Washington Post 2012 Annual Report Download - page 73

including the reporting unit’s financial performance and conditions
in the television broadcasting industry. The Company’s policy
requires the performance of a quantitative impairment review of the
goodwill at least once every three years.
In connection with the Company’s reporting units where the two-step
goodwill impairment process was performed, the Company used a
discounted cash flow model, and where appropriate, a market
value approach was also utilized to supplement the discounted cash
flow model to determine the estimated fair value of its reporting
units. The Company made estimates and assumptions regarding
future cash flows, discount rates, long-term growth rates and market
values to determine each reporting unit’s estimated fair value. The
methodology used to estimate the fair value of the Company’s
reporting units on November 30, 2012, was consistent with the
one used during the 2011 annual goodwill impairment test.
The Company made changes to certain of its assumptions utilized in
the discounted cash flow models for 2012 compared with the prior
year to take into account changes in the economic environment,
regulations and their impact on the Company’s businesses. The key
assumptions used by the Company were as follows:
• Expected cash flows underlying the Company’s business plans for
the periods 2013 through 2017 were used. The expected cash
flows took into account historical growth rates, the effect of the
changed economic outlook at some of the Company’s
businesses, industry challenges and an estimate for the possible
impact of for-profit education regulations. Expected cash flows
also reflected the anticipated savings from restructuring plans at
the newspaper publishing and certain education divisions’
reporting units, and other initiatives.
• Cash flows beyond 2017 were projected to grow at a long-term
growth rate, which the Company estimated between 1% and 3%
for each reporting unit.
• The Company used a discount rate of 11.5% to 19.0% to risk
adjust the cash flow projections in determining the estimated
fair value.
As part of the annual impairment review, the KTP reporting unit
failed the step one goodwill impairment test, and, therefore, a
step two analysis was performed. As a result of the step two
analysis, the Company recorded a goodwill and other long-lived
asset impairment charge of $111.6 million. The impairment charge
is the result of a recent slowdown in enrollment growth at KTP,
operating losses for the past three years and other factors. A
substantial portion of the impairment charge is due to the amount
of unrecognized intangible assets identified in the step two analysis.
Following the impairment, the remaining goodwill balance at
the KTP reporting unit as of December 31, 2012, totaled
$49.9 million.
The fair value of each of the other reporting units exceeded its
respective carrying value as of November 30, 2012.
The estimated fair value of the KHE reporting unit exceeded its carrying
value by a margin in excess of 35%; however, this is a substantial
decrease in its estimated fair value compared with the prior year.
There exists a reasonable possibility that a decrease in the assumed
projected cash flows or the long-term growth rate, or an increase in the
discount rate assumption used in the discounted cash flow model of this
reporting unit, could result in an impairment charge.
The estimated fair value of the Company’s other reporting units with
significant goodwill balances exceeded their respective carrying
values by a margin in excess of 50%. Additional impairment
charges could occur at these reporting units as well, given the
inherent variability in projecting future operating performance.
Indefinite-Lived Intangible Assets
In the fourth quarter of 2012, the Company adopted new
accounting guidance that allows for an initial assessment of
qualitative factors to determine if it is more likely than not that the
fair value of its indefinite-lived intangible assets is less than its
carrying value. The Company compares the fair value of the
indefinite-lived intangible asset with its carrying value if the
qualitative factors indicate it is more likely than not that the fair value
of the asset is less than its carrying value or if it decides to bypass
the qualitative assessment. The Company records an impairment
loss if the carrying value of the indefinite-lived intangible assets
exceeds the fair value of the assets for the difference in the values.
The Company uses a discounted cash flow model, and in certain
cases, a market value approach is also utilized to supplement the
discounted cash flow model to determine the estimated fair value of
the indefinite-lived intangible assets. The Company makes estimates
and assumptions regarding future cash flows, discount rates, long-
term growth rates and other market values to determine the
estimated fair value of the indefinite-lived intangible assets.
The Company’s intangible assets with an indefinite life are
principally from franchise agreements at its cable television division.
These franchise agreements result from agreements the Company has
with state and local governments that allow the Company to contract
and operate a cable business within a specified geographic area.
The Company expects its cable franchise agreements to provide the
Company with substantial benefit for a period that extends beyond
the foreseeable horizon, and the Company’s cable television
division historically has obtained renewals and extensions of such
agreements for nominal costs and without material modifications to
the agreements. The franchise agreements represent 92% of the
$539.7 million of indefinite-lived intangible assets of the Company
as of December 31, 2012. The Company grouped the recorded
values of its various cable franchise agreements into regional cable
television systems or units of account.
As of November 30, 2012, the Company performed a qualitative
analysis to test the franchise agreements for impairment. The
estimated fair value of the Company’s franchise agreements
exceeded their respective carrying values by a margin in excess of
50% as of November 30, 2011, the last date a quantitative review
was performed. The Company’s qualitative assessment indicated
that it is not more likely than not that the estimated fair value of the
franchise rights are less than its carrying amount considering all
factors, including the review of prior year assumptions, the cable
division’s financial performance and conditions in the cable
television industry.
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