Tucows 2015 Annual Report Download - page 181

(g) Goodwill and Other Intangible assets
Goodwill
Goodwill represents the excess of purchase price over the fair values assigned to the net assets acquired in
business combinations. The Company does not amortize goodwill. Impairment testing for goodwill is performed annually
in the fourth quarter of each year or more frequently if impairment indicators are present. Impairment testing is performed
at the operating segment level. The Company has determined that it has three operating segments, Domain Services and
Network Access - Mobile Services and Network Access – Other Services.
The Company performs a qualitative assessment to determine whether there are events or circumstances which
would lead to a determination that it is more likely than not that goodwill has been impaired. If, after this qualitative
assessment, the Company determines that it is not more likely than not that goodwill has been impaired, then no further
quantitative testing is necessary. In performance of the qualitative test, an evaluation is made of the impact of various
factors to the expected future cash flows attributable to its operating segments and to the assumed discount rate which
would be used to present value those cash flows. Consideration is given to factors such as, macro-economic and industry
and market conditions including the capital markets and the competitive environment amongst others. In the event that the
qualitative tests indicate that there may be impairment, quantitative impairment testing is required.
In performance of the quantitative test, the Company uses a discounted cash flow or income approach in which
future expected cash flows at the operating segment level are converted to present value using factors that consider the
timing and risk of the future cash flows. The estimate of cash flows used is prepared on an unleveraged debt-free basis.
The discount rate reflects a market-derived weighted average cost of capital. The Company believes that this approach is
appropriate because it provides a fair value estimate based upon the Company’s expected long-term operating and cash
flow performance for its operating segment. The projections are based upon the Company’s best estimates of projected
economic and market conditions over the related period including growth rates, estimates of future expected changes in
operating margins and cash expenditures.
Other significant estimates and assumptions include terminal value growth rates, terminal value margin rates,
future capital expenditures and changes in future working capital. If assumptions and estimates used to allocate the
purchase price or used to assess impairment prove to be inaccurate, future asset impairment charges could be required.
Intangibles Assets not subject to amortization
Intangible assets not subject to amortization consist of surname domain names and direct navigation domain
names. While the domain names are renewed annually, through payment of a renewal fee to the applicable registry, the
Company has the exclusive right to renew these names at its option. Renewals occur routinely and at a nominal cost.
Moreover, the Company has determined that there are currently no legal, regulatory, contractual, economic or other factors
that limit the useful life of these domain names on an aggregate basis and accordingly treat the portfolio of domain names
as indefinite life intangible assets. The Company reevaluates the useful life determination for domain names in the
portfolio each year to determine whether events and circumstances continue to support an indefinite useful life.
The Company reviews individual domain names in the portfolio for potential impairment throughout the fiscal
year in determining whether a particular name should be renewed. Impairment is recognized for names that are not
renewed. The Company performs a qualitative assessment of the portfolio of domain names on an aggregate basis in the
fourth quarter of each year, to determine whether it is more likely than not that the fair market value of the portfolio of
domain names was less than the carrying amount. As part of the assessment, certain qualitative factors are considered,
including macro-economic conditions, industry and market conditions, levels of advertising revenue generated by the
names in the portfolio, non-renewal of names, as well as other factors. If there are indications of impairment following the
qualitative impairment testing, further quantitative impairment testing would be necessary. The fair value of the intangibles
in the operating segment is determined using an income approach consistent with that utilized for goodwill impairment
testing outlined above. Where the fair value of the aggregated portfolio of domain names is less than the aggregated
carrying amount of the portfolio, impairment is recognized.
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