iHeartMedia 2010 Annual Report Download - page 84

CLEAR CHANNEL CAPITAL I, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A
nnual Impairment Test to FCC Licenses and Billboard permits
The Company performs its annual impairment test on October 1 of each year.
The aggregate fair value of the Company’s FCC licenses on October 1, 2010 increased approximately 14% from the fair value at
October 1, 2009. The increase in fair value resulted primarily from improvements to general market conditions leading to increased
advertising spending, which results in higher revenues for the industry.
The aggregate fair value of the Company’s permits on October 1, 2010 increased approximately 58% from the fair value at October 1,
2009. The increase in fair value resulted primarily from improvements to general market conditions leading to increased advertising
spending, which results in higher revenues for the industry.
Although the aggregate fair values of FCC licenses and billboard permits increased, certain markets experienced continuing declines. As
a result, impairment charges were recorded in 2010 for FCC licenses and billboard permits of $0.5 million and $4.8 million,
respectively.
I
nterim Impairments to FCC Licenses
The Company performed interim impairment tests on its FCC licenses as of December 31, 2008 and again on June 30, 2009 as a result
of the poor economic environment during those periods. In determining the fair value of the Company’s FCC licenses, the following key
assumptions were used:
The discount rate used in the December 31, 2008 impairment model increased 150 basis points compared to the discount rate used in the
preliminary purchase price allocation as of July 30, 2008 which resulted in a decline in the fair value of the Company’s licenses. As a
result, the Company recognized a non-cash impairment charge at December 31, 2008 in approximately one-quarter of its markets, which
totaled $936.2 million.
The BIA forecast for 2009 declined 8.7% and declined between 13.8% and 15.7% through 2013 compared to the BIA forecasts used in
the 2008 impairment test. Additionally, the industry profit margin declined 100 basis points from the 2008 impairment test. These
market driven changes were primarily responsible for the decline in fair value of the FCC licenses below their carrying value. As a
result, the Company recognized a non-cash impairment charge at June 30, 2009 in approximately one-quarter of its markets, which
totaled $590.3 million.
In calculating the fair value of its FCC licenses, the Company primarily relied on the discounted cash flow models. However, the
Company relied on the stick method for those markets where the discounted cash flow model resulted in a value less than the stick
method indicated. Approximately 17% and 23% of the fair value of the Company’s FCC licenses at December 31, 2008 and June 30,
2009, respectively, was determined using the stick method.
I
nterim Impairments to Billboard Permits
The Company performed interim impairment tests on its billboard permits as of December 31, 2008 and again on June 30, 2009 as a
result of the poor economic environment during those periods. In determining the fair value of the Company’s billboard permits, the
following key assumptions were used:
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(i) Industry revenue forecast by BIA Financial Network, Inc. (“BIA”) of 1.9% and 1.8%, respectively, were used during the
three
y
ear buil
d
-u
p
p
eriod in the December 31, 2008 and June 30, 2009 im
p
airment tests;
(ii) Operating margin of 12.5% in the first year gradually climbs to the industry average margin in year 3 of 30% and 29%,
respectively, in the December 31, 2008 and June 30, 2009 impairment tests;
(iii) 2% revenue growth was assumed beyond the discrete buil
d
-up projection period in both the December 31, 2008 and June 30,
2009 impairment tests; and
(iv) Assumed discount rates of 10% for the 13 largest markets and 10.5% for all other markets in both the December 31, 2008 and
June 30, 2009 impairment tests;
(i) Industry revenue growth of negative 9% and negative 16%, respectively, during the one year build-up period used in the
December 31, 2008 and June 30, 2009 impairment tests;
(ii) Cost structure reached a normalized level over a three year period and the operating margins gradually grew over that period
to the industry average margins of 46% and 45%, respectively, in the December 31, 2008 and June 30, 2009 impairment tests.
The margin in year three was the lower of the industry average margin or the actual margin for the market;