iHeartMedia 2005 Annual Report Download - page 69

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69
The SEC staff issued D-108 at the September 2004 meeting of the EITF. D-108 states that the residual method
should no longer be used to value intangible assets other than goodwill. Rather, D-108 requires that a direct method
be used to value intangible assets other than goodwill. Prior to adoption of D-108, the Company recorded its
acquisition at fair value using an industry accepted income approach. The value calculated using the income
approach was allocated to the indefinite-lived intangibles after deducting the value of tangible and intangible assets,
as well as estimated costs of establishing a business at the market level. The Company used a similar approach in its
annual impairment test prior to its adoption of D-108.
D-108 requires that an impairment test be performed upon adoption using a direct method for valuing intangible
assets other than goodwill. Under the direct method, it is assumed that rather than acquiring indefinite-lived
intangible assets as a part of a going concern business, the buyer hypothetically obtains indefinite-lived intangible
assets and builds a new operation with similar attributes from scratch. Thus, the buyer incurs start-up costs during
the build-up phase which are normally associated with going concern value. Initial capital costs are deducted from
the discounted cash flows model which results in value that is directly attributable to the indefinite-lived intangible
assets.
Under the direct method, the Company continues to aggregate its indefinite-lived intangible assets at the market
level for purposes of impairment testing as prescribed by EITF 02-07, Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets. The Company’s key assumptions using the direct method are market revenue
growth rates, market share, profit margin, duration and profile of the build-up period, estimated start-up capital
costs and losses incurred during the build-up period, the risk-adjusted discount rate and terminal values. This data
is populated using industry normalized information representing an average station within a market.
The Company’s adoption of the direct method resulted in an aggregate fair value of its indefinite-lived intangible
assets that were less than the carrying value determined under its prior method. As a result of the adoption of D-
108, the Company recorded a non-cash charge of $4.9 billion, net of deferred taxes of $3.0 billion as a cumulative
effect of a change in accounting principle during the fourth quarter of 2004. The non-cash charge of $4.9 billion,
net of tax is comprised of a non-cash charge of $4.7 billion and $.2 billion within our broadcasting FCC licenses
and our outdoor permits, respectively.
Goodwill
The Company tests goodwill for impairment using a two-step process. The first step, used to screen for potential
impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The second
step, used to measure the amount of the impairment loss, compares the implied fair value of the reporting unit
goodwill with the carrying amount of that goodwill. The following table presents the changes in the carrying
amount of goodwill in each of the Company’s reportable segments for the years ended December 31, 2005 and
2004:
(In thousands)
Radio
Americas
Outdoor
International
Outdoor
Other
Total
Balance as of December 31, 2003 $ 6,419,191 $ 355,354 $ 355,461 $ 28,742 $ 7,158,748
Acquisitions 8,201 53,718 3,066 458 65,443
Foreign currency 29,401 29,401
Adjustments (58,210) (11,007) 1,701 (61) (67,577)
Balance as of December 31, 2004 6,369,182 398,065 389,629 29,139 7,186,015
Acquisitions 7,497 1,896 4,407 2,957 16,757
Foreign currency ― ― (50,232) ― (50,232)
Adjustments (55,285) 6,003 (193) 8,883 (40,592)
Balance as of December 31, 2005 $ 6,321,394 $ 405,964 $ 343,611 $ 40,979 $ 7,111,948