iHeartMedia 2009 Annual Report Download - page 104

The Company’s billboard permits are effectively issued in perpetuity by state and local governments and are transferable or
renewable at little or no cost. Permits typically specify the location which allows the Company the right to operate an advertising
structure at the specified location. The Company’s permits are located on owned land, leased land or land for which we have acquired
permanent easements. In cases where the Company’s permits are located on leased land, the leases typically have initial terms of
between 10 and 20 years and renew indefinitely, with rental payments generally escalating at an inflation-based index. If the
Company loses its lease, the Company will typically obtain permission to relocate the permit or bank it with the municipality for
future use.
The indefinite-lived intangibles and goodwill are not subject to amortization, but are tested for impairment at least annually. The
Company tests for possible impairment of indefinite-lived intangible assets whenever events or changes in circumstances, such as a
reduction in operating cash flow or a dramatic change in the manner for which the asset is intended to be used, indicate that the
carrying amount of the asset may not be recoverable. If indicators exist, the Company compares the undiscounted cash flows related
to the asset to the carrying value of the asset. If the carrying value is greater than the undiscounted cash flow amount, an impairment
charge is recorded in amortization expense in the statement of operations for amounts necessary to reduce the carrying value of the
asset to fair value.
I
nterim Impairments to FCC Licenses
The United States and global economies have undergone an economic downturn, which caused, among other things, a general
tightening in the credit markets, limited access to the credit markets, lower levels of liquidity and lower consumer and business
spending. These disruptions in the credit and financial markets and the impact of adverse economic, financial and industry conditions
on the demand for advertising negatively impacted the key assumptions used in the discounted cash flow models used to value the
Company’s FCC licenses since the merger. Therefore, the Company performed an interim impairment test on its FCC licenses as of
December 31, 2008, which resulted in a non-cash impairment charge of $936.2 million.
The industry cash flows forecast by BIA Financial Network, Inc. (“BIA”) during the first six months of 2009 were below the BIA
forecast used in the discounted cash flow model used to calculate the impairment at December 31, 2008. As a result, the Company
performed another interim impairment test as of June 30, 2009 on its FCC licenses resulting in an additional non-cash impairment
charge of $590.3 million.
The impairment test consisted of a comparison of the fair value of the FCC licenses at the market level with their carrying amount. If
the carrying amount of the FCC license exceeded its fair value, an impairment loss was recognized equal to that excess. After an
impairment loss is recognized, the adjusted carrying amount of the FCC license is its new accounting basis. The fair value of the FCC
licenses was determined using the direct valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the
fair value of the FCC licenses was calculated at the market level as prescribed by ASC 350-30-35. The Company engaged Mesirow
Financial, a third-party valuation firm, to assist it in the development of the assumptions and the Company’s determination of the fair
value of its FCC licenses.
The application of the direct valuation method attempts to isolate the income that is properly attributable to the license alone (that is,
apart from tangible and identified intangible assets and goodwill). It is based upon modeling a hypothetical “greenfield” build up to a
“normalized” enterprise that, by design, lacks inherent goodwill and whose only other assets have essentially been paid for (or added)
as part of the build-up process. The Company forecasted revenue, expenses, and cash flows over a ten-year period for each of its
markets in its application of the direct valuation method. The Company also calculated a “normalized” residual year which represents
the perpetual cash flows of each market. The residual year cash flow was capitalized to arrive at the terminal value of the licenses in
each market.
Under the direct valuation method, it is assumed that rather than acquiring indefinite-lived intangible assets as part of a going concern
business, the buyer hypothetically develops 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 flow model which results in value that is directly attributable to the
indefinite-lived intangible assets.
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