XO Communications 2010 Annual Report Download - page 41

Download and view the complete annual report

Please find page 41 of the 2010 XO Communications annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 96

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96

the uncertainty involved in predicting the likelihood of future events and estimating the financial impact of
such events. Accordingly, it is possible that upon the further development or resolution of a contingent matter,
a significant charge could be recorded in a future period related to an existing contingent matter. For
additional information regarding all of our legal proceedings and loss contingencies, see Note 16 of our
consolidated financial statements in Item 8 of this Annual Report.
Property and Equipment
We annually evaluate the estimated useful lives used to depreciate our assets. When performing this
assessment we consider (i) our historical usage and future planned use of the assets, (ii) the views of experts
within and outside of XOH, (iii) the impact of technological advances and (iv) trends in the industry on the
value and useful lives of our network assets. Such criteria include the valuation of similar assets within the
industry and information gathered from manufacturers and other market participants. While we believe our
current estimates of useful lives are reasonable, significant differences in actual experience or significant
changes in assumptions may cause additional changes to future depreciation expense. As a result of an
evaluation, we changed the estimated useful life of certain network equipment which resulted in an increase of
$4.2 million to depreciation expense during 2009. No significant revisions were made as a result of
evaluations made in 2010 or 2008.
Impairment of Long-lived Assets
We assess the possible impairment of equipment and other assets held for use whenever events or
changes in circumstances indicate that the carrying amount of the assets may be impaired. The assessment
includes comparing estimated future undiscounted cash flows with the carrying values of the assets. This
analysis requires management to make subjective assessments of factors including future cash flows, holding
periods of assets and capitalization rates. In the event that there are changes in the planned use of these assets
or our expected future undiscounted cash flows are reduced significantly, the assessment of our ability to
recover the carrying value of these assets in the future could change. There were no impairments of our long-
lived assets held for use recorded during 2010, 2009 or 2008.
Goodwill and Indefinite-Lived Intangible Assets
We assess the possible impairment of goodwill and indefinite-lived intangible assets on an annual basis or
when impairment indicators exist. Both goodwill and indefinite-lived intangible assets are tested using a
discounted cash flow model. Cash flow projections and assumptions are based on a combination of our
historical performance and trends, our business plans and management’s estimate of future performance,
giving consideration to existing and anticipated competitive economic conditions. Other assumptions include
our estimated weighted average cost of capital and long-term rate of growth for our business.
Goodwill is tested by comparing the fair value of a reporting unit with its carrying amount including
goodwill. If the carrying value of the reporting unit exceeds fair value, the second step of the goodwill
impairment test is performed to measure the impairment loss, if any. Our indefinite-lived intangible assets are
tested in a manner similar to our goodwill. We estimate the fair value of our indefinite-lived intangible assets
using a discounted cash flow model. If the carrying value exceeds its fair value, the carrying value of the asset
is reduced to its fair value, resulting in an impairment charge. Any impairment loss determined by our
analysis would be recorded as a reduction in the carrying value of the related goodwill or indefinite-lived
intangible asset and charged to results of operations.
The Company performed its annual impairment evaluation of goodwill and indefinite-lived intangible
assets as of October 1, 2010 and determined that the fair value of the LMDS licenses was less than the
carrying value. Accordingly, LMDS licenses with a carrying amount of $27.5 million were written down to
their fair value of $7.5 million, resulting in an impairment charge of $20.0 million. The Company also
concluded that no impairment was required of its goodwill. The Company performed an impairment
evaluation of our LMDS licenses during the second quarter of 2009 as a result of integrating our Nextlink
segment into our existing product offerings. Based on the results of this evaluation, we recorded an
impairment charge of $8.3 million. There were no additional impairments of goodwill or indefinite-lived assets
as of December 31, 2009 or 2008. Although we believe our accounting policies are designed to properly
37