America Online 2009 Annual Report Download - page 63

Table of Contents
future revenue streams and cash flows of the reporting unit. In addition, when a DCF analysis is used as the primary method for determining fair value, we
assess the reasonableness of its determined fair value by reference to other fair value indicators such as comparable company public trading values, research
analyst estimates and, where available, values observed in private market transactions. As an example of the judgments made by us, in our 2009 goodwill
impairment analysis, the discount rates utilized in the DCF analysis were in a range of 10.5% to 14% in 2009, as compared to 13% to 15% in 2008, while the
terminal growth rates for our advertising revenues were 4% in 2009 as compared to a range of 2.5% to 3% in 2008. The premium used to arrive at a
controlling interest equity value for the market-based approach was determined based on values observed in recent market transactions. Significant changes in
the estimates and assumptions described above could materially affect the determination of fair value for our reporting unit which could trigger future
impairment.
If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the
impairment test is not necessary. If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment
test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying
amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination. In other words, the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that unit
(including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was
the purchase price paid. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Based on our goodwill impairment analysis, we have determined that the estimated fair value of our sole reporting unit exceeded its book value by
approximately 3% and therefore no impairment charge was recorded for 2009. However, any future declines in estimated fair value of our reporting unit will
likely result in a significant goodwill impairment charge. As the market-based approach is based on our market capitalization, volatility in our stock price
could have a significant impact on the estimated fair value of our sole reporting unit. If the estimated fair value of our reporting unit had been hypothetically
lower by 5% as of December 31, 2009, the book value would have exceeded fair value by approximately $70 million. If the book value of our reporting unit
had been greater than fair value, the second step of the goodwill impairment test would have been required to be performed to determine the implied fair value
of goodwill, and would likely have resulted in a significant goodwill impairment charge.
Income Taxes
Prior to the spin-off, income taxes as presented in the consolidated financial statements represented current and deferred income taxes of Time Warner
attributed to us in a manner that is systematic, rational and consistent with the asset and liability method prescribed by the accounting guidance for income
taxes. AOL's income tax provision prior to the spin-off was prepared under the "separate return method." The separate return method applies the accounting
guidance for income taxes to the standalone financial statements as if AOL were a separate taxpayer and a standalone enterprise. Income taxes (i.e., deferred
tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the
current year and include the results of any difference between GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss,
capital loss and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for
financial statement and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management
determines it is more likely than not that some portion or all of the deferred tax asset will not be realized. Significant judgment is required with respect to the
determination of whether or not a valuation allowance is required for certain of our deferred tax assets. Subsequent to the spin-off, AOL will file its own
consolidated income tax return (beginning with the short period December 10 – December 31, 2009).
With respect to uncertain tax positions, we recognize in the consolidated financial statements those tax positions determined to be "more likely than
not" of being sustained upon examination, based on the technical merits of the positions.
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