ServiceMagic 2014 Annual Report Download - page 53

Table of Contents
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following disclosure is provided to supplement the descriptions of IAC's accounting policies contained in Note 2 to the consolidated
financial statements in regard to significant areas of judgment. Management of the Company is required to make certain estimates, judgments and
assumptions during the preparation of its consolidated financial statements in accordance with U.S. generally accepted accounting principles. These
estimates, judgments and assumptions impact the reported amount of assets, liabilities, revenue and expenses and the related disclosure of
contingent assets and liabilities as of the date of the consolidated financial statements. Actual results could differ from those estimates. Because of
the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on
our consolidated financial statements than others. What follows is a discussion of some of our more significant accounting policies and estimates.
Business Combinations
The purchase price of each acquisition is attributed to the assets acquired and liabilities assumed based on their fair values at the date of
acquisition, including identifiable intangible assets that either arise from a contractual or legal right or are separable from goodwill. The fair value
of these intangible assets is based on detailed valuations that use information and assumptions provided by management. The excess purchase price
over the net tangible and identifiable intangible assets is recorded as goodwill.
In connection with some business combinations, the Company has entered into contingent consideration arrangements that are determined to
be part of the purchase price. Each of these arrangements are recorded at its fair value at the time of the acquisition and reflected at current fair
value for each subsequent reporting period thereafter until settled. The contingent consideration arrangements are generally based upon earnings
performance and/or operating metrics. The Company generally determines the fair value of contingent consideration using probability-weighted
analyses over the period in which the obligation is expected to be settled, and, to the extent the arrangement is long-term in nature, applies a
discount rate that appropriately captures the risk associated with the obligation. Significant changes in forecasted earnings or operating metrics
would result in a significantly higher or lower fair value measurement. Determining fair value is inherently difficult and subjective and can have a
material impact on our consolidated financial statements. The changes in the remeasured fair value of the contingent consideration arrangements
each reporting period are recognized in “General and administrative expense” in the accompanying consolidated statement of operations. See Note
7 for a discussion of contingent consideration arrangements.
Recoverability of Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets, which consist of the Company's acquired trade names and trademarks, are assessed annually
for impairment as of October 1 or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value
of a reporting unit or the fair value of an indefinite-lived intangible asset below its carrying value. The 2014, 2013 and 2012 annual assessments
identified no material impairments. The value of goodwill and indefinite-lived intangible assets that is subject to annual assessment for impairment
is $1.8 billion and $405.2 million, respectively, at December 31, 2014.
The Company has the option to qualitatively assess whether it is more likely than not that the fair value of a reporting unit is less than its
carrying value. If the Company elects to perform a qualitative assessment and concludes it is not more likely than not that the fair value of the
reporting unit is less than its carrying value, no further assessment of that reporting unit's goodwill is necessary; otherwise goodwill must be tested
for impairment using a two-
step process. The first step involves a comparison of the estimated fair value of each of the Company's reporting units to
its carrying value, including goodwill. In performing the first step, the Company determines the fair value of a reporting unit using both an income
approach based on discounted cash flows ("DCF") and a market approach based on multiples of earnings. Determining fair value requires the
exercise of significant judgment with respect to several items, including judgment about the amount and timing of expected future cash flows and
appropriate discount rates. The expected cash flows used in the DCF analyses are based on the Company's most recent budget and, for years beyond
the budget, the Company's estimates, which are based, in part, on forecasted growth rates. The discount rates used in the DCF analyses are intended
to reflect the risks inherent in the expected future cash flows of the respective reporting units. Assumptions used in the DCF analyses, including the
discount rate, are assessed annually based on the reporting units' current results and forecast, as well as macroeconomic and industry specific
factors. The discount rates used in the Company's annual goodwill impairment assessment ranged from 13% to 19% in 2014 and 13% to 25% in
2013. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired and the second step of
the impairment test is not necessary. If the carrying value of a reporting unit exceeds its estimated fair value, then the second step of the goodwill
impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's
goodwill with its carrying value to measure the amount of impairment, if any. The implied fair value of goodwill is determined in the same manner
as the amount of goodwill recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired
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