair values of our reporting units in the goodwill impairment
test, we applied a hypothetical 10% decrease to the fair values of each reporting unit. This hypothetical 10% decrease resulted in a lowest excess of fair
value over carrying amount of approximately 4%
for service provider business unit. We will continue to monitor goodwill on an annual basis as of the
beginning of our fourth fiscal quarter and whenever events or changes in circumstances, such as significant adverse changes in business climate or
operating results, changes in management's business strategy or significant declines in our stock price, indicate that there may be potential indicator of
impairment.
No goodwill impairment was recognized in the years ended December 31, 2013 , 2012 or 2011 .
Intangible 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 four to ten years. Finite-
lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition.
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