Waste Management 2013 Annual Report Download - page 133

Goodwill — At least annually, and more frequently if warranted on a nonrecurring basis, we assess our
goodwill for impairment using Level 3 inputs.
We assess whether a goodwill impairment exists using both qualitative and quantitative assessments. Our
qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely
than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If based on this
qualitative assessment we determine it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, we will not perform a quantitative assessment.
If the qualitative assessment indicates that it is more likely than not that the fair value of a reporting unit is
less than its carrying amount or if we elect not to perform a qualitative assessment, we perform a quantitative
assessment, or two-step impairment test, to determine whether a goodwill impairment exists at the reporting unit.
The first step in our quantitative assessment identifies potential impairments by comparing the estimated fair
value of the reporting unit to its carrying value, including goodwill. If the carrying value exceeds estimated fair
value, there is an indication of potential impairment and the second step is performed to measure the amount of
impairment. Fair value is typically estimated using a combination of the income approach and market approach
or only an income approach when applicable. The income approach is based on the long-term projected future
cash flows of the reporting units. We discount the estimated cash flows to present value using a weighted-
average cost of capital that considers factors such as market assumptions, the timing of the cash flows and the
risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value
estimate based upon the reporting units’ expected long-term performance considering the economic and market
conditions that generally affect our business. The market approach estimates fair value by measuring the
aggregate market value of publicly-traded companies with similar characteristics to our business as a multiple of
their reported cash flows. We then apply that multiple to the reporting units’ cash flows to estimate their fair
values. We believe that this approach is appropriate because it provides a fair value estimate using valuation
inputs from entities with operations and economic characteristics comparable to our reporting units.
Fair value computed by these two methods is arrived at using a number of factors, including projected future
operating results, economic projections, anticipated future cash flows, comparable marketplace data and the cost
of capital. There are inherent uncertainties related to these factors and to our judgment in applying them to this
analysis. However, we believe that these two methods provide a reasonable approach to estimating the fair value
of our reporting units.
As a result of our annual fourth quarter impairment tests for our Wheelabrator business during the years
ended December 31, 2012 and 2011, we concluded that goodwill was not impaired. In the second quarter of
2012, we believed an impairment indicator existed such that the fair value of our Wheelabrator business could
potentially be less than its carrying amount because of the negative effect on our revenues of the continued
deterioration of electricity commodity prices, coupled with our continued increased exposure to market prices as
a result of the expiration of several long-term, fixed-rate electricity commodity contracts at our waste-to-energy
and independent power facilities, and the expiration of several long-term disposal contracts at above-market
rates. We performed the interim quantitative assessment using both an income and a market approach in the
second quarter of 2012, which indicated that the estimated fair value of our Wheelabrator business exceeded its
carrying value. In the fourth quarter of 2012, we again performed our annual impairment test of our goodwill
balances, which indicated that the estimated fair value of our Wheelabrator business exceeded its carrying value
by approximately 10% compared to an excess of 30% at our annual fourth quarter 2011 test. This quantitative
assessment was performed using both an income and market approach.
During 2013, we noted no indicators of impairment that required us to perform an interim impairment test;
however, during our annual impairment test of our goodwill balances we determined the fair value of our
Wheelabrator business had declined and the associated goodwill was impaired. As a result, we recognized an
impairment charge of $483 million, which had no related tax benefit. We estimated the implied fair value of our
Wheelabrator reporting unit goodwill using a combination of income and market approaches. Because the annual
impairment test indicated that Wheelabrator’s carrying value exceeded its estimated fair value, we performed the
“step two” analysis. In the “step two” analysis, the fair values of all assets and liabilities were estimated,
including tangible assets, power contracts, customer relationships and trade name for the purpose of deriving an
estimate of the implied fair value of goodwill. The implied fair value of goodwill was then compared to the
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