ServiceMagic 2011 Annual Report Download - page 53

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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 2011 and 2010, and the royalty rates used ranged from 1% to 9% in 2011 and 1% to 10% in 2010.
The fair value of each of the Company's six reporting units exceed their carrying values by more than 20% at October 1, 2011, the date of
our most recent annual impairment assessment. 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 2011 and 2010 the Company wrote-off certain capitalized software costs.
These charges are more fully described above in "Results of Operations for the Years Ended December 31, 2011, 2010 and 2009". The value of
property and equipment and definite-lived intangible assets is $286.2 million at December 31, 2011.
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 4 to the
consolidated financial statements, and reflect management's assessment of actual future taxes to be paid on items reflected in the consolidated
financial statements, giving consideration to both timing and the probability of realization. As of December 31, 2011, the balance of deferred tax
liabilities, net, is $260.1 million. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax
apportionment or the outcome of any review of our tax returns by the IRS, as well as actual operating results of the Company that vary
significantly from anticipated results.
We recognize liabilities for uncertain tax positions based on the two-step process. The first step is to evaluate the tax position for
recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement. This measurement
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