Vonage 2014 Annual Report Download - page 66

Table of Contents
VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
F-11 VONAGE ANNUAL REPORT 2014
improvements are amortized over their estimated useful life of the
related assets or the life of the lease, whichever is shorter. The cost of
renewals and substantial improvements is capitalized while the cost of
maintenance and repairs is charged to operating expenses as incurred.
Company-owned customer premises equipment is depreciated on a
straight-line basis over three years.
Our network equipment and computer hardware, which
consists of routers, gateways, and servers that enable our telephony
services, is subject to technological risks and rapid market changes due
to new products and services and changing customer demand. These
changes may result in future adjustments to the estimated useful lives
or the carrying value of these assets, or both.
Software Costs
We capitalize certain costs, such as purchased software and
internally developed software that we use for customer acquisition and
customer care automation tools, in accordance with FASB ASC 350-40,
“Internal-Use Software”. Computer software is stated at cost less
accumulated amortization and the estimated useful life is two to five
years.
As previously disclosed, we experienced delays and
incremental costs during the course of the development and
implementation of a new billing and ordering system by Amdocs
Software Systems Limited and Amdocs, Inc. (collectively, "Amdocs")
and the transition of customers to the system. We conducted
discussions with Amdocs to resolve the issues associated with the billing
and ordering system. Based on these discussions, and after our
consideration of the progress made improving our overall IT
infrastructure, the incremental time and costs to develop and implement
the Amdocs system, as well as the expected reduction in capital
expenditures, in June 2012 we and Amdocs determined that terminating
the program was in the best interest of both parties. On July 30, 2012,
we entered into a Settlement Agreement with Amdocs terminating the
related license agreement. As a result, we wrote off our investment in
the system of $25,262, net of settlement amounts to us, in the second
quarter of 2012. This charge is recorded as loss from abandonment of
software assets in the statement of income.
Goodwill and Purchased-Intangible Assets
Goodwill acquired in acquisition of a business is accounted
for based upon the excess fair value of consideration transferred over
the fair value of net assets acquired in the business combination.
Goodwill is tested for impairment on an annual basis on October 1st
and, when specific circumstances dictate, between annual tests. When
impaired, the carrying value of goodwill is written down to fair value. The
goodwill impairment test involves evaluating qualitative information to
determine if it is more than 50% likely that the fair value of a reporting
unit is less than its carrying value in determining if the traditional two-
step goodwill impairment test described below must be applied. The first
step, identifying a potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill. If the carrying
value of the reporting unit exceeds its fair value, the second step would
need to be conducted; otherwise, no further steps are necessary as no
potential impairment exists. The second step, measuring the impairment
loss, compares the implied fair value of the reporting unit goodwill with
the carrying amount of that goodwill. Any excess of the reporting unit
goodwill carrying value over the respective implied fair value is
recognized as an impairment loss. There was no impairment of goodwill
for the year ended December 31, 2014.
Purchased-intangible assets are accounted for based upon
the fair value of assets received. Purchased-intangible assets are
amortized on a straight-line or accelerated basis over the periods of
benefit, ranging from two to ten years. We perform a review of
purchased-intangible assets whenever events or changes in
circumstances indicate that the useful life is shorter than we had
originally estimated or that the carrying amount of assets may not be
recoverable. If such facts and circumstances exist, we assess the
recoverability of purchased-intangible assets by comparing the
projected undiscounted net cash flows associated with the related asset
or group of assets over their remaining lives against their respective
carrying amounts. Impairments, if any, are based on the excess of the
carrying amount over the fair value of those assets. If the useful life of
the asset is shorter than originally estimated, we accelerate the rate of
amortization and amortize the remaining carrying value over the new
shorter useful life. There was no impairment of purchased-intangible
assets identified for the years ended December 31, 2014, 2013, or 2012.
Intangible Assets and Goodwill
Intangible assets acquired in the settlement of litigation or by
direct purchase are accounted for based upon the fair value of assets
received. Goodwill acquired in acquisition of a business is accounted
for based upon the excess fair value of consideration transferred over
the fair value of net assets acquired in the business combinations.
Patents and Patent Licenses
Patent rights acquired in the settlement of litigation or by direct
purchase are accounted for based upon the fair value of assets received.
Long-Lived Assets
We evaluate impairment losses on long-lived assets used in
operations when events and changes in circumstances indicate that the
assets might be impaired. If our review indicates that the carrying value
of an asset will not be recoverable, based on a comparison of the carrying
value of the asset to the undiscounted future cash flows, the impairment
will be measured by comparing the carrying value of the asset to its fair
value. Fair value will be determined based on quoted market values,
discounted cash flows or appraisals. Impairments of property and
equipment are recorded in the statement of income as part of
depreciation expense.
Debt Related Costs
Costs incurred in raising debt are deferred and amortized as
interest expense using the effective interest method over the life of the
debt.
Noncontrolling Interest and Redeemable Noncontrolling
Interest
We consolidate a majority-owned entity where we have the
ability to exercise controlling influence. The ownership interest of the
noncontrolling party is presented as noncontrolling interest in the
Consolidated Balance Sheet as Stockholders' Equity. If we are required
to repurchase the noncontrolling interest at fair value, subject to
adjustment, under a put option or other contractual redemption
requirement, we will report the noncontrolling interest as redeemable in
the Consolidated Balance Sheets between liabilities and equity. We
adjust the redeemable noncontrolling interest to the redemption values
on each balance sheet date with changes recognized as an adjustment
to retained earnings, or in the absence of retained earnings, as an
adjustment to additional paid-in capital when it becomes probable the
noncontrolling interest will become redeemable.
Restricted Cash and Letters of Credit
We had a cash collateralized letter of credit for $3,311 and
$4,306 as of December 31, 2014 and 2013, respectively, related to lease
deposits for our Holmdel offices. In the aggregate, cash reserves and