Vonage 2015 Annual Report Download - page 71

VONAGE HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(In thousands, except per share amounts)
F-11 VONAGE ANNUAL REPORT 2015
of the related assets, which range from three to five years. Leasehold
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.
Goodwill
Goodwill acquired in the 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. If such a determination
is made, then 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,
2015.
Intangible Assets
Intangible assets acquired in the settlement of litigation or by
direct purchase are accounted for based upon the fair value of assets
received.
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, 2015, 2014, or 2013.
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. A portion of these costs are netted against the underlying notes
payable in accordance with ASU 2015-15, "Interest-Imputation of
Interest".
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 $2,498 and
$3,311 as of December 31, 2015 and 2014, respectively, mainly related
to lease deposits for our Holmdel office. In the aggregate, cash reserves
and collateralized letters of credit of $2,587 and $3,405 were recorded
as long-term restricted cash at December 31, 2015 and 2014,
respectively.
Derivatives
We do not hold or issue derivative instruments for trading
purposes. However, in accordance with FASB ASC 815, “Derivatives
and Hedging” (“FASB ASC 815”), we review our contractual obligations
to determine whether there are terms that possess the characteristics
of derivative financial instruments that must be accounted for separately
from the financial instrument in which they are embedded. We recognize
these features as liabilities in our consolidated balance sheet at fair
value each period and recognize any change in the fair value in our
statement of operations in the period of change. We estimate the fair
value of these liabilities using available market information and
appropriate valuation methodologies.
Income Taxes
We recognize deferred tax assets and liabilities at enacted
income tax rates for the temporary differences between the financial
reporting bases and the tax bases of our assets and liabilities. Any effects
of changes in income tax rates or tax laws are included in the provision
for income taxes in the period of enactment. Our net deferred tax assets
primarily consist of net operating loss carry forwards (“NOLs”). We are
required to record a valuation allowance against our net deferred tax
assets if we conclude that it is more likely than not that taxable income
generated in the future will be insufficient to utilize the future income tax
benefit from our net deferred tax assets (namely, the NOLs) prior to