ServiceMagic 2014 Annual Report Download - page 72

IAC/INTERACTIVECORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
lower by 20% as of October 1, 2014, the carrying value of Search & Applications would have exceeded its fair value by approximately $100
million .
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, the fair value of the
reporting unit has to be determined and if the carrying value of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal
to the excess is recorded. The Company also has the option to qualitatively assess whether it is more likely than not that the fair value of an
indefinite-lived intangible asset 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 an indefinite-lived intangible asset is less than its carrying value, the fair value of the asset does not need
to be determined; otherwise, the fair value of the indefinite-
lived intangible asset has to be determined and if its carrying value exceeds its estimated
fair value, an impairment loss equal to the excess is recorded.
The Company determines the fair values of its reporting units using both an income approach based on discounted cash flows ("DCF") and a
market approach based on a multiple of earnings. Determining fair value requires the exercise of significant judgment with respect to several items,
including 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 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 each reporting unit's 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 .
The Company determines the fair values of its indefinite-lived intangible assets using avoided royalty DCF analyses. Significant judgments
inherent in these analyses 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 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 10% to 20% in 2014 and 10% to 18% in
2013 , and the royalty rates used ranged from 1% to 9% in both 2014 and 2013 .
The Company's reporting units are consistent with its determination of its operating segments. Goodwill is tested for impairment at the
reporting unit level. See Note 13 for additional information regarding the Company's method of determining operating and reportable segments.
Long-Lived Assets and Intangible Assets with Definite Lives
Long-lived assets, which consist of property and equipment and intangible assets with definite lives, are reviewed 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. Amortization of definite-lived intangible assets is computed either on a straight-line basis or based on the pattern in
which the economic benefits of the asset will be realized.
Fair Value Measurements
The Company categorizes its financial instruments measured at fair value into a fair value hierarchy that prioritizes the inputs used in pricing
the asset or liability. The three levels of the fair value hierarchy are:
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Level 1: Observable inputs obtained from independent sources, such as quoted prices for identical assets and liabilities in active markets.