AT&T Wireless 2007 Annual Report Download - page 61

2007 AT&T Annual Report
| 59
and reusable supplies and network equipment of our local
telephone operations, which are stated principally at average
original cost, except that specific costs are used in the case of
large individual items. Inventories of our other subsidiaries are
stated at the lower of cost or market.
Property, Plant and Equipment Property, plant and
equipment is stated at cost, except for assets acquired using
purchase accounting, which are recorded at fair value (see
Note 2). The cost of additions and substantial improvements
to property, plant and equipment is capitalized. The cost of
maintenance and repairs of property, plant and equipment is
charged to operating expenses. Property, plant and equipment
is depreciated using straight-line methods over their estimated
economic lives. Certain subsidiaries follow composite group
depreciation methodology; accordingly, when a portion of
their depreciable property, plant and equipment is retired in
the ordinary course of business, the gross book value is
reclassified to accumulated depreciation; no gain or loss is
recognized on the disposition of this plant.
Property, plant and equipment is reviewed for recoverability
whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. An impairment
loss shall be recognized only if the carrying amount of a
long-lived asset is not recoverable and exceeds its fair value.
The carrying amount of a long-lived asset is not recoverable
if it exceeds the sum of the undiscounted cash flows expected
to result from the use and eventual disposition of the asset.
The fair value of a liability for an asset retirement
obligation is recorded in the period in which it is incurred
if a reasonable estimate of fair value can be made. In periods
subsequent to initial measurement, period-to-period changes
in the liability for an asset retirement obligation resulting
from the passage of time and revisions to either the timing
or the amount of the original estimate of undiscounted cash
flows are recognized. The increase in the carrying value of
the associated long-lived asset is depreciated over the
corresponding estimated economic life.
Software Costs It is our policy to capitalize certain costs
incurred in connection with developing or obtaining internal-
use software. Capitalized software costs are included in
“Property, Plant and Equipment” on our consolidated balance
sheets and are primarily amortized over a three-year period.
Software costs that do not meet capitalization criteria are
expensed immediately.
Goodwill and Other Intangible Assets Goodwill repre-
sents the excess of consideration paid over the fair value of
net assets acquired in business combinations. Goodwill and
other indefinite-lived intangible assets are not amortized
but are tested at least annually for impairment. We have
completed our annual impairment testing for 2007 and
determined that no impairment exists. The significant
increase in the carrying amount of our goodwill in 2006
primarily resulted from our acquisition of BellSouth.
Intangible assets that have finite useful lives are amortized
over their useful lives, a weighted average of 7.4 years.
Customer relationships are amortized using primarily the
sum-of-the-months-digits method of amortization over the
expected period in which those relationships are expected
to contribute to our future cash flows based in such a way
as to allocate it as equitably as possible to periods during
which we expect to benefit from those relationships.
A significant portion of intangible assets in our wireless
segment are Federal Communications Commission (FCC)
licenses that provide us with the exclusive right to utilize
certain radio frequency spectrum to provide wireless communi-
cations services. While FCC licenses are issued for a fixed time,
renewals of FCC licenses have occurred routinely and at nominal
cost. Moreover, we have determined that there are currently
no legal, regulatory, contractual, competitive, economic or
other factors that limit the useful lives of our FCC licenses, and
therefore the FCC licenses are an indefinite-lived intangible
asset under the provisions of Statement of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible Assets.”
In accordance with EITF No. 02-7, “Unit of Accounting
for Testing Impairment of Indefinite-Lived Intangible Assets,”
we test FCC licenses for impairment on an aggregate basis,
consistent with the management of the business on a
national scope. We utilize a fair value approach, incorporating
discounted cash flows, to complete the test. This approach
determines the fair value of the FCC licenses and, accordingly,
incorporates cash flow assumptions regarding the investment
in a network, the development of distribution channels and
other inputs for making the business operational. As these
inputs are included in determining free cash flows of the
business, the present value of the free cash flows is
attributable to the licenses. The discount rate applied to
the cash flows is consistent with our weighted-average
cost of capital. During the fourth quarter of 2007, we
completed the annual impairment tests for indefinite-lived
FCC licenses. These annual impairment tests resulted in
no impairment of indefinite-lived FCC licenses.
Advertising Costs Advertising costs for advertising
products and services or for promoting our corporate image
are expensed as incurred.
Foreign Currency Translation Our foreign investments
and foreign subsidiaries generally report their earnings in their
local currencies. We translate our share of their foreign assets
and liabilities at exchange rates in effect at the balance sheet
dates. We translate our share of their revenues and expenses
using average rates during the year. The resulting foreign
currency translation adjustments are recorded as a separate
component of accumulated other comprehensive income in
the accompanying consolidated balance sheets. Gains and
losses resulting from exchange-rate changes on transactions
denominated in a currency other than the local currency are
included in earnings as incurred.
We have also entered into foreign currency contracts to
minimize our exposure to risk of adverse changes in currency
exchange rates. We are subject to foreign exchange risk for
foreign currency-denominated transactions, such as debt
issued, recognized payables and receivables and forecasted
transactions. At December 31, 2007, our foreign currency
exposures were principally Euros, British pound sterling,
Danish krone and Japanese yen.
Derivative Financial Instruments We record derivatives
on the balance sheet at fair value. We do not invest in
derivatives for trading purposes. We use derivatives from time
to time as part of our strategy to manage risks associated
with our contractual commitments. These derivatives are
designated as either a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment (fair
value hedge), or a hedge of a forecasted transaction or of