iHeartMedia 2006 Annual Report Download - page 51

51
vesting period. Determining the fair value of share-based awards at the grant date requires assumptions and judgments
about expected volatility and forfeiture rates, among other factors. If actual results differ significantly from these
estimates, our results of operations could be materially impacted.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances
where we are aware of a specific customer’s inability to meet its financial obligations, we record a specific reserve to
reduce the amounts recorded to what we believe will be collected. For all other customers, we recognize reserves for
bad debt based on historical experience of bad debts as a percent of revenues for each business unit, adjusted for relative
improvements or deteriorations in the agings and changes in current economic conditions.
If our agings were to improve or deteriorate resulting in a 10% change in our allowance, it is estimated that our
2006 bad debt expense would have changed by $5.8 million and our 2006 net income would have changed by $3.4
million.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment are reviewed for impairment when events and
circumstances indicate that depreciable and amortizable long-lived assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying amount of those assets. When specific assets
are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair market value.
We use various assumptions in determining the current fair market value of these assets, including future
expected cash flows and discount rates, as well as future salvage values. Our impairment loss calculations require
management to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and
selecting the discount rate that reflects the risk inherent in future cash flows.
Using the impairment review described, we found no impairment charge required for the year ended December
31, 2006. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows
and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in
business combinations. We review goodwill for potential impairment annually using the income approach to determine
the fair value of our reporting units. The fair value of our reporting units is used to apply value to the net assets of each
reporting unit. To the extent that the carrying amount of net assets would exceed the fair value, an impairment charge
may be required to be recorded.
The income approach we use for valuing goodwill involves estimating future cash flows expected to be
generated from the related assets, discounted to their present value using a risk-adjusted discount rate. Terminal values
were also estimated and discounted to their present value. In accordance with Statement 142, we performed our annual
impairment tests as of October 1, 2004, 2005 and 2006 on goodwill. No impairment charges resulted from these tests.
We may incur additional impairment charges in future periods under Statement 142 to the extent we do not achieve our
expected cash flow growth rates, and to the extent that market values and long-term interest rates in general decrease and
increase, respectively.
Indefinite-lived Assets
Indefinite-lived assets are reviewed annually for possible impairment using the direct method as prescribed in
SEC Staff Announcement No. D-108, Use of the Residual Method to Value Acquired 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.
Our 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