iHeartMedia 2014 Annual Report Download - page 83

IHEARTCOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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quarter of 2013. The Company recognized an impairment charge for outdoor advertising structures in its Americas outdoor segment
of $1.7 million during 2012.
Indefinite-lived Intangible Assets
The Company’s indefinite-lived intangible assets consist of FCC broadcast licenses and billboard permits. FCC broadcast licenses are
granted to radio stations for up to eight years under the Telecommunications Act of 1996 (the “Act”). The Act requires the FCC to
renew a broadcast license if the FCC finds that the station has served the public interest, convenience and necessity, there have been
no serious violations of either the Communications Act of 1934 or the FCC’s rules and regulations by the licensee, and there have
been no other serious violations which taken together constitute a pattern of abuse. The licenses may be renewed indefinitely at little
or no cost. The Company does not believe that the technology of wireless broadcasting will be replaced in the foreseeable future.
The Company’s billboard permits are granted for the right to operate an advertising structure at the specified location as long as the
structure is in compliance with the laws and regulations of each jurisdiction. 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. Due to significant differences in both business practices and regulations,
billboards in the International outdoor segment are subject to long-term, finite contracts unlike the Company’s permits in the United
States and Canada. Accordingly, there are no indefinite-lived intangible assets in the International outdoor segment.
The impairment tests for indefinite-lived intangible assets consist of a comparison between the fair value of the indefinite-lived
intangible asset at the market level with its carrying amount. If the carrying amount of the indefinite-lived intangible asset exceeds its
fair value, an impairment loss is recognized equal to that excess. After an impairment loss is recognized, the adjusted carrying amount
of the indefinite-lived asset is its new accounting basis. The fair value of the indefinite-lived asset is determined using the direct
valuation method as prescribed in ASC 805-20-S99. Under the direct valuation method, the fair value of the indefinite-lived assets is
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 indefinite-lived
intangible assets.
The application of the direct valuation method attempts to isolate the income that is properly attributable to the indefinite-lived
intangible asset 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 forecasts 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 calculates 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.
The 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 FCC license or
billboard permit within a market.
Annual Impairment Test to FCC Licenses and Billboard Permits
The Company performs its annual impairment test on October 1 of each year.
During 2014, the Company recognized a $15.7 million impairment charge related to FCC licenses in eleven markets due to changes in
the revenue growth forecasts and margins for those markets. During 2013, the Company recognized a $2.0 million impairment charge
related to FCC licenses in two markets due to changes in the discount rates and weight-average cost of capital for those markets. In
addition, the Company recognized a $2.5 million impairment charge related to billboard permits in a certain market due to increased