iHeartMedia 2009 Annual Report Download - page 38

While we believe we have made reasonable estimates and utilized reasonable assumptions to calculate the fair value of our
FCC licenses, it is possible a material change could occur. If our future actual results are not consistent with our estimates, we could
be exposed to future impairment losses that could be material to our results of operations. The following table shows the decline in
the fair value of our FCC licenses that would result from a 100 basis point decline in our discrete and terminal period revenue growth
rate and profit margin assumptions and a 100 basis point increase in our discount rate assumption:
Interim Impairments to Billboard Permits
Our billboard permits are effectively issued in perpetuity by state and local governments as they are transferable or
renewable at little or no cost. Permits typically specify the locations at which we are allowed to operate an advertising structure. Due
to significant differences in both business practices and regulations, billboards in our International segment are subject to long-term,
finite contracts unlike our permits in the United States and Canada. Accordingly, there are no indefinite-lived assets in our
International segment.
The United States and global economies have undergone a period of economic uncertainty, 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 in the discounted cash flow models used
to value our billboard permits since the merger. Therefore, we performed an interim impairment test on our billboard permits as of
December 31, 2008, which resulted in a non-cash impairment charge of $722.6 million.
Our cash flows during the first six months of 2009 were below those in the discounted cash flow model used to calculate
the impairment at December 31, 2008. As a result, we performed an interim impairment test as of June 30, 2009 on our billboard
permits resulting in a non-cash impairment charge of $345.4 million.
Our impairment tests consisted of a comparison of the fair value of the billboard permits at the market level with their
carrying amount. If the carrying amount of the billboard permit 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 billboard permit is its new accounting basis.
The fair value of the billboard permits was determined using the direct valuation method as prescribed in ASC 805-20-S99. Under the
direct valuation method, the fair value of the billboard permits was calculated at the market level as prescribed by ASC 350-30-35.
We engaged Mesirow Financial to assist us in the development of the assumptions and our determination of the fair value of our
billboard permits.
Our application of the direct valuation method utilized the “greenfield” approach as discussed above. Our key assumptions
using the direct valuation 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 billboard permit within a market.
Management uses its internal forecasts to estimate industry normalized information as it believes these forecasts are similar
to what a market participant would expect to generate. This is due to the pricing structure and demand for outdoor signage in a market
being relatively constant regardless of the owner of the operation. Management also relied on its internal forecasts because there is
little public data available for each of its markets.
The build-up period represents the time it takes for the hypothetical start-up operation to reach normalized operations in
terms of achieving a mature market revenue share and profit margin. Management believes that a one-year build-up period is required
for a start-up operation to erect the necessary structures and obtain advertisers in order to achieve mature market revenue share. It is
estimated that a start-up operation would be able to obtain 10% of the potential revenues in the first year of operations and 100% in
the second year. Management assumed industry revenue growth of negative 9% and negative 16% during the build-up period for the
December 31, 2008 and June 30, 2009 interim impairment tests, respectively. However, the cost structure is expected to reach the
normalized level over three years due to the time required to recognize the synergies and cost savings associated with the ownership
of the permits within the market.
35
(In thousands)
Indefinite-lived intangible Revenue growth rate Profit margin Discount rate
FCC licenses $ 275,410 $ 117,410 $ 378,300