ServiceMagic 2010 Annual Report Download - page 51

Table of Contents
exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. The estimates of fair value of indefinite-lived
intangible assets are determined using an avoided royalty DCF valuation analysis. Significant judgments inherent in this analysis include the
selection of appropriate royalty and discount rates and estimating the amount and timing of expected future cash flows. The discount rates used
in the DCF analyses are intended to reflect the risks inherent in the expected future cash flows generated by the respective intangible assets. The
royalty rates used in the DCF analyses are based upon an estimate of the royalty rates that a market participant would pay to license the
Company's trade names and trademarks. Assumptions used in the avoided royalty DCF analyses, including the discount rate and royalty rate, are
assessed annually based on the actual and projected cash flows related to the asset, as well as macroeconomic and industry specific factors. The
discount rates used in the Company's annual indefinite-lived impairment assessment ranged from 13% to 20% in both 2010 and 2009, and the
royalty rates used ranged from 1% to 10% in both 2010 and 2009.
The Company has six reporting units with goodwill. Of these, IAC Search & Media and Shoebuy have fair values closest to their carrying
values. The amount of goodwill of each of these reporting units is $534.0 million and $21.7 million, respectively, at December 31, 2010. To
illustrate the magnitude of potential impairment charges related to potential future changes in estimated fair values, had the estimated fair values
of each of these reporting units been hypothetically lower by 10% as of October 1, 2010, their estimated fair values would exceed their carrying
values. Had the estimated fair values of each of these reporting units been hypothetically lower by 20% as of October 1, 2010, the carrying
values of IAC Search & Media and Shoebuy would have exceeded their fair values by approximately $9 million and $3 million, respectively. If
operating results of these businesses vary significantly from anticipated results, future, and in the case of IAC Search & Media, potentially
material, impairments of goodwill and/or indefinite-lived intangible assets could occur.
Any impairment charge that might result in the future would be determined based upon the excess of the carrying value of goodwill over its
implied fair value using the second step of the impairment analysis that is described above but, in any event, would not be expected to be lower
than the excess of the carrying value of the reporting unit over its fair value. The primary driver in the DCF valuation analyses and the
determination of the fair values of the Company's reporting units is the estimate of future revenue and profitability. Generally, the Company
would expect to record an impairment if forecasted revenue and profitability are no longer expected to be achieved and as a result, the carrying
value of a reporting unit(s) exceeds its fair value. This assessment would be based, in part, upon the performance of its businesses relative to
budget, the Company's assessment of macroeconomic factors, industry and competitive dynamics and the strategies of its businesses in response
to these factors.
Recoverability of Long-Lived Assets
We review the carrying value of all long-lived assets, comprising property and equipment and definite-lived intangible assets, for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value
of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual
disposition of the asset. If the carrying value is deemed not to be recoverable, an impairment loss is recorded equal to the amount by which the
carrying value of the long-lived asset exceeds its fair value. During 2010, the Company did not record any impairment charges related to
definite-lived intangible assets. During 2009, the Company recorded an impairment charge related to the definite-lived intangible assets of IAC
Search & Media. The definite-lived intangible asset impairment charge primarily related to certain technology and advertiser relationships, the
carrying values of which were no longer considered recoverable based upon an assessment of future cash flows related to these assets.
Accordingly, these assets were written down to fair value in 2009. The value of long-lived assets that is subject to assessment for impairment is
$276.0 million at December 31, 2010.
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