Southwest Airlines 2015 Annual Report Download - page 78

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acquisition date. In addition, the Company’s other intangible assets have a net carrying amount of
approximately $464 million at December 31, 2015, of which $303 million related to indefinite-lived
intangible assets. Indefinite-lived assets are not amortized and primarily consist of take-off and landing
slots at certain domestic slot-controlled airports. Finite-lived intangible assets include leasehold rights
to airport gates and certain intangible assets recognized as a part of the valuation of AirTran and are
amortized over their estimated economic useful lives. Goodwill and indefinite-lived intangible assets
are not amortized, but tested for impairment annually, as of October 1st, or more frequently if events or
circumstances indicate that impairment may exist.
The Company applies a fair value based impairment test to the carrying value of goodwill and
indefinite-lived intangible assets annually on October 1st, or more frequently if certain events or
circumstances indicate that an impairment loss may have been incurred. The Company assesses the
value of goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under
a qualitative approach, the Company considers various market factors, including applicable key
assumptions listed below. These factors are analyzed to determine if events and circumstances have
affected the fair value of goodwill and indefinite-lived intangible assets. If the Company determines
that it is more likely than not that an indefinite-lived intangible asset is impaired, the quantitative
approach is used to assess the asset’s fair value and the amount of the impairment. Under a quantitative
approach, the fair value is calculated based on key assumptions listed below. If the asset’s carrying
value exceeds its fair value calculated using the quantitative approach, an impairment charge is
recorded for the difference in fair value and carrying value.
When performing a quantitative impairment assessment of goodwill and indefinite-lived intangible
assets, fair value is estimated based on (i) recent market transactions, where available, (ii) projected
discounted cash flows (an income approach) or (iii) a combination of limited market transactions and
the lease savings method (which reflects potential annual after-tax lease savings arising from owning
the slots rather than leasing them from another airline at market rates).
Key assumptions and/or estimates made in the Company’s impairment tests include: (i) a projection of
revenues, expenses, and cash flows; (ii) terminal period revenue growth and cash flows; (iii) an
estimated weighted average cost of capital; (iv) an assumed discount rate depending on the asset, (v) a
tax rate and (vi) market prices for comparable assets. The Company believes these assumptions are
consistent with those a hypothetical market participant would use given circumstances that were
present at the time the estimates were made. However, actual results and amounts may be significantly
different from the Company’s estimates.
As part of this evaluation, the Company assesses whether changes in (i) macroeconomic conditions;
(ii) industry and market conditions; (iii) cost factors; (iv) overall financial performance; and
(v) Company-specific events, have occurred which would impact the use and/or fair value of these
assets since the Company’s quantitative analysis in 2013. In 2015, the Company performed a
qualitative assessment of goodwill and determined that there was no indication that goodwill was
impaired. The qualitative assessment included analysis and weighting of all relevant factors noted
above. The Company performed a quantitative assessment of all indefinite-lived intangible assets and
determined that there was no impairment in 2015.
Future impairment of Goodwill and indefinite-lived intangible assets may result from changes in
assumptions, estimates, or circumstances, some of which are beyond the Company’s control. Factors
which could result in an impairment of Goodwill, holding other assumptions constant, could include,
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